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As filed with the Securities and Exchange Commission on March 30, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark One
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
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)
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<S> <C>
Delaware 95-4703316
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
415 Huntington Drive, San Marino, California 91108
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (626) 799-5700
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
As of February 28, 1999, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $220,312,500.
Number of shares of common stock of the registrant outstanding as of
February 28, 1999: 23,500,000 shares
The following documents are incorporated by reference herein:
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Part of Form
10-K Into Which
Document Incorporated Incorporated
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1998 Annual Report......................................... Parts II and IV
Definitive Proxy Statement for the Annual Meeting of
Stockholders which will be filed within 120 days of the
fiscal year ended December 31, 1998....................... Part III
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PART I
ITEM 1. BUSINESS
Organization
East West Bancorp, Inc. (the "Company") is a Delaware corporation
incorporated on August 26, 1998 pursuant to a Plan of Reorganization and
Agreement of Merger to be the holding company for East West Bank (the "Bank").
The Company became the holding company for the Bank as of December 30, 1998,
and is subject to the Bank Holding Company Act of 1956, as amended.
The principal office of the Company is located at 415 Huntington Drive, San
Marino, California 91108, and its telephone number is (626) 799-5700.
The Company has one wholly-owned subsidiary, the Bank. The Bank's deposits
are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
applicable limits. The Bank is not a member of the Federal Reserve System. The
Bank is the fifth largest commercial bank headquartered in Los Angeles,
California as of December 31, 1998, and one of the largest banks in the United
States that focuses on the Chinese-American community. Until June 12, 1998,
the Bank was wholly owned by two shareholders, a husband and wife, who are
residents of Indonesia. At that time, the former shareholders sold all of
their interest in the Bank to approximately 160 institutional and accredited
investors.
The Bank was chartered by the Federal Home Loan Bank Board in June 1972, as
the first federally-chartered savings institution focused primarily on the
Chinese-American community, and opened for business at its first office in the
Chinatown district of Los Angeles in January 1973. Until the early 1990's, the
Bank conducted a traditional savings and loan business by making predominately
long-term, single-family residential and commercial and multi-family real
estate loans with interest rates tied to the Eleventh District Cost of Funds
Index ("COFI"). These loans were made principally within the ethnic Chinese
market in Southern California and were funded primarily with retail savings
deposits and advances from the Federal Home Loan Bank ("FHLB") of San
Francisco. Currently, the Bank specializes in lending for commercial,
construction, and residential real estate projects and financing international
trade for California companies. The Bank has emphasized commercial lending
since its conversion to a state-chartered commercial bank on July 31, 1995.
As of December 31, 1998, the Bank had two wholly-owned subsidiaries. The
first subsidiary, E-W Services, Inc., is a California corporation organized by
the Bank in 1977. E-W Services, Inc. holds property used by the Bank in its
operations. At December 31, 1998, the Bank's total investment in E-W Services,
Inc. was $11.2 million. The second subsidiary, East-West Investments, Inc., is
a California corporation organized by the Bank in 1972. East-West Investments,
Inc. primarily acts as a trustee in connection with real estate secured loans.
At December 31, 1998, the Bank's total investment in East-West Investments,
Inc. was $57,000.
Banking Services
Through its network of 23 retail branches, the Bank provides a wide range of
personal and commercial banking services to small and medium-sized businesses,
business executives, professionals, and other individuals. The Bank offers
multilingual services to all of its customers in English, Cantonese, Mandarin
and Spanish. The Bank offers a variety of deposit products which includes the
traditional range of personal and business checking and savings accounts, time
deposits and individual retirement accounts, travelers' checks, safe deposit
boxes, and Master Card and Visa merchant deposit services.
The Bank's lending activities include residential and commercial real
estate, construction, commercial, trade finance, account receivables,
inventory and working capital loans. The Bank provides commercial loans to
small and medium-sized businesses with annual revenues that generally range
from several million to $200 million. In addition, the Bank provides short-
term trade finance facilities for terms of less than one year primarily to
U.S. importers and manufacturers doing business in the Asia Pacific region.
Management believes that these activities
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have not been adversely affected to a significant degree by the recent
economic crisis in Asia. The Bank currently has no extensions of credit to
foreign or overseas customers. The Bank's commercial borrowers are engaged in
a wide variety of manufacturing, wholesale trade, and service businesses.
Market Area and Competition
The Bank concentrates on marketing its services in the Los Angeles
metropolitan area, Orange County, the San Francisco Bay area, and the Silicon
Valley area in Santa Clara County, with a particular focus on regions with a
high concentration of ethnic Chinese. The ethnic Chinese markets within the
Bank's primary market area have experienced rapid growth in recent periods.
According to the 1990 Census data, management believes there were an estimated
2.7 million Asian and Pacific Islanders residing in California. As California
continues to gain momentum as the hub of the Pacific Rim, the Bank provides
important competitive advantages to its customers participating in the Asia
Pacific marketplace. Management believes the Bank's customers benefit from its
understanding of Asian markets and cultures, its corporate and organizational
ties throughout Asia, as well as its international banking products and
services. Management believes that this approach, combined with the extensive
ties of its management and Board of Directors to the growing Asian and ethnic
Chinese communities, provides the Bank with an advantage in competing for
customers in its market area.
The banking and financial services industry in California generally, and in
the Bank's market areas specifically, are highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation,
changes in technology and product delivery systems, and the accelerating pace
of consolidation among financial services providers. The Bank competes for
loans, deposits, and customers with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions, and
other nonbank financial service providers. Some of these competitors are
larger in total assets and capitalization, have greater access to capital
markets and offer a broader range of financial services than the Bank. The
Bank has 23 offices located in the following counties: Los Angeles, Orange,
San Francisco and Santa Clara. Neither the deposits nor loans of the offices
of the Bank exceed 1% of the deposits or loans of all financial services
companies located in the counties in which the Bank operates.
Accounting Changes
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This statement provides standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings.
SFAS No. 125 supersedes SFAS No. 122, "Accounting for Mortgage Servicing
Rights," which was adopted by the Bank on a prospective basis beginning
January 1, 1997. In December 1996, the FASB issued SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No.
127 deferred for one year the effective date of SFAS No. 125 as it relates to
transactions involving secured borrowings and collateral and transfers and
servicing of financial assets. The adoption of the applicable provisions of
these statements did not have a material impact on the Bank's results of
operations or financial position.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." Under
the provisions of this statement, the presentation of primary and fully
diluted earnings per share as previously required by APB Opinion No. 15 is
replaced with basic and diluted earnings per share. The statement also
requires dual presentation of basic and diluted earnings per share on the face
of the income statement and a reconciliation of the numerators and
denominators between the two calculations. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997. The
adoption of this statement did not have any effect on the Bank's results of
operations. All prior period earnings per share data have been restated to
conform with the statement's requirements.
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In August 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for disclosing
information about capital structure, including pertinent rights and privileges
of various securities outstanding. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. The adoption of this
statement did not have a material impact on the Bank's results of operations
or financial position.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and presenting
comprehensive income and its components in a full set of financial statements.
The term "comprehensive income" describes the total of all components of
comprehensive income including net income. "Other comprehensive income" refers
to revenues, expenses, and gains and losses that are included in comprehensive
income but are excluded from net income as they have been recorded directly in
equity under the provisions of other FASB statements. The Company presents the
comprehensive income disclosure as a part of the statements of changes in
stockholders' equity, by identifying each element of other comprehensive
income including net income. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Comparative financial statements provided
for earlier periods have been reclassified to reflect application of the
provisions of SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards
for the way that public business enterprises report information about
operating segments in both annual financial statements and interim financial
reports issued to shareholders. The statement also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The statement uses a "management approach" to identify operating
segments and defines an operating segment as a component of an enterprise (i)
for which discrete financial information is available; (ii) that engages in
business activities that may earn revenues and incur expenses (including
revenues and expenses relating to transactions with other components of the
same enterprise); and (iii) whose operating results are regularly reviewed by
the enterprise's chief operating decision maker. Reportable segments
(aggregrated if appropriate) are operating segments that meet specified
quantitative thresholds based on revenues, profit or loss and assets, using a
ten percent rule. This statement supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise," but retains the requirement to report
information about major customers. It amends SFAS No. 94, "Consolidation of
All Majority-Owned Subsidiaries," to remove the special disclosure
requirements for previously unconsolidated subsidiaries. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. Segment information that is presented for comparative purposes is to be
restated to conform to the requirements of SFAS No. 131 unless it is
impracticable to do so. The required interim disclosures are not required to
be made in the initial year of application but the information for the interim
periods for the initial year is required as comparative information in the
second year of application. Adoption of the statement did not have any effect
on the Bank's results of operations or financial position.
In February 1998, the FASB issued SFAS No. 132, "Statement on Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
revises employers' disclosures about pension and other postretirement benefit
plans. SFAS No. 132 does not change the measurement or recognition of those
plans and is effective for fiscal years beginning after December 15, 1997.
Adoption of the statement did not have any effect on the Bank's results of
operations or financial position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. Management of the Bank has not yet determined whether the adoption of
SFAS No. 133 will have a material impact on the Bank's results of operations
or financial position when adopted.
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In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for certain activities of mortgage banking
enterprises and other enterprises that conduct operations that are
substantially similar. SFAS No. 134 requires that after the securitization of
mortgage loans held for sale, the resulting mortgage-backed securities and
other retained interests should be classified in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," based on
the company's ability and intent to sell or hold those investments. SFAS No.
134 is effective for the first fiscal quarter beginning after December 15,
1998. Management of the Bank does not believe that the adoption of SFAS No.
134 will have a material impact on the Bank's results of operations or
financial position when adopted.
Economic Conditions, Government Policies, Legislation and Regulation
The Bank's profitability, like most financial institutions, is primarily
dependent on interest rate differentials. In general, the difference between
the interest rates paid by the Bank on interest-bearing liabilities, such as
deposits and other borrowings, and the interest rates received by the Bank on
its interest-earning assets, such as loans extended to its clients and
securities held in its investment portfolio, comprise the major portion of the
Company's earnings. These rates are highly sensitive to many factors that are
beyond the control of the Company and the Bank, such as inflation, recession
and unemployment, and the impact which future changes in domestic and foreign
economic conditions might have on the Company and the Bank cannot be
predicted.
The business of the Bank is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Federal Reserve Board. The Federal Reserve Board implements
national monetary policies (with objectives such as curbing inflation and
combating recession) through its open-market operations in U.S. Government
securities by adjusting the required level of reserves for depository
institutions subject to its reserve requirements and by varying the target
federal funds and discount rates applicable to borrowings by depository
institutions. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates earned on interest-earning assets and paid on interest-bearing
liabilities. The nature and impact on the Company and the Bank of any future
changes in monetary and fiscal policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently made in the U.S.
Congress, in the state legislatures and before various bank regulatory
agencies.
General
Bank holding companies and banks are extensively regulated under both
federal and state law. This regulation is intended primarily for the
protection of depositors and the deposit insurance fund and not for the
benefit of stockholders of the Company or the Bank. Set forth below is a
summary description of the material laws and regulations which relate to the
operations of the Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to the applicable laws
and regulations.
In recent years, significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by Congress.
Such proposals include legislation to revise the Glass-Steagall Act and the
BHC Act and to expand permissible activities for banks, principally to
facilitate the convergence of commercial and investment banking. Certain
proposals also sought to expand insurance activities of banks. It is unclear
whether any of these proposals, or any form of them introduced in the current
Congress, will become law. Consequently, it is not possible to determine what
effect, if any, they may have on the Company and the Bank.
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The Company
General. The Company, as a registered bank holding company, is subject to
regulation under the BHC Act. The Company is required to file with the Federal
Reserve Board quarterly, semi-annual, and annual reports and such additional
information as the Federal Reserve Board may require pursuant to the BHC Act.
The Federal Reserve Board may conduct examinations of the Company and its
subsidiaries.
The Federal Reserve Board may require that the Company terminate an activity
or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company
must file written notice and obtain approval from the Federal Reserve Board
prior to purchasing or redeeming its equity securities.
Under the BHC Act and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "- The Bank--Capital Standards."
The Company is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5% of the outstanding shares of any
class of voting securities or substantially all of the assets of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank
holding company.
The Company is prohibited by the BHC Act, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control
of more than 5% of the outstanding voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, the Company, subject to the
prior approval of the Federal Reserve Board, may engage in any, or acquire
shares of companies engaged in, activities that are deemed by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve Board to be an
unsafe and unsound banking practice or a violation of the Federal Reserve
Board's regulations or both.
The Company is a bank holding company within the meaning of Section 3700 of
the California Financial Code. As such, the Company and its subsidiaries will
be subject to examination by, and may be required to file reports with, the
California Department of Financial Institutions ("DFI").
The Company's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As such, the Company is subject to the information, proxy
solicitation, insider trading, and other requirements and restrictions of the
Exchange Act.
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The Bank
General. The Bank, as a California chartered bank, is subject to primary
supervision, periodic examination, and regulation by the DFI and the FDIC. To
a lesser extent, the Bank is also subject to certain regulations promulgated
by the Federal Reserve Board. If, as a result of an examination of the Bank,
the FDIC should determine that the financial condition, capital resources,
asset quality, earnings prospects, management, liquidity, or other aspects of
the Bank's operations are unsatisfactory or that the bank or its management is
violating or has violated any law or regulation, various remedies are
available to the FDIC. Such remedies include the power to enjoin "unsafe or
unsound" practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order
that can be judicially enforced, to direct an increase in capital, to restrict
the growth of the Bank, to assess civil monetary penalties, to remove officers
and directors and ultimately to terminate the Bank's deposit insurance, which
for a California chartered bank would result in a revocation of the Bank's
charter. The DFI has many of the same remedial powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit
accounts, interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain certain levels of
capital. See "- Capital Standards."
Dividends and Other Transfers of Funds. Dividends from the Bank constitute
the principal source of income to the Company. The Company is a legal entity
separate and distinct from the Bank. The Bank is subject to various statutory
and regulatory restrictions on its ability to pay dividends to the Company.
Under such restrictions, the amount available for payment of dividends to the
Company by the Bank totaled $32.2 million at December 31, 1998. In addition,
the DFI and the Federal Reserve Board have the authority to prohibit the Bank
from paying dividends, depending upon the Bank's financial condition, if such
payment is deemed to constitute an unsafe or unsound practice.
The FDIC and the Commissioner also have authority to prohibit the Bank from
engaging in activities that, in the FDIC's or the Commissioner's opinion,
constitute unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that the FDIC or the Commissioner could assert that the payment
of dividends or other payments might, under some circumstances, be an unsafe
or unsound practice. Further, the FDIC and the Federal Reserve Board have
established guidelines with respect to the maintenance of appropriate levels
of capital by banks or bank holding companies under their jurisdiction.
Compliance with the standards set forth in such guidelines and the
restrictions that are or may be imposed under the prompt corrective action
provisions of federal law could limit the amount of dividends which the Bank
or the Company may pay. An insured depository institution is prohibited from
paying management fees to any controlling persons or, with certain limited
exceptions, making capital distributions if after such transaction the
institution would be undercapitalized. The Commissioner may impose similar
limitations on the conduct of California-chartered banks. See "- Prompt
Corrective Regulatory Action and Other Enforcement Mechanisms" and "- Capital
Standards" for a discussion of these additional restrictions on capital
distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of, or investments
in, stock or other securities thereof, the taking of such securities as
collateral for loans, and the purchase of assets of the Company or other
affiliates. Such restrictions prevent the Company and such other affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank to or in the Company or to or in any other affiliate are limited,
individually, to 10.0% of the Bank's capital and surplus (as defined by
federal regulations), and such secured loans and investments are limited, in
the aggregate, to 20.0% of the Bank's capital and surplus (as defined by
federal regulations). California law also imposes certain restrictions with
respect to transactions involving the Company and other controlling persons of
the Bank. Additional restrictions on transactions with
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affiliates may be imposed on the Bank under the prompt corrective action
provisions of federal law. See also "Prompt Corrective Action and Other
Enforcement Mechanisms."
Capital Standards. The Federal Reserve Board and the FDIC have adopted risk-
based minimum capital guidelines intended to provide a measure of capital that
reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as commercial loans.
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risked-based guidelines,
federal banking regulators require banking organizations to maintain a minimum
amount of Tier 1 capital to total assets, referred to as the leverage ratio.
For a banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Capital" for information regarding the Company's
regulatory capital ratios at December 31, 1998.
Prompt Corrective Action and Other Enforcement Mechanisms. Federal banking
agencies possess broad powers to take corrective and other supervisory action
to resolve the problems of insured depository institutions, including but not
limited to those institutions that fall below one or more prescribed minimum
capital ratios. Each federal banking agency has promulgated regulations
defining the following five categories in which an insured depository
institution will be placed, based on its capital ratios: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. At December 31, 1998, the Bank exceeded the
required ratios for classification as "well capitalized."
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation, or
any condition imposed in writing by the agency or any written agreement with
the agency.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines designed to assist the federal banking agencies in identifying and
addressing potential safety and soundness concerns before capital becomes
impaired. The guidelines set forth operational and managerial standards
relating to: (i) internal controls, information systems and internal audit
systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset
growth, (v) earnings, and (vi) compensation, fees and benefits. In addition,
the federal banking agencies have also adopted safety and soundness guidelines
with respect to asset quality and earnings standards. These guidelines provide
six standards for establishing and maintaining a system to identify problem
assets and prevent those assets from deteriorating. Under these standards, an
insured depository institution should: (i) conduct periodic asset quality
reviews to identify problem assets, (ii) estimate the inherent losses in
problem assets and
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establish reserves that are sufficient to absorb estimated losses, (iii)
compare problem asset totals to capital, (iv) take appropriate corrective
action to resolve problem assets, (v) consider the size and potential risks of
material asset concentrations, and (vi) provide periodic asset quality reports
with adequate information for management and the board of directors to assess
the level of asset risk. These guidelines also set forth standards for
evaluating and monitoring earnings and for ensuring that earnings are
sufficient for the maintenance of adequate capital and reserves.
Premiums for Deposit Insurance. Although the Bank is a commercial bank, the
Bank's deposit accounts are insured by the SAIF, as administered by the FDIC,
up to the maximum amount permitted by law. Insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits based on
the risk a particular institution poses to its deposit insurance fund. Under
this system as of December 31, 1998, SAIF members paid within a range of 0 to
27 basis points per $100 of insured deposits, depending upon the institution's
risk classification. This risk classification is based on an institution's
capital group and supervisory subgroup assignment. Pursuant to the Economic
Growth and Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF
at the designated reserve level of 1.25% as of October 1, 1996. Based on the
Bank's deposits as of March 31, 1995, the date for measuring the amount of the
special assessment pursuant to the Paperwork Reduction Act, the Bank paid a
special assessment of $7.0 million in November 1996 to recapitalize the SAIF.
This expense was recognized during the last quarter of fiscal 1996.
Pursuant to the Paperwork Reduction Act, the Bank pays, in addition to its
normal deposit insurance premium as a member of the SAIF, an amount equal to
approximately 6.4 basis points toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980s to assist in the recovery
of the savings and loan industry. Members of the Bank Insurance Fund ("BIF"),
by contrast, pay, in addition to their normal deposit insurance premium,
approximately 1.3 basis points. Under the Paperwork Reduction Act, the FDIC
also is not permitted to establish SAIF assessment rates that are lower than
comparable BIF assessment rates. Beginning no later than January 1, 2000, the
rate paid to retire the Fico Bonds will be equal for members of the BIF and
the SAIF. The Paperwork Reduction Act also provides for the merging of the BIF
and the SAIF by January 1, 1999 provided there are no financial institutions
still chartered as savings associations at that time. Should the insurance
funds be merged before January 1, 2000, the rate paid by all members of this
new fund to retire the Fico Bonds would be equal.
Interstate Banking and Branching. The BHC Act currently permits bank holding
companies in any state to acquire banks and bank holding companies located in
any other state, subject to certain conditions, including certain nationwide-
and state-imposed concentration limits. The Bank has the ability, subject to
certain restrictions, to acquire by acquisition or merger branches outside its
home state. The establishment of new interstate branches is also possible in
those states with laws that expressly permit it. Interstate branches are
subject to certain laws of the states in which they are located. Competition
may increase further as banks branch across state lines and enter new markets.
Community Reinvestment Act and Fair Lending Developments. The Bank is
subject to certain fair lending requirements and reporting obligations
involving home mortgage lending operations and Community Reinvestment Act
("CRA") activities. The CRA generally requires the federal banking agencies to
evaluate the record of a financial institution in meeting the credit needs of
its local communities, including low- and moderate-income neighborhoods. A
bank may be subject to substantial penalties and corrective measures for a
violation of certain fair lending laws. The federal banking agencies may take
compliance with such laws and CRA obligations into account when regulating and
supervising other activities.
8
<PAGE>
A bank's compliance with its CRA obligations is based a performance-based
evaluation system which bases CRA ratings on an institution's lending service
and investment performance. When a bank holding company applies for approval
to acquire a bank or other bank holding company, the Federal Reserve Board
will review the assessment of each subsidiary bank of the applicant bank
holding company, and such records may be the basis for denying the
application. Based on an examination conducted in April 1997, the Bank was
rated "Satisfactory" in complying with its CRA obligations.
Year 2000 Compliance. In May 1997, the Federal Financial Institutions
Examination Council issued an interagency statement to the chief executive
officers of all federally supervised financial institutions regarding Year
2000 project management awareness. It is expected that unless financial
institutions address the technology issues relating to the coming of the year
2000, there will be major disruptions in the operations of financial
institutions. The statement provides guidance to financial institutions,
providers of data services, and all examining personnel of the federal banking
agencies regarding the Year 2000 problem. The federal banking agencies intend
to conduct Year 2000 compliance examinations, and the failure to implement a
Year 2000 program may be seen by the federal banking agencies as an unsafe and
unsound banking practice. If a federal banking agency determines that the Bank
is operating in an unsafe and unsound manner, the Bank may be required to
submit a compliance plan. Failure to submit a compliance plan or to implement
an accepted plan may result in enforcement action being taken, which may
include a cease and desist order and fines. For a discussion of the Company's
Year 2000 readiness plan, refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000."
Employees
The Company does not have any employees other than executive officers who
are also executive officers of the Bank. Such employees are not separately
compensated for their employment with the Company. As of December 31, 1998,
the Bank had a total of 346 full-time employees and 33 part-time employees.
Employees are not represented by a union or collective bargaining group. The
management of the Bank believes that its employee relations are satisfactory.
9
<PAGE>
ITEM 2. PROPERTIES
The Company owns no real property but utilizes the main office of the Bank.
The Company pays no rent or other consideration for use of this facility. The
Bank owns the land and buildings at 11 of its 23 branch offices and all of its
administrative locations. Those locations include:
<TABLE>
<CAPTION>
Office Name Address Owned/Leased
----------- ------- ------------
<S> <C> <C>
Alhambra Valley 403 W. Valley Blvd. Owned
Alhambra, CA 91803
Alhambra-Main 1881 West Main St. Owned
Alhambra, CA 91801
Arcadia 200 E. Duarte Road Owned
Arcadia, CA 91006
Artesia 18512 Gridley Road Owned
Artesia, CA 90701
Commercial Loan Center 475 Huntington Dr. Owned
San Marino, CA 91108
Cupertino 10945 Wolfe Road Leased
Cupertino, CA 95014
Diamond Bar 379 S. Diamond Bar Blvd. Leased
Diamond Bar, CA 91765
El Monte 9550 Flair Drive Leased
El Monte, CA 91731
Geary Street 4355 Geary Street #101 Owned
San Francisco, CA 94111
Headquarters 415 Huntington Dr. Owned
San Marino, CA 91108
Irvine 4860 Irvine Blvd. Leased
Irvine, CA 92720
Lincoln Heights 2601 No. Broadway Owned
Los Angeles, CA 90031
Los Angeles 942 North Broadway Leased
Chinatown Los Angeles, CA 90012
Market Street 444 Market Street Leased
Financial District San Francisco, CA 94111
Milpitas 642 Barber Lane Leased
Milpitas, CA 95035
Montebello 2825 Via Campo Leased
Montebello, CA 90640
Monterey Park 101 W. Garvey Ave. Leased
Monterey Park, CA 91754
Rolling Hills 27421 Hawthorne Blvd. Owned
Rolling Hills Estates, CA 90274
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Office Name Address Owned/Leased
----------- ------- ------------
<S> <C> <C>
Rosemead 8168 East Garvey Ave. Owned
Rosemead, CA 91770
Rowland Heights 18458 Colima Road Leased
Rowland Heights, CA 91748
San Francisco- 1241 Stockton St. Leased
Chinatown San Francisco, CA 94133
San Marino 805 Huntington Dr. Owned
San Marino, CA 91108
Silverlake 2496 Glendale Blvd. Owned
Los Angeles, CA 90039
South Pasadena 1001 Fair Oaks Ave. Owned
S. Pasadena, CA 91030
Westminster 9032 Bolsa Avenue Leased
Westminster, CA 92683
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Neither the Bank nor the Company is involved in any material legal
proceedings. The Bank, from time to time, is party to litigation which arises
in the ordinary course of business, such as claims to enforce liens, claims
involving the origination and servicing of loans, and other issues related to
the business of the Bank. In the opinion of management, the resolution of any
such issues would not have a material adverse impact on the financial
position, results of operations, or liquidity of the Bank or the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, the Registrant solicited the approval of
its security holders by written consent, on the following matters:
(a) The Company's 1998 Stock Incentive Plan (the "Company Incentive
Plan") that reserves 1,902,000 shares of the Company Common Stock to be
issued pursuant to awards granted to officers, directors, employees and
consultants of the Company and its subsidiaries; and
(b) the Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan")
that reserves 1,000,000 shares of Company Common Stock to be sold to full-
time and certain part-time employees of the Company and its subsidiaries at
a discount.
The number of shares voted in favor of, against, abstaining and broker non-
votes on each of the above proposals is set forth below:
(a) Proposal to approve the Company's Incentive Plan:
<TABLE>
<S> <C>
For: 11,908,400
Against: 1,857,000
Abstain: 27,500
Broker Non-Votes: 9,257,100
</TABLE>
(b) Proposal to approve the Purchase Plan:
<TABLE>
<S> <C>
For: 13,527,400
Against: 238,000
Abstain: 27,500
Broker Non-Votes: 9,257,100
</TABLE>
11
<PAGE>
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of February 28, 1999, the executive
officers of the Company, their positions, principal occupation during the past
five years and ages. Each officer is appointed by the Board of Directors of
the Company or Bank and serves at their pleasure.
<TABLE>
<CAPTION>
Name Age(1) Position with Company or Bank
---- ------ -----------------------------
<C> <C> <S>
Dominic Ng.................. 40 Chairman of the Board, President, and
Chief Executive Officer of the Company
and the Bank
Julia Gouw.................. 39 Executive Vice President and Chief
Financial Officer of the Company and the
Bank
John Stephan................ 44 Executive Vice President, Director of
Retail Banking of the Bank
Sandra Wong................. 45 Executive Vice President and Chief Credit
Officer of the Bank
Wayland Bourne.............. 50 Senior Vice President, Commercial
Services of the Bank
William Chu................. 43 Senior Vice President, Director of
Planning and Business Development of the
Bank
Donald Chow................. 47 Senior Vice President, Commercial Loan
Manager of the Bank
Kenneth Fung................ 49 Senior Vice President, Deputy Director of
Retail Banking of the Bank
Douglas Krause.............. 42 Senior Vice President, General Counsel,
and Secretary of the Company and the Bank
Victor Naramura............. 54 Senior Vice President, International
Banking Manager of the Bank
</TABLE>
- --------
(1) As of February 28, 1999
Biographical Information
The principal occupation during the past five years of each executive
officer is set forth below. All executive officers have held their present
positions for at least five years, unless otherwise stated.
Dominic Ng has served as a director and the President and Chief Executive
Officer of the Bank since October 1992, and was elected Chairman of the Board
in 1998. Mr. Ng has held the same positions with the Company since its
formation. Mr. Ng also served as the director in charge of Chinese Business
Services for the international accounting firm of Deloitte & Touche LLP. Mr.
Ng currently serves as a member of the of the Board of Visitors of The
Anderson School at UCLA, Board of Regents of Loyola Marymount University, and
serves, among others, as a director of the Los Angeles Chamber of Commerce,
and United Way of Greater Los Angeles. Mr. Ng also serves on the Board of ESS
Technology, Inc.
Julia Gouw has served as Executive Vice President and Chief Financial
Officer of the Bank since 1994 and as a director of the Bank since 1997, and
has held these same positions with the Company since its formation. Ms. Gouw
joined the Bank in July 1989 as Vice President and Controller. Prior to
joining the Bank, Ms. Gouw was a Senior Audit Manager with the international
accounting firm of KPMG Peat Marwick, LLP. Ms. Gouw is on the Board of
Visitors of UCLA School of Medicine, a member of the Financial Executives'
Institute and the California Society of CPA's and is a past president of the
Financial Managers Society--Los Angeles Chapter.
John Stephan has served as Executive Vice President and Director of Retail
Banking of the Bank since October 1997. He is charged with managing the retail
branch network, retail bank marketing, retail operations, residential lending
and consumer lending. Prior to joining the Bank, Mr. Stephan was Senior Vice
President of Retail Banking at Great Western Bank where he managed all aspects
of a 106 branch retail delivery network in Southern California. Mr. Stephan
also served as Senior Vice President of Retail Banking at First Interstate
Bank.
12
<PAGE>
Sandra Wong joined the Bank in November 1998 as Executive Vice President and
Chief Credit Officer. Prior to joining the Bank, Ms. Wong was Senior Vice
President--Senior Credit Officer, Business Banking Division with Bank of
America, where she managed portfolio performance and credit standards for a $3
billion loan portfolio of small business customers.
Wayland Bourne serves as the Senior Vice President / Commercial Services of
the Bank. Mr. Bourne joined the Bank in 1996 and is charged with building the
commercial infrastructure that will allow the Bank to effectively
differentiate itself and compete in the California banking arena. Mr. Bourne
is responsible for cash management, and commercial non-credit products, sales,
and service. Prior to joining the Bank, Mr. Bourne was a Senior Vice President
at Metrobank, a Southern California regional business bank, where he developed
its cash management and non-credit services programs. Mr. Bourne began his
banking career at Union Bank, where he held a number of senior level
positions.
William Chu serves as the Senior Vice President, Director of Planning and
Business Development of the Bank. Mr. Chu joined the Bank in June 1994. Mr.
Chu created the commercial banking division for the Bank and manages three
marketing teams which focus on commercial real estate, trade finance, and
business banking loan products. Before joining the Bank, Mr. Chu was President
and Chief Executive Officer of United Pacific Bank. Mr. Chu is a Certified
Public Accountant.
Donald Chow serves as Senior Vice President and Commercial Lending Manager
of the Bank. Mr. Chow has been with the Bank since April 1994. Mr. Chow has
over 25 years of experience in commercial lending. Before joining the Bank,
Mr. Chow was First Vice President and Senior Credit Officer for Mitsui
Manufacturers Bank. Mr. Chow was also employed for over 10 years with Security
Pacific National Bank where he held a number of positions, including Vice
President and unit leader of commercial real estate lending.
Kenneth Fung serves as Senior Vice President and Deputy Director of Retail
Banking of the Bank. Mr. Fung has been with the Bank since 1990. As Deputy
Director of Retail Banking, Mr. Fung oversees the retail branch network's
commercial asset business development and marketing. Mr. Fung brings over 20
years of both domestic and international and commercial banking experience to
the Bank and has held several management positions in various aspects of
retail banking and branch network expansion in Hong Kong with the Hong Kong
and Shanghai Banking Corporation, Plc.
Douglas Krause has served as Senior Vice President, General Counsel, and
Secretary of the Bank since he joined the Bank in 1996 and has held these same
positions with the Company since its formation. Prior to employment with the
Bank, Mr. Krause was Corporate Senior Vice President and General Counsel of
Metrobank. Prior to that, Mr. Krause was with the law firms of Dewey
Ballantine and Jones, Day, Reavis and Pogue specializing in financial
services. Mr. Krause is a member of the Consumer Financial Services Committee
of the California Bar Association.
Victor Naramura serves as Senior Vice President and International Banking
Manager of the Bank. Mr. Naramura joined the Bank in 1996 after spending over
20 years with The Hong Kong and Shanghai Banking Corporation, Plc as Senior
Vice President and Head of the West Coast Region. Mr. Naramura has extensive
experience in providing international trade credit facilities to importers and
exporters and assisting foreign depositors, real estate investors and clients
with overseas accounts. Prior to that, Mr. Naramura spent over 10 years with
Security Pacific Bank as Manager of Credit Training and Officer of
International Banking.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
For information concerning the market for the Company's Common Stock and
related shareholder matters, see "Common Stock Price Range and Dividends"
contained in the 1998 Annual Report, which is incorporated herein by
reference, and "Item 1. BUSINESS -- Regulation and Supervision -- Restrictions
on Transfer of Funds to the Company by the Bank."
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Consolidated Financial Statements and the accompanying notes
presented elsewhere herein.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Interest and dividend
income................. $ 126,708 $ 107,092 $ 96,876 $ 85,876 $ 85,355
Interest expense........ 71,043 62,646 57,268 54,376 41,517
---------- ---------- ---------- ---------- ----------
Net interest income..... 55,665 44,446 39,608 30,979 34,685
Provision for loan
losses................. 5,356 5,588 4,398 6,200 4,155
---------- ---------- ---------- ---------- ----------
Net interest income
after privision for
loan losses............ 50,309 38,858 35,210 24,779 30,530
Noninterest income...... 10,027 8,493 5,571 3,502 3,286
SAIF recapitalization
expense................ -- -- 7,040 -- --
Noninterest expense..... 32,626 29,010 28,049 26,585 27,382
---------- ---------- ---------- ---------- ----------
Income before provision
for income taxes....... 27,710 18,341 5,692 1,696 6,434
Provision for income
taxes.................. 9,682 7,330 2,486 653 2,112
---------- ---------- ---------- ---------- ----------
Net income(1)........... $ 18,028 $ 11,011 $ 3,206 $ 1,043 $ 4,322
========== ========== ========== ========== ==========
Basic and diluted
earnings per share(1).. $ 0.76 $ 0.46 $ 0.13 $ 0.04 $ 0.18
Average number of shares
outstanding............ 23,775 23,775 23,775 23,775 23,775
At Year End:
Total assets............ $2,058,160 $1,734,339 $1,621,547 $1,371,140 $1,319,752
Loans receivable, net... 1,100,579 934,850 862,640 776,476 825,971
Investment securities... 682,436 374,810 406,468 353,435 403,646
Deposits................ 1,292,937 1,235,072 1,182,886 1,157,469 1,066,946
Federal Home Loan Bank
advances............... 563,000 211,000 55,000 61,000 56,000
Stockholders' equity.... 150,830 132,552 122,375 118,290 73,443
Shares outstanding...... 23,775 23,775 23,775 23,775 23,775
Book value per share.... $6.34 $5.58 $5.15 $4.98 $3.09
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(In Thousands, Except Per
Share Data)
<S> <C> <C> <C> <C> <C>
Financial Ratios:
Return on assets(2)........................ 1.00% 0.70% 0.22% 0.08% 0.34%
Return on equity(2)........................ 12.83 8.91 2.71 1.13 5.91
Average stockholders' equity to average
assets.................................... 7.80 7.87 8.16 7.07 5.82
Net interest margin........................ 3.22 2.92 2.82 2.47 2.88
Efficiency ratio(2)(3)..................... 48.08 52.87 75.61 74.39 69.61
Assets Quality Ratios:
Net chargeoffs to average loans............ 0.11% 0.37% 0.37% 1.47% 0.56%
Nonperforming assets to year end total
assets.................................... 0.99 1.25 1.28 1.57 2.69
Allowance for loan losses to year end total
gross loans............................... 1.47 1.29 1.15 1.11 1.73
</TABLE>
- -------
(1) Excluding the one-time Savings Association Insurance Fund ("SAIF")
recapitalization assessment, net income and earnings per share (basic and
diluted) for the year ended December 31, 1996 were $7.4 million and $0.31,
respectively.
(2) Excluding the SAIF recapitalization assessment, the Company's return on
assets, return on equity and efficiency ratios were 0.51%, 6.26% and
59.89%, respectively, during the year ended December 31, 1996.
(3) Represents noninterest expense, excluding the amortization of intangibles,
divided by the aggregate of net interest income before provision for loan
losses and noninterest income.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of
operations, financial condition, liquidity, and capital resources of East West
Bancorp, Inc. (the "Company"). This information is intended to facilitate the
understanding and assessment of significant changes and trends related to the
financial condition of the Company and the results of its operations. This
discussion and analysis should be read in conjunction with the Company's
Consolidated Financial Statements and the accompanying notes presented
elsewhere herein. Certain statements under this caption constitute "forward-
looking statements" under Section 27A of the 1934 Act and Section 21E of the
1934 Act which involve inherent risks and uncertainties. A number of important
factors could cause the Company's actual results to differ materially from
those discussed in such forward-looking statements. These factors include, but
are not limited to, economic conditions and competition in the geographic and
business areas in which the Company operates, demographic changes, inflation
or deflation, fluctuations in interest rates, changes in business strategy or
development plans, and changes in legislation and governmental regulation.
Given these uncertainties, the reader is cautioned not to place undue reliance
on such forward-looking statements. The Company disclaims any obligation to
update any such factors or to publicly announce the results of any revisions
to any of the forward-looking statements contained herein to reflect future
events or developments.
General
The Company was recently formed and has no material separate results of
operations at this time. Accordingly, the following discussion principally
reflects the operations of its wholly-owned subsidiary, East West Bank (the
"Bank"). The Bank's results of operations are primarily dependent on its net
interest income, which is the difference between the interest income earned on
its assets, primarily loans and investments, and the interest expense on its
liabilities, primarily deposits and borrowings. Net interest income may be
affected significantly by general economic and competitive conditions and
policies of regulatory agencies, particularly those with respect to market
interest rates. The results of operations are also significantly influenced by
the level of noninterest expenses, such as employee salaries and benefits;
noninterest income, such as fees on deposit-related services; and the Bank's
provision for loan losses.
Through its network of 23 retail branches, the Bank provides a wide range of
personal and commercial banking services to small and medium-sized businesses,
business executives, professionals, and other individuals. The Bank offers
multilingual services to all of its customers in English, Spanish, Cantonese,
Mandarin, and Vietnamese. The Bank offers a variety of deposit products,
including the traditional range of personal and business checking and savings
accounts, time deposits and individual retirement accounts, travelers' checks,
safe deposit boxes, and Mastercard and Visa merchant deposit services.
Operating Strategy
The Bank's strategy is to become the premier commercial bank in California
serving the personal and business banking needs of customers engaged in
business or having family ties or origins in the Asia Pacific region. The Bank
has initiated several measures in recent years to implement this strategy,
including hiring experienced personnel having language capability and cultural
sensitivity appropriate for the region. In July 1995, the Bank converted its
federal savings bank charter to a California commercial bank charter. Until
its conversion, the Bank focused on the commercial banking needs of its
customers within the limits of a federal savings bank charter and traditional
savings and loan culture and capacity. In addition to this legal conversion,
the Bank also identified necessary enhancements to its information and
operating systems, policies, and procedures, as well as the appropriate
personnel necessary for the Bank to operate as a commercial bank. The Bank has
significantly enhanced its senior management team by adding several
experienced commercial bankers with in-depth knowledge of business practices
and cultures of the Asia Pacific region. The Bank has restructured its balance
sheet to reduce interest rate risk and to enhance operating results. The
Bank's balance sheet today is substantially more reflective of a commercial
bank. The Bank continues to focus its marketing strategy on
16
<PAGE>
emphasizing commercial real estate and business loans, trade finance and the
generation of lower-cost demand deposits.
Pending Acquisition
On January 29, 1999, the Company's Board of Directors announced its
intention to acquire First Central Bank for $13.7 million in an all cash
transaction. Completion of the merger is anticipated in the second quarter of
1999 and is subject to regulatory and shareholder approval.
First Central Bank is a national bank with three branches in Southern
California. Since it opened for business in 1986, First Central has
specialized in fulfilling the banking needs of the Chinese-American community.
At December 31, 1998, First Central had total assets of $104.8 million and
total common stockholders' equity of $8.8 million.
Results of Operations
The Company achieved earnings of $18.0 million for the year ended December
31, 1998, representing a 64% increase from the $11.0 million earned in 1997,
and 462% higher than 1996 earnings of $3.2 million.
Components of Net Income
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In millions)
<S> <C> <C> <C>
Net interest income.................................. $ 55.7 $ 44.4 $ 39.6
Provision for loan losses............................ (5.4) (5.6) (4.4)
Noninterest income................................... 10.0 8.5 5.6
Noninterest expense.................................. (32.6) (29.0) (35.1)
Provision for income taxes........................... (9.7) (7.3) (2.5)
------ ------ ------
Net income......................................... $ 18.0 $ 11.0 $ 3.2
====== ====== ======
Net income as a percentage
of average total assets............................. 1.00% 0.70% 0.22%
====== ====== ======
</TABLE>
Basic and diluted earnings per share in 1998 were $0.76, compared to $0.46
and $0.13 in 1997 and 1996, respectively. During 1998, the Bank benefitted
from increased net interest income, primarily due to an increase in the
average balance of earning assets and higher yields on loans. This was
partially offset by an increase in the average balance of FHLB advances. Other
contributions to earnings included a decrease in the provision for loan
losses, and an increase in noninterest income partially offset by an increase
in noninterest expense. Earnings in 1997 improved over 1996 primarily due to
higher average balances and yields earned on loans, an increase in noninterest
income, and a reduction in noninterest expense relating to the payment of a
one-time special assessment totaling $7.0 million to recapitalize the SAIF
during 1996. These factors were partially offset by higher average balances on
short-term borrowings and FHLB advances.
The Company's return on average total assets was 1.00% for the twelve months
ended December 31, 1998, compared to 0.70% and 0.22% for 1997 and 1996,
respectively. Return on average stockholders' equity was 12.83% for the year
ended December 31, 1998, compared to 8.91% and 2.71% for 1997 and 1996,
respectively. Excluding the impact of the SAIF recapitalization assessment,
the Company's returns on average total assets and average stockholders' equity
would have been 0.51% and 6.26%, respectively, during 1996.
Net Interest Income
The Bank's primary source of revenue is net interest income, which is the
difference between interest income on earning assets and interest expense on
interest-bearing liabilities. Net interest income in 1998 totaled $55.7
million, a 25% increase over net interest income of $44.4 million in 1997.
17
<PAGE>
Total interest and dividend income during 1998 increased 18% to $126.7
million compared to $107.1 million during 1997. This increase is derived
primarily from the growth of average interest-earning assets from $1,524.5
million during 1997 to $1,729.1 million during 1998, bolstered by an increase
in loan yields from 7.93% during 1997 to 8.54% during 1998. The increase in
loan yields is a result of the shifting composition of the loan portfolio
whereby lower yielding single family residential mortgage loans were replaced
by higher yielding commercial real estate, construction, and business loans
consistent with the Bank's increased commercial lending activities.
The $204.6 million net growth in the balance of average earning assets is
primarily attributed to a $91.4 million increase in mortgage-backed securities
and an $89.3 million increase in loans receivable. The growth in average
earning assets was primarily funded by an increase of $186.6 million in
average FHLB advances and $27.4 million in average time deposits offset in
part by a decrease in average short-term borrowings of $37.4 million.
Comparing 1997 to 1996, net interest income increased $4.8 million or 12%
from $39.6 million during 1996, resulting from an increase in interest and
dividend income of $10.2 million partially offset by an increase of $5.4
million in interest expense. The growth in interest and dividend income was
derived primarily from an increase in the average balance of loans from $819.9
million during 1996 to $915.2 million during 1997. The yield on loans also
increased from 7.65% to 7.93% during this same period which is reflective of
the Bank's ongoing efforts to increase the proportion of higher yielding
business and commercial loans in its portfolio in comparison to single family
residential mortgage loans.
The growth in average loans from 1996 to 1997 was funded by increases of
$77.6 million in average short-term borrowings and $39.0 million in average
FHLB advances. The increase in interest expense was attributed to increases in
average short-term borrowings and FHLB advances partially offset by a decrease
in the average volume of time deposits of $21.6 million as well as a decrease
in the cost of these deposits from 5.14% during 1996 to 5.06% during 1997.
18
<PAGE>
The following table presents the net interest spread, net interest margin,
average balances, interest income and expense, and the average yields and
rates by asset and liability component:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Interest-earning assets:
Short-term
investments............ $ 227,112 $ 13,302 5.86% $ 212,536 $ 12,409 5.84% $ 193,439 $10,880 5.62%
Investment securities
(1)(2)................. 477,338 26,405 5.53 385,965 21,455 5.56 381,361 22,696 5.95
Loans receivable, net
(1)(3)................. 1,004,477 85,806 8.54 915,202 72,577 7.93 819,868 62,706 7.65
FHLB stock............. 20,140 1,195 5.93 10,764 651 6.05 9,811 594 6.05
---------- -------- ---------- -------- ---------- -------
Total interest-
earning assets....... 1,729,067 26,708 7.33 1,524,467 107,092 7.03 1,404,479 96,876 6.90
-------- ---- -------- ---- ------- ----
Noninterest-earning
assets:
Cash and due from
banks................ 25,231 18,618 18,467
Allowance for loan
losses............... (14,253) (11,172) (9,021)
Other assets......... 60,537 38,110 34,908
---------- ---------- ----------
Total assets....... $1,800,582 $1,570,023 $1,448,833
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS EQUITY
- -------------------
Interest-bearing
liabilities:
Checking accounts...... $ 78,066 $ 1,072 1.37 $ 78,209 $ 1,173 1.50 $ 76,093 $ 1,070 1.41
Money market
accounts............... 28,051 1,010 3.60 17,565 622 3.54 12,834 402 3.13
Savings deposits....... 213,675 5,048 2.36 211,619 5,192 2.45 213,637 5,078 2.38
Time deposits.......... 845,749 42,369 5.01 818,317 41,407 5.06 839,938 43,166 5.14
Short-term
borrowings............. 119,638 6,767 5.66 157,054 8,811 5.61 79,492 4,382 5.51
FHLB advances.......... 282,091 14,777 5.24 95,450 5,441 5.70 56,451 3,170 5.62
---------- -------- ---------- -------- ---------- -------
Total interest-
bearing liabilities.. 1,567,270 71,043 4.53 1,378,214 62,646 4.55 1,278,445 57,268 4.48
-------- ---- -------- ---- ------- ----
Noninterest-bearing
liabilities:
Demand deposits........ 78,802 56,202 37,951
Other liabilities...... 14,009 11,973 14,204
Stockholders' equity... 140,501 123,634 118,233
---------- ---------- ----------
Total liabilities
and stockholders'
equity............. $1,800,582 $1,570,023 $1,448,833
========== ========== ==========
Interest rate spread.... 2.80% 2.48% 2.42%
==== ==== ====
Net interest income and
net interest margin..... $ 55,665 3.22% $ 44,446 2.92% $39,608 2.82%
======== ==== ======== ==== ======= ====
</TABLE>
- ----
(1) Includes amortization of premiums and accretion of discounts on loans
receivable and investment securities. Also includes the amortization of
deferred loan fees.
(2) Average balances exclude unrealized gains or losses on available for sale
securities.
(3) Average balances include nonperforming loans and are net of discounts and
deferred loan fees.
19
<PAGE>
Analysis of Changes in Net Interest Margin
Changes in the Bank's net interest income are a function of changes in rates
and volumes of both interest-earning assets and interest-bearing liabilities.
The following table sets forth information regarding changes in interest
income and interest expense for the years indicated. The total change for each
category of interest-earning asset and interest-bearing liability is segmented
into the change attributable to variations in volume (changes in volume
multiplied by old rate) and the change attributable to variations in interest
rates (changes in rates multiplied by old volume). Nonaccrual loans are
included in average loans used to compute this table.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
----------------------------- -----------------------------
Total Changes Due to Total Changes Due to
Change Volume (1) Rates (1) Change Volume (1) Rates (1)
------- ---------- --------- ------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short-term investments.. $ 893 $ 851 $ 42 $ 1,529 $ 1,074 $ 455
Investment securities... 4,950 5,079 (129) (1,241) 274 (1,515)
Loans receivable, net... 13,229 7,080 6,149 9,871 7,291 2,580
FHLB stock.............. 544 567 (23) 57 58 (1)
------- ------- -------- ------- ------- -------
Total interest
income............... $19,616 $13,577 $ 6,039 $10,216 $ 8,697 $ 1,519
======= ======= ======== ======= ======= =======
INTEREST-BEARING
LIABILITIES:
Checking accounts....... $ (101) $ (2) $ (99) $ 103 $ 30 $ 73
Money market accounts... 388 371 17 220 148 72
Savings deposits........ (144) 50 (194) 114 (48) 162
Time deposits........... 962 1,388 (426) (1,759) (1,111) (648)
Short-term borrowings... (2,044) (2,099) 55 4,429 4,276 153
FHLB advances........... 9,336 10,639 (1,303) 2,271 2,190 81
------- ------- -------- ------- ------- -------
Total interest
expense.............. $ 8,397 $10,347 $ (1,950) $ 5,378 $ 5,485 $ (107)
======= ======= ======== ======= ======= =======
CHANGE IN NET INTEREST
INCOME................. $11,219 $ 3,230 $ 7,989 $ 4,838 $ 3,212 $ 1,626
======= ======= ======== ======= ======= =======
</TABLE>
- --------
(1) Changes in interest income/expense not arising from volume or rate
variances are allocated proportionately to rate and volume.
Provision for Loan Losses
The provision for loan losses was $5.4 million for 1998 compared to $5.6
million in 1997 and $4.4 million in 1996. The decrease of $232 thousand or 4%
from 1997 reflects the Bank's stable asset quality. The composition of the
Bank's loan portfolio continues to shift away from residential mortgage loans
to commercial real estate and business loans. This shift was the predominant
factor in the increased provision when comparing 1997 to 1996. The Bank has an
ongoing effort to improve loan quality through the implementation of more
stringent underwriting parameters and administration procedures, and
aggressively pursuing collection efforts with troubled debtors. These efforts
have resulted in lower net chargeoffs and a continued decline in non-
performing loans.
The increase in the provision for loan losses of $1.2 million or 27% from
1996 is due primarily to an increase in gross loan balances to $949.5 million
at December 31, 1997 from $874.6 million at December 31, 1996. The increase in
the provision during 1997 also coincides with the Bank's transition from a
traditional savings bank to a full-service commercial bank and reflects a
shift in the composition of the loan portfolio from residential mortgage loans
to commercial real estate and business loans. At December 31, 1997,
residential single family mortgage loans represented 38% of the Bank's total
loan portfolio compared to 49% at December 31, 1996. Conversely, at December
31, 1997, commercial real estate and business loans represented 43% of the
Bank's total loan portfolio compared to 33% at December 31, 1996.
20
<PAGE>
Noninterest Income
Components of Noninterest Income
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
(In millions)
<S> <C> <C> <C>
Loan fees................................................... $ 2.4 $1.7 $1.8
Branch fees................................................. 2.6 2.1 1.7
Letters of credit fees and commissions...................... 2.8 1.2 0.5
Net gains on sales of securities............................ 1.3 2.7 0.5
Other....................................................... 0.9 0.8 1.1
----- ---- ----
Total....................................................... $10.0 $8.5 $5.6
===== ==== ====
</TABLE>
Noninterest income increased $1.5 million or 18% to $10.0 million during
1998. Branch fees increased $488 thousand or 23% primarily due to higher
revenues generated from wire transfer operations and increased analysis
charges related to commercial deposit accounts. The $701 thousand or 42%
increase in loan fees is attributed primarily to increased servicing fee
income as well as higher revenues from sales of loans in the secondary market.
Letters of credit fees and commissions, which are generated from the issuance
of standby letters of credit as well as activities related to the Bank's trade
finance operations, increased $1.6 million or 139%. Partially offsetting these
increases in fees and service charges is a $1.4 million decline in net gains
on sales of securities.
Comparing 1997 to 1996, noninterest income increased $2.9 million or 52% to
$8.5 million, primarily due to an increase in net gains on sales of securities
of $2.2 million. Other contributions included an increase in various fees and
service charges relating to standby letters of credit, wire transfer
operations and analysis charges on commercial deposit accounts. Partially
offsetting these increases is a decline in other operating income of $314
thousand due primarily to gains recorded from the sale of approximately $25
million of COFI-based loans during 1996.
Noninterest Expense
Components of Noninterest Expense
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(In millions)
<S> <C> <C> <C>
Compensation and employee benefits....................... $17.3 $15.7 $12.9
Net occupancy............................................ 5.0 4.6 4.1
Data processing.......................................... 1.2 1.2 1.1
Amortization of intangibles.............................. 1.2 1.2 1.2
Amortization of affordable housing investments........... 1.0 0.2 --
Deposit insurance premiums and regulatory assessments.... 0.8 0.1 2.7
SAIF recapitalization assessment......................... -- -- 7.0
Other real estate owned (OREO) operations, net........... (0.4) 0.3 1.1
Other.................................................... 6.5 5.7 5.0
----- ----- -----
Total.................................................. $32.6 $29.0 $35.1
===== ===== =====
</TABLE>
Noninterest expense increased $3.6 million or 13% in 1998 compared to 1997.
Noninterest expense is comprised primarily of compensation and employee
benefits, occupancy and other operating expenses. Compensation and employee
benefits increased $1.6 million or 10% due primarily to the hiring of
additional personnel in line with the Bank's overall growth, as well as the
impact of normal salary and cost increases for existing employees. The
increase in occupancy expenses of $328 thousand or 7% reflects the opening of
a new branch in Milpitas, California in August 1998; a full year of operations
for the Cupertino, California branch which was opened in September 1997; as
well as the impact of normal rent adjustments in existing leases. The
21
<PAGE>
$807 thousand increase in amortization of affordable housing investments
reflects a full year of amortization for 1998. These investments were
purchased during the latter part of 1997. Deposit insurance premiums increased
$677 thousand or 457% from 1997 to 1998 due to a partial refund received in
1997 amounting to $495 thousand of the $7.0 million one-time SAIF assessment
paid in 1996. No such refunds were received during 1998. Expenses related to
OREO operations decreased $680 thousand or 227% during 1998 primarily due to a
decrease in loss writedowns and an increase in rental income collected on OREO
properties. Other operating expenses include advertising and public relations,
telephone and postage, stationery and supplies, bank and item processing
charges, insurance, and legal expenses. Increases in other operating expenses
can be attributed to the overall growth of the Bank.
Comparing 1997 to 1996, noninterest expense decreased $6.1 million or 17%
primarily due to the payment of the $7.0 million one-time SAIF
recapitalization assessment during 1996. Directly correlated to the payment of
this assessment, the Bank's annual deposit insurance premium decreased, which
to a large extent, accounts for the $2.6 million decrease in deposit insurance
premiums from 1996 to 1997. As previously mentioned, the Bank also received a
$495 thousand partial refund of this special assessment during 1997 which
further contributed to the decrease in deposit insurance premiums.
Compensation and employee benefits increased $2.8 million or 22% from $12.9
million during 1997, primarily due to the hiring of additional personnel as
evidenced by the increase in the number of full-time equivalent employees to
365 from 329 as of December 31, 1997 and 1996, respectively. This was
compounded by the impact of normal salary and cost increases related to
existing employees. Occupancy expenses increased $536 thousand or 13% due to
the opening of a new branch office in Cupertino in September 1997, purchases
of various software packages, and increases in depreciation and amortization
expenses related to premises and equipment. Expenses from OREO operations
decreased $761 thousand or 72% primarily due to a decrease in OREO loss
writedowns of $290 thousand and an increase in net gains on sales of OREO
properties of $252 thousand. Increases in advertising and public relations,
telephone and postage, bank and item processing charges, and other operating
expenses can be attributed to the overall growth of the Bank.
Provision for Income Taxes
The provision for income taxes increased $2.4 million or 32% during 1998
mainly as a direct result of higher pretax income partially offset by the
utilization of tax credits from affordable housing investments amounting to
$1.7 million. The 1998 provision of $9.7 million reflects an effective tax
rate of 34.9% compared to provisions of $7.3 million in 1997 and $2.5 million
in 1996, representing effective tax rates of 40.0% and 43.7%, respectively.
Balance Sheet Analysis
The Bank's total assets at December 31, 1998 were $2.06 billion, an increase
of $323.8 million or 19% over December 31, 1997. The asset growth was
reflected in all categories of interest-earning assets with the exception of
lower-yielding federal funds sold and securities purchased under agreements to
resell. Mortgage-backed securities available for sale and loans receivable
reflected the largest growth, increasing by $307.6 million and $165.7 million,
respectively. The asset growth was primarily funded by an increase of $352.0
million in FHLB advances and an increase in total deposits of $57.9 million,
partially offset by a decrease in short-term borrowings of $106.0 million.
Investment Securities
Income from investing activities provides a significant portion of the
Bank's total income. Management generally maintains an investment portfolio
with adjustable rates and relatively short maturities to minimize overall
interest rate risk. The Bank has a substantial investment in residential
mortgage-backed securities, consisting primarily of adjustable-rate pass-
through certificates issued by GNMA, FHLMC and FNMA. As of December 31, 1998,
the carrying value of mortgage-backed securities totaled $682.4 million, or
33% of total
22
<PAGE>
assets which included 78% with adjustable rates. The mortgage-backed
securities portfolio also contains pass-through certificates issued by private
issuers. At December 31, 1998, the Bank held $1.6 million, $266.3 million,
$296.5 million, and $118.0 million of mortgage-backed securities issued by
GNMA, FHLMC, FNMA, and private issuers, respectively. At December 31, 1998,
$158.2 million in mortgage-backed securities were pledged as collateral for
public funds.
The Bank's entire investment portfolio was classified as available-for-sale
at December 31, 1998, with the exception of equity investments in the Federal
Home Loan Bank . Management believes it has the ability to hold all its
investments until maturity; maintaining the entire investment portfolio as
available-for-sale allows the investment portfolio to be used as a tool to
provide additional liquidity beyond that of normal principal and interest
payments. It also allows for a restructuring of the investment portfolio
should market or other economic factors indicate the need to do so.
The following table sets forth the carrying value of the Bank's investment
portfolio, including equity investments in the FHLB for each of the past three
years. At December 31, 1998, the market value of the Bank's investment
portfolio totaled $715.3 million.
<TABLE>
<CAPTION>
At December 31,
--------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
U.S. Treasury.................................... $ -- $ -- $ 50,120
U.S. Government agency........................... 5,000
Mortgage-backed securities....................... 682,436 374,810 351,348
FHLB stock....................................... 32,874 13,881 10,074
-------- -------- --------
Total investment securities.................... $715,310 $388,691 $416,542
======== ======== ========
</TABLE>
Mortgage-backed securities of $682.4 million as of December 31, 1998
represents an increase of $307.6 million or 82% compared to the December 31,
1997 balance of $374.8 million. During 1998, the Bank sold mortgage-backed
securities with total carrying value of $278.2 million as a result of
increasing prepayments prompted by falling interest rates. The Bank recorded
net gains on sale of $1.3 million from these transactions. Proceeds from the
sale of these securities, along with funds obtained from lower-cost callable
FHLB advances, were used to purchase additional mortgage-backed securities
with more attractive yields. Furthermore, $35.9 million of COFI-based
adjustable rate loans were securitized through FNMA during 1998. No gain or
loss was recorded upon securitization.
The following table sets forth certain information regarding the carrying
values, weighted average yields, and contractual maturity distribution,
excluding periodic principal payments, of the Bank's investment securities
portfolio at December 31, 1998.
<TABLE>
<CAPTION>
After Five Years
After One Year But But Within
Within One Year Within Five Years Ten Years After Ten Years Total
---------------- ------------------- ----------------- ----------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- --------- -------- --------- ------- --------- ------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury........... $ -- --% $ -- --% $ -- --% $ -- --% $ -- --%
U.S. Government agency.. -- -- -- -- -- -- -- -- -- --
Mortgage-backed
securities............. 3,985 5.36 -- -- 15,481 6.08 662,970 6.05 682,436 6.05
Other................... -- -- -- -- -- -- 32,874 3.64 32,874 3.64
-------- --------- --------- --------- --------
Total.................. $3,985 5.36 -- -- $15,481 6.08 $695,844 5.94 $715,310 5.94
======== ========= ========= ========= ========
</TABLE>
23
<PAGE>
Loans
The Bank offers a broad range of products designed to meet the credit needs
of its borrowers. The Bank's principal lending activities consist of
residential mortgage loans, multifamily real estate loans, commercial real
estate loans, construction loans, commercial and trade finance loans, and
consumer loans. Net loans receivable at December 31, 1998 totaled $1.10
billion, representing an increase of $165.7 million or 18% from December 31,
1997. This increase reflects, in large part, the replacement of short-term
investments in favor of higher yielding assets.
The composition of the net growth in loans includes increases in commercial
real estate loans of $89.8 million; construction loans of $51.9 million; and
commercial loans, including trade finance products, of $84.9 million.
Collectively, these increases in commercial loan products represent a 52%
increase over year-end 1997 balances. Partially offsetting the increases in
these loan categories is a decline of $86.0 million in single family
residential loans, resulting primarily from the securitization of
approximately $35.9 million of COFI-based loans through FNMA. These activities
are consistent with the Bank's ongoing strategy of restructuring its balance
sheet to be more reflective of a commercial bank and to reduce its interest
rate risk exposure.
24
<PAGE>
The following table provides the composition of the Bank's loan portfolio at
the end of each of the past five years:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential, one to
four units........... $ 270,444 24.2% $356,478 37.5% $425,270 48.7% $474,192 60.4% $532,647 63.4%
Residential,
multifamily.......... 167,545 15.0 144,147 15.2 141,649 16.2 150,333 19.1 159,093 18.9
Commercial and
industrial real
estate............... 358,850 32.0 269,028 28.3 214,599 24.5 142,423 18.1 133,643 15.9
Construction.......... 78,922 7.0 27,020 2.8 11,607 1.3 2,151 0.3 2,829 0.3
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate
loans.............. 875,761 78.2 796,673 83.8 793,125 90.7 769,099 97.9 828,212 98.5
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Other loans:
Business, commercial.. 223,318 20.0 138,408 14.6 71,672 8.2 11,880 1.5 5,411 0.7
Automobile............ 4,972 0.4 5,259 0.6 3,877 0.4 840 0.1 1,849 0.2
Other consumer........ 15,156 1.4 9,137 1.0 5,953 0.7 3,680 0.5 5,143 0.6
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total other loans... 243,446 21.8 152,804 16.2 81,502 9.3 16,400 2.1 12,403 1.5
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total gross
loans............ 1,119,207 100.0% 949,477 100.0% 874,627 100.0% 785,499 100.0% 840,615 100.0%
===== ===== ===== ===== =====
Unearned fees, premiums
and
discounts, net......... (2,122) (2,354) (1,903) (288) (129)
Allowance for loan
losses................. (16,506) (12,273) (10,084) (8,735) (14,515)
---------- -------- -------- -------- --------
Loans receivable,
net................ $1,100,579 $934,850 $862,640 $776,476 $825,971
========== ======== ======== ======== ========
</TABLE>
25
<PAGE>
Residential Mortgage Loans. The Bank offers first mortgage loans secured by
one-to-four unit residential properties located in the Bank's primary lending
area. At December 31, 1998, $270.4 million or 24% of the loan portfolio was
secured by one-to-four family residential real estate mortgages, compared to
$356.5 million or 38% at December 31, 1997. The decrease in residential
mortgage loans reflects the Bank's strategy of de-emphasizing the origination
of single family mortgage loans for its portfolio. Under the Bank's current
lending strategy, substantially all new fixed-rate single family residential
loans are sold into the secondary market.
Multifamily and Commercial Real Estate Loans. The Bank has historically
originated a limited number of mortgage loans secured by multifamily and
commercial real estate as part of its business operations. In recent years the
Bank has increased its emphasis on such lending activities. While real estate
lending activities are collateralized by real property, these transactions are
subject to similar credit evaluation, underwriting and monitoring standards as
those applied to commercial loans. Multifamily and commercial real estate
loans accounted for $167.5 million or 15% and $358.9 million or 32%,
respectively, of the Bank's loan portfolio at December 31, 1998. At year-end
1997, multifamily and commercial real estate loans amounted to $144.1 million
or 15% and $269.0 million or 28%, respectively.
Construction Loans. The Bank offers loans to finance the construction of
income-producing or owner-occupied buildings. The Bank limits its exposure in
construction loans to no more than 25% of total loans. At December 31, 1998,
construction loans accounted for $78.9 million or 7% of the Bank's loan
portfolio. This compares with $27.0 million or 3% of the loan portfolio at
December 31, 1997.
Commercial Loans. The Bank finances small and middle-market businesses in a
wide spectrum of industries throughout California. The Bank offers commercial
loans for working capital, accounts receivable and inventory lines. At
December 31, 1998, commercial loans accounted for $118.2 million or 11% of the
Bank's loan portfolio compared to $74.2 million or 8% at December 31, 1997.
Trade Finance. In 1994, the Bank introduced a variety of international
finance and trade services and products, including letters of credit,
revolving lines of credit, import loans, bankers' acceptances, working capital
lines, domestic purchase financing, and pre-export financing. Total fee income
generated from trade finance activities has grown significantly from $26
thousand in 1994 to $1.4 million in 1998. A substantial portion of this
business involves California-based customers engaged in import activities. To
the Bank's best knowledge, these activities have not been adversely affected
to a significant degree by the recent economic crisis in Asia. The Bank
currently has no extensions of credit to foreign or overseas customers.
At December 31, 1998, loans to finance international trade totaled $105.1
million or 9% of the Bank's loan portfolio. Of this amount, approximately 98%
was made to borrowers on the import side of international trade. At December
31, 1997, such loans amounted to $64.2 million or 7% of the Bank's loan
portfolio. These financings are generally made through letters of credit
ranging from $100 thousand to $1 million. All trade finance transactions are
U.S. dollar denominated.
Affordable Housing. The Bank is engaged in a variety of lending and credit
enhancement programs to finance the development of affordable housing
projects, which generally are eligible for federal low income housing tax
credits. As of December 31, 1998, the Bank had outstanding $138.1 million of
letters of credit, which were issued to enhance the ratings of revenue bonds
used to finance affordable housing projects. This compares to $66.6 million as
of year-end 1997, representing a $71.5 million or 107% increase. Credit
facilities for individual projects generally range in size from $2 million to
$10 million.
26
<PAGE>
The following table presents the maturity schedule of the Bank's loan
portfolio at December 31, 1998. All loans are shown maturing based upon
contractual maturities, and include scheduled repayments but not potential
prepayments. Demand loans, loans having no stated schedule of repayments and
no stated maturity, and overdrafts are reported as due in one year or less.
Loan balances have not been reduced for undisbursed loan proceeds, unearned
discounts, and the allowance for loan losses. Nonaccrual loans of $9.8 million
are included in the within one year category:
<TABLE>
<CAPTION>
More
After One than
Within But Within Five
One Year Five Years Years Total
-------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Residential, one to four units..... $ 16,937 $ 25,244 $228,263 $ 270,444
Residential, multifamily........... 9,266 42,096 116,183 167,545
Commercial and industrial real
estate............................ 62,028 246,337 50,485 358,850
Construction....................... 78,922 -- -- 78,922
Business, commercial............... 194,985 27,054 1,279 223,318
Other consumer..................... 4,298 3,444 12,386 20,128
-------- -------- -------- ----------
Total............................ $366,436 $344,175 $408,596 $1,119,207
======== ======== ======== ==========
</TABLE>
As of December 31, 1998, excluding nonaccrual loans, outstanding loans
scheduled to be repriced within one year, after one but within five years, and
in more than five years, are as follows:
<TABLE>
<CAPTION>
After One
Within But Within More than
One Year Five Years Five Years Total
-------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Total fixed rate................... $128,196 $ 92,549 $18,808 $ 239,553
Total variable rate................ 845,378 13,043 11,471 869,892
-------- -------- ------- ----------
Total............................ $973,574 $105,592 $30,279 $1,109,445
======== ======== ======= ==========
</TABLE>
Nonperforming Assets
Loans are continually monitored by management and the Board of Directors.
The Bank's policy is to place a loan on nonaccrual status if either (i)
principal or interest payments are past due in excess of 90 days; or (ii) the
full collection of principal or interest becomes uncertain, regardless of the
length of past due status. When a loan reaches nonaccrual status, any interest
accrued on the loan is reversed and charged against current income. Subsequent
payments are either applied to the outstanding principal balance or recorded
as interest income based upon management's assessment of the collectibility of
the account. Nonaccrual loans totaled $9.8 million at December 31, 1998,
compared to $8.5 million at year-end 1997. The $1.3 million increase is
primarily due to a $4.2 million construction loan and $2.5 million in
commercial loans that were placed on nonaccrual status during 1998. It is
management's opinion that a large portion of these loans will be repaid
according to their contractual terms. These increases in nonaccrual loans
compared to the prior year were offset in part by $742 thousand in loan
payoffs and $4.7 million of nonaccrual loans that were transferred to other
real estate owned.
Restructured loans or loans that have had their original terms modified
totaled $5.9 million at December 31, 1998, representing a $1.6 million
reduction from the $7.5 million reported at December 31, 1997. The decrease in
restructured loans is primarily due to the payoff of a $1.2 million loan
previously classified as restructured.
Other real estate owned includes properties acquired through foreclosure or
through full or partial satisfaction of loans. The difference between the fair
value of the real estate or other collateral, less the estimated costs of
disposal, and the loan balance at the time of transfer to OREO is reflected in
the allowance for loan losses as a charge-off. Any subsequent declines in fair
value of the OREO after the date of transfer are recorded through a provision
for writedowns on OREO. Routine holding costs, net of any income and gains and
losses on disposal, are reported as noninterest expense. OREO totaled $4.6
million and $3.2 million at December 31, 1998
27
<PAGE>
and 1997, respectively. Additions to OREO totaled $4.7 million for 1998,
including two commercial real estate properties with combined book values of
$3.1 million. The Bank sold sixteen OREO properties with a total book value of
$3.0 million during 1998. The Bank is actively marketing the remaining
properties.
The following table sets forth nonperforming loans, restructured loans and
other real estate owned at the end of each of the past five years:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans................. $ 9,762 $ 8,490 $11,613 $ 7,496 $13,682
Loans past due 90 days or more
but not on nonaccrual........... 129 2,403 206 -- 904
------- ------- ------- ------- -------
Total nonperforming loans...... 9,891 10,893 11,819 7,496 14,586
------- ------- ------- ------- -------
Restructured loans............... 5,936 7,487 5,485 7,604 12,724
Other real estate owned, net..... 4,600 3,217 3,491 6,388 8,197
------- ------- ------- ------- -------
Total nonperforming assets..... $20,427 $21,597 $20,795 $21,488 $35,507
======= ======= ======= ======= =======
Total nonperforming assets to
total assets.................... 0.99% 1.25% 1.28% 1.57% 2.69%
Allowance for loan losses to
nonperforming loans............. 166.88 112.67 85.32 116.53 99.51
Nonperforming loans to total
gross loans..................... 0.88 1.15 1.35 0.95 1.74
</TABLE>
At December 31, 1998 and 1997, the Bank had classified $10.0 million and
$17.6 million, respectively, of its loans as impaired, with specific reserves
of $350 thousand and $1.6 million, respectively. Charge-offs related to
impaired loans totaled $1.6 million and $2.9 million for 1998 and 1997,
respectively. A significant portion of the impaired loans, 67% at December 31,
1998 and 81% at December 31, 1997, were secured by real estate. The Bank's
average recorded investment in impaired loans for the years ended December 31,
1998 and 1997 was $10.5 million and $18.8 million, respectively. During 1998
and 1997, gross interest income that would have been recorded on impaired
loans, had they performed in accordance with their original terms, totaled
$1.1 million and $1.4 million, respectively. Of these amounts, actual interest
recognized on impaired loans, on a cash basis, was $890 thousand and $1.1
million during 1998 and 1997, respectively.
Allowance for Loan Losses
A certain degree of risk is inherent in the extension of credit. The
allowance for loan losses is maintained at a level considered by management to
be commensurate with the estimated known and inherent risks in the existing
portfolio. Management performs an ongoing assessment of the risks inherent in
the loan portfolio. The allowance for loan losses is increased by the
provision for loan losses which is charged against current period operating
results, and is decreased by the amount of net charge-offs during the period.
The Bank determines the level of the allowance for loan losses, and
correspondingly, the provision for loan losses based upon various judgments
and assumptions, including general economic conditions (especially in
California), loan portfolio composition and concentrations, prior loan loss
experience, collateral value, identification of problem and potential problem
loans, and other relevant data. While management believes that the allowance
for loan losses is adequate at December 31, 1998, future additions to the
allowance will be subject to continuing evaluation of inherent risks in the
loan portfolio.
28
<PAGE>
At December 31, 1998, the allowance for loan losses amounted to $16.5
million, or 1.47% of total loans, compared to $12.3 million, or 1.29% of total
loans, at December 31, 1997. The following table summarizes activity in the
allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance balance at
beginning of period...... $ 12,273 $ 10,084 $ 8,735 $ 14,515 $ 14,846
Provision for loan
losses................... 5,356 5,588 4,398 6,200 4,155
Actual charge-offs:
1-4 family residential
real estate............ 196 469 530 1,666 823
Multifamily real
estate................. 588 1,595 1,919 5,251 2,316
Commercial and
industrial real
estate................. 60 1,079 985 5,350 410
Business, commercial.... 1,689 986 92 -- 140
Automobile.............. 130 5 28 27 67
Other................... 3 2 17 46 850
---------- -------- -------- -------- --------
Total charge-offs..... 2,666 4,136 3,571 12,340 4,606
---------- -------- -------- -------- --------
Recoveries:
1-4 family residential
real estate............ 172 12 49 -- 3
Multifamily real
estate................. 1 275 174 35 --
Commercial and
industrial real
estate................. 845 385 284 164 --
Business, commercial.... 480 41 3 -- 90
Automobile.............. 45 19 9 9 14
Other................... -- 5 3 152 13
---------- -------- -------- -------- --------
Total recoveries...... 1,543 737 522 360 120
---------- -------- -------- -------- --------
Net charge-offs..... 1,123 3,399 3,049 11,980 4,486
---------- -------- -------- -------- --------
Allowance balance at end
of period................ $ 16,506 $ 12,273 $ 10,084 $ 8,735 $ 14,515
========== ======== ======== ======== ========
Average loans
outstanding.............. $1,004,277 $915,202 $819,868 $814,970 $806,659
========== ======== ======== ======== ========
Total loans outstanding at
end of period............ $1,119,207 $949,477 $874,627 $785,499 $840,615
========== ======== ======== ======== ========
Net charge-offs to average
loans.................... 0.11% 0.37% 0.37% 1.47% 0.56%
Allowance for loan losses
to total gross
loans at end of year..... 1.47 1.29 1.15 1.11 1.73
Provision for loan losses
to net chargeoffs........ 4.77 1.64 1.44 0.52 0.93
</TABLE>
The provision for loan losses totaled $5.4 million for the year ended
December 31, 1998 compared to $5.6 million for the year ended December 31,
1997. The decline reflects the Bank's stable asset quality. Net charge-offs
totaled $1.1 million for 1998, a significant reduction from $3.4 million for
1997. As a percentage of average loans outstanding , net charge-offs were
0.11% and 0.37%, respectively, for the years ended December 31, 1998 and 1997.
The Bank uses several methodologies to test the overall adequacy of the
allowance. The two primary methodologies, the classification migration model
and the individual loan review analysis methodology, provide the basis for
determining the overall adequacy of the allowance. These methodologies are
augmented by ancillary analyses, which include historical loss analyses, peer
group comparisons, and analyses based on the federal regulatory interagency
policy for loan and lease losses. The Bank also performs an analysis to
quantify the potential impact on asset quality created by customer
preparedness or lack thereof to "Year 2000" technology requirements.
29
<PAGE>
The change in charters in June 1995 to a commercial business bank from a
federally insured savings bank began a transition in the Bank's balance sheet
from a traditional residential real estate lender to a full service commercial
bank. As a result of this transition, the Bank developed various methodologies
to estimate allowance requirements based on both historical and current
exposure estimates. The Bank's overall approach is not to place undue reliance
on historical losses nor decrease estimated reserves to better coincide with
actual observed net losses. Although net charge-offs have declined since 1995,
they are primarily attributable to assets that were booked prior to the Bank's
conversion to a commercial bank.
The classification migration model utilizes net losses incurred by the Bank
during the preceding five years in conjunction with current asset
classifications to extrapolate loss factors for various loan categories in
determining an estimated allowance requirement. The individual loan review
analysis method provides a more contemporaneous assessment of the portfolio by
incorporating individual asset evaluations prepared by the Bank's credit
administration department. Loans are reviewed at least annually and more
frequently if warranted by circumstances. Real estate loans and commercial
business loans not subject to individual loan review as well as out-of-cycle
individually reviewed loans are monitored based on problem loan indicators
such as loan payment and property tax status. The estimated exposure and
subsequent charge-offs that result from these individual loan reviews provide
the basis for loss factors assigned to the various loan categories.
30
<PAGE>
The following table reflects management's allocation of the allowance for
loan losses by loan category and the ratio of each loan category to total
loans as of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
1998 % 1997 % 1996 % 1995 % 1994 %
------- ----- ------- ----- ------- ----- ------ ----- ------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1-4 family residential
real estate............. $ 500 24.2% $ 894 37.5% $ 996 48.7% $1,327 60.4% $ 2,829 63.5%
Multifamily real
estate.................. 2,435 15.0 3,022 15.2 3,445 16.2 3,298 19.1 5,113 18.9
Commercial and
industrial real estate.. 1,373 32.0 1,059 28.3 2,044 24.5 2,772 18.1 5,920 15.9
Construction............ 2,339 7.0 404 2.8 66 1.3 23 0.3 249 0.3
Business, commercial.... 7,679 20.0 5,249 14.6 1,357 8.2 377 1.5 128 0.6
Automobile.............. 45 0.4 33 0.6 27 0.4 6 0.1 28 0.2
Consumer and other...... 22 1.4 32 1.0 23 0.7 19 0.5 62 0.6
Year 2000 exposure...... 600 -- -- -- --
Other risks............. 1,513 1,580 2,126 913 186
------- ----- ------- ----- ------- ----- ------ ----- ------- -----
Total................. $16,506 100.0% $12,273 100.0% $10,084 100.0% $8,735 100.0% $14,515 100.0%
======= ===== ======= ===== ======= ===== ====== ===== ======= =====
</TABLE>
31
<PAGE>
The allowance for loan losses of $16.5 million at December 31, 1998 exceeded
the Bank's estimated allowance requirement by $2.1 million based on the
results of the classification migration and the individual loan review
analysis methodologies. The estimated allowance requirement as of December 31,
1998 is $14.4 million compared to $10.7 million as of December 31, 1997.
Increased loan volume, changes in portfolio composition, and the
implementation of minimum loss factors to compensate for the relative risk
associated with the restructuring of the balance sheet were the primary
factors contributing to the increase in the allocated portion of the allowance
from 1997 to 1998. Total nonperforming assets declined marginally from year-
end 1997 to year-end 1998, and are not anticipated to increase materially in
the near future.
During 1998, the Bank earmarked $600 thousand of the unallocated allowance
to absorb any potential exposure to "Year 2000" issues. The remaining $1.5
million unallocated allowance at year-end 1998 is comparable to the $1.6
million unallocated allowance at year-end 1997. These amounts represent 9% and
13% of the total allowance for loan losses at December 31, 1998 and 1997,
respectively. The effects of various conditions, which include existing
general economic and business conditions, credit quality trends, collateral
values, loan volumes and concentrations, and the seasoning of the portfolio,
cannot be directly measured in the determination of the allowance requirement.
The evaluation of the inherent loss with respect to these conditions is
subject to a higher degree of uncertainty because they are not identified with
specific problem credits or portfolio segments. Consequently, management has
deemed it prudent to maintain the unallocated portion of the allowance to
compensate for the estimation risk associated with the classification
migration and the individual loan review analysis methodologies.
FUNDING SOURCES
Deposits
The Bank offers a wide variety of retail deposit account products to both
consumer and commercial deposit customers. Time deposits, consisting primarily
of retail fixed-rate certificates of deposit, comprised 66% of the deposit
portfolio at December 31, 1998 compared to 70% at year-end 1997. Non-time
deposits--including noninterest bearing demand accounts, interest-bearing
checking accounts, savings deposits, and money market accounts--accounted for
34% of the deposit portfolio at December 31, 1998 compared to 30% at December
31, 1997. While the Bank does not solicit brokered certificates of deposits,
it held $3.7 million and $3.6 million of brokered deposits at December 31,
1998 and 1997, respectively. The Bank's market strategy is based on its
reputation as a community bank that provides quality products and personal
customer service.
Deposits of $1.29 billion at December 31, 1998, represented an increase of
$57.9 million or 5% over December 31, 1997. The increase in deposits is
comprised primarily of increases in noninterest-bearing demand accounts of
$35.9 million or 53%, money market accounts of $18.4 million or 87% and
savings accounts of $13.5 million or 7%. These increases in non-time deposit
accounts are partially offset by a decline in time deposits of $10.5 million
or 1%. The increase in noninterest-bearing demand accounts is largely
attributable to new commercial demand accounts reflecting a growth of $26.4
million or 60% from $43.7 million to $70.1 million at December 31, 1997 and
1998, respectively. Similarly, the increase in money market accounts is almost
entirely due to the increase in commercial accounts, while $6.2 million,
representing a 40% increase, of the growth in savings accounts is attributable
to commercial accounts. This reflects the Bank's concentrated effort in
increasing the volume of low-cost transaction accounts, which generate higher
fee income and are less costly as a source of funds compared to time deposits.
Although time deposits posted a net decrease in 1998 compared to 1997,
public deposits continued its growth trend increasing $46.6 million or 75% to
$109.2 million as of December 31, 1998 from $62.6 million as of December 31,
1997. The balance of public deposits at year-end 1998 is comprised almost
entirely of deposits from the State of California. The growth in public
deposits was more than offset by runoffs on higher rate retail customer
certificates of deposits.
32
<PAGE>
Time deposits greater than $100 thousand totaled $386.9 million and
accounted for 30% of the deposit portfolio at December 31, 1998. These
accounts had a weighted average interest rate of 4.87% at December 31, 1998
and consisted primarily of deposits by consumers and public funds. The
following table provides the remaining maturities at December 31, 1998 of time
deposits greater than $100 thousand (in thousands):
<TABLE>
<S> <C>
3 months or less............................................... $249,105
Over 3 months through 6 months................................. 60,586
Over 6 months through 12 months................................ 64,062
Over 12 months................................................. 13,712
--------
Total........................................................ $386,925
========
</TABLE>
Borrowings
The Bank regularly uses short-term borrowings and FHLB advances to manage
the liquidity position of the balance sheet. Short-term borrowings consist
primarily of federal funds purchased and securities sold under agreements to
repurchase. Short-term borrowings decreased from $139.0 million as of December
31, 1997 to $33.0 million as of December 31, 1998. The following table
provides information on short-term borrowings for the periods indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Average balance outstanding during the
period....................................... $119,638 $157,054 $ 79,492
Maximum amount outstanding at any month-end
during
the period................................... $191,635 $300,000 $244,000
Weighted average interest rate during the
period....................................... 5.66% 5.61% 5.51%
Total short-term borrowings at period end..... $ 33,000 $139,000 $244,000
Weighted average interest rate at period end.. 5.75% 6.08% 5.64%
</TABLE>
This decrease of $106.0 million or 76% represents the replacement of
repurchase agreements with callable FHLB advances as a source of funds,
partially accounting for the $352.0 million or 167% increase in FHLB advances
over the same period. Mortgage-backed securities that were previously pledged
against repurchase agreements and certain real estate loans are pledged
against FHLB advances. Because callable advances have a quarterly call feature
that enables the FHLB to call the advances due once per quarter, they are more
inexpensive than traditional FHLB advances and provide a stable alternative to
short-term borrowings. As of December 31, 1998, $241.0 million or 43% of the
total $563.0 million FHLB advances were callable. At December 31, 1998 and
1997, FHLB advances had a weighted average interest rate of 4.95% and 5.64%,
respectively. Approximately 48% or $272 million of outstanding FHLB advances
at December 31, 1998 had remaining maturities greater than one year.
Capital
At December 31, 1998, stockholders' equity totaled $150.8 million, an
increase of $18.3 million or 14% from $132.6 million as of December 31, 1997.
The increase is due primarily to net income of $18.0 million, enhanced by a
net decrease in unrealized losses on available-for-sale securities of $250
thousand.
Management is committed to maintaining capital at a level sufficient to
assure shareholders, customers and regulators that the Company and its bank
subsidiary are financially sound. The Company and its bank subsidiary are
subject to risk-based capital regulations adopted by the federal banking
regulators in January 1990. These guidelines are used to evaluate capital
adequacy and are based on an institution's asset risk profile and off-balance
sheet exposures. According to the regulations, institutions whose Tier 1 and
total capital ratios meet or exceed 6% and 10%, respectively, are deemed to be
"well-capitalized." At December 31, 1998, the Bank's
33
<PAGE>
Tier 1 and total capital ratios were 10.3% and 11.4%, respectively, compared
to 12.2% and 13.4% , respectively, at year-end 1997. During 1998, due to the
Company's high capital level, investments securities purchases funded by FHLB
advances were transacted to leverage the balance sheet, achieving a positive
spread with minimal interest rate risk.
The following table compares the Company's actual capital ratios at December
31, 1998, to those required by regulatory agencies for capital adequacy and
well-capitalized classification purposes:
<TABLE>
<CAPTION>
Minimum Well
East West Regulatory Capitalized
Bancorp Requirements Requirements
--------- ------------ ------------
<S> <C> <C> <C>
Total Capital (to Risk-Weighted
Assets)............................... 11.4% 8.0% 10.0%
Tier 1 Capital (to Risk-Weighted
Assets)............................... 10.3 4.0 6.0
Tier 1 Capital (to Average Assets)..... 7.4 4.0 5.0
</TABLE>
ASSET LIABILITY AND MARKET RISK MANAGEMENT
Liquidity
Liquidity management involves the Bank's ability to meet cash flow
requirements arising from fluctuations in deposit levels and demands of daily
operations, which include funding of securities purchases, providing for
customers' credit needs and ongoing repayment of borrowings. The Bank's
liquidity is actively managed on a daily basis and reviewed periodically by
the Asset/Liability Committee and the Board of Directors. This process is
intended to ensure the maintenance of sufficient funds to meet the needs of
the Bank, including adequate cash flow for off-balance sheet instruments.
The Bank's primary sources of liquidity are derived from financing
activities which include the acceptance of customer deposits, federal funds
facilities, repurchase agreement facilities and advances from the Federal Home
Loan Bank of San Francisco. These funding sources are augmented by payments of
principal and interest on loans, the routine liquidation of securities from
the available-for-sale portfolio and securitizations of eligible loans. As a
means of augmenting its liquidity, the Bank has established federal funds
lines with two correspondent banks and several master repurchase agreements
with major brokerage companies. At December 31, 1998, the Bank's available
borrowing capacity include approximately $46 million in repurchase
arrangements and $35 million in federal funds line facilities. Management
believes its liquidity sources to be stable and adequate.
The Bank uses cash flows primarily to fund originations of loans and
purchases of investment securities. At December 31, 1998, management was not
aware of any information that would result in or that was reasonably likely to
have a material effect on the Bank's liquidity position.
The liquidity of the parent company, East West Bancorp, Inc. is primarily
dependent on the payment of cash dividends by its subsidiary, East West Bank,
subject to limitations imposed by the Financial Code of the State of
California. For 1998, East West Bank declared dividends amounting to $73
thousand to East West Bancorp, Inc. As of December 31, 1998, approximately
$32.2 million of undivided profits of the Bank was available for dividends to
the Company.
Interest Rate Sensitivity Management
The Bank's success is largely dependent upon its ability to manage interest
rate risk, which is the impact of adverse fluctuations in interest rates on
the Bank's net interest income and net portfolio value. Although in the normal
course of business the Bank manages other risks, such as credit and liquidity
risk, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the
Bank's financial condition and results of operations.
34
<PAGE>
The fundamental objective of the asset liability management process is to
manage the Bank's exposure to interest rate fluctuations while maintaining
adequate levels of liquidity and capital. The Bank's strategy is formulated by
the Asset/Liability Committee, which coordinates with the Board of Directors
to monitor the Bank's overall asset and liability composition. The Committee
meets regularly to evaluate, among other things, the sensitivity of the Bank's
assets and liabilities to interest rate changes, the book and market values of
assets and liabilities, unrealized gains and losses on its available-for-sale
portfolio (including those attributable to hedging transactions), purchase and
securitization activity, and maturities of investments and borrowings.
The Bank's overall strategy is to minimize the adverse impact of immediate
incremental changes in market interest rates (rate shock) on net interest
income and net portfolio value. Net portfolio value is defined as the present
value of assets, minus the present value of liabilities and off-balance sheet
instruments. The attainment of this goal requires a balance between
profitability, liquidity and interest rate risk exposure. The table below
shows the estimated impact of changes in interest rates on net interest income
and market value of equity as of December 31, 1998, assuming a parallel shift
of 100 to 200 basis points in both directions:
<TABLE>
<CAPTION>
Change in Interest Rates Net Interest Income Net Portfolio Value
(Basis Points) Volatility (1) Volatility (2)
------------------------ ------------------- -------------------
<S> <C> <C>
+200 4.5 % (7.7)%
+100 4.4 % (1.1)%
-100 (4.6)% (4.8)%
-200 (9.3)% (11.0)%
</TABLE>
- --------
(1) The percentage change represents net interest income for twelve months in
a stable interest rate environment versus the net interest income in the
various rate scenarios.
(2) The percentage change represents net portfolio value of the Bank in a
stable rate environment versus the net portfolio value in the various rate
scenarios.
All interest-earning assets, interest-bearing liabilities and derivative
contracts are included in the interest rate sensitivity analysis at December
31, 1998. At December 31, 1998, the Bank's estimated changes in net interest
income and net portfolio value were within the ranges established by the Board
of Directors.
The primary analytical tool used by the Bank to gauge interest rate
sensitivity is a simulation model used by many major banks and bank
regulators, and is based on the actual maturity and repricing characteristics
of interest-rate sensitive assets and liabilities. The model attempts to
predict changes in the yields earned on assets and the rates paid on
liabilities in relation to changes in market interest rates. The model also
incorporates prepayment assumptions and market rates of interest provided by
independent broker/dealer quotations, an independent pricing model and other
available public sources. Adjustments are made to reflect the shift in the
Treasury and other appropriate yield curves. The model factors in projections
of anticipated activity levels by Bank product line and takes into account the
Bank's increased ability to control rates offered on deposit products in
comparison to its ability to control rates on adjustable-rate loans tied to
published indices.
35
<PAGE>
The following table provides the outstanding principal balances and the
weighted average interest rates of the Bank's non-derivative financial
instruments as of December 31, 1998. The Bank does not consider these
financial instruments to be materially sensitive to interest rate
fluctuations. Historically, the balances of these financial instruments have
remained fairly constant over various economic conditions. The information
presented below is based on the repricing date for variable rate instruments
and the expected maturity date for fixed rate instruments.
<TABLE>
<CAPTION>
Expected Maturity or Repricing Date by Year
------------------------------------------------------
After Fair value at
1999 2000 2001 2002 2003 2003 Total Dec 31, 1998
-------- ------- ------- ------- -------- ------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Short-term investments.. $124,000 $ -- $ -- $ -- $ -- $ -- $ 124,000 $ 124,000
Weighted average rate.. 5.82% -- % -- % -- % -- % -- % 5.82%
Investment securities
available-for-sale
(fixed rate)........... $ 45,855 $31,741 $21,956 $15,176 $ 10,482 $23,210 $ 148,420 $ 148,255
Weighted average rate
...................... 6.47% 6.47% 6.47% 6.47% 6.47% 6.46% 6.47%
Investment securities
available-for-sale
(variable rate)........ $534,304 $ -- $ -- $ -- $ -- $ -- $ 534,304 $ 534,181
Weighted average rate
...................... 6.01% -- % -- % -- % -- % -- % 6.01%
Total gross loans....... $993,680 $46,152 $25,217 $17,867 $ 16,133 $20,158 $1,119,207 $1,129,881
Weighted average rate.. 8.01% 7.98% 8.42% 8.37% 8.40% 8.23% 8.03%
Liabilities:
Checking accounts....... $ 78,923 $ -- $ -- $ -- $ -- $ -- $ 78,923 $ 78,923
Weighted average rate.. 1.15% -- % -- % -- % -- % -- % 1.15%
Money market accounts... $ 39,536 $ -- $ -- $ -- $ -- $ -- $ 39,536 $ 39,536
Weighted average rate.. 2.93% -- % -- % -- % -- % -- % 2.93%
Savings deposits........ $219,390 $ -- $ -- $ -- $ -- $ -- $ 219,390 $ 219,390
Weighted average rate.. 1.79% -- % -- % -- % -- % -- % 1.79%
Time deposits........... $813,869 $35,050 $ 552 $ 677 $ 737 $ 1,085 $ 851,970 $ 852,045
Weighted average rate.. 4.72% 5.74% 5.80% 5.41% 5.08% 6.25% 4.76%
Short-term borrowings... $ 33,000 $ -- $ -- $ -- $ -- $ -- $ 33,000 $ 33,016
Weighted average rate.. 5.75% -- % -- % -- % -- % -- % 5.75%
FHLB advances........... $291,000 $17,000 $ -- $ -- $255,000 $ -- $ 563,000 $ 565,115
Weighted average rate.. 4.77% 5.71% -- % -- % 5.09% -- % 4.95%
</TABLE>
Expected maturities of assets are contractual maturities adjusted for
projected payment based on contractual amortization and unscheduled
prepayments of principal as well as repricing frequency. Expected maturities
for deposits are based on contractual maturities adjusted for projected
rollover rates and changes in pricing for deposits with no stated maturity
dates. The Bank utilizes assumptions supported by documented analyses for the
expected maturities of its loans and repricing of its deposits. It also relies
on third party data providers for prepayment projections for amortizing
securities. The actual maturities of these instruments could vary
significantly if future prepayments and repricing differ from the Bank's
expectations based on historical experience.
The fair values of short-term investments approximate their book values due
to their short maturities. The fair values of available for sale securities
are based on bid quotations from third party data providers. The fair values
of loans are estimated for portfolios with similar financial characteristics
and takes into consideration discounted cash flows based on expected
maturities or repricing dates utilizing estimated market discount rates as
projected by third party data providers.
Transaction deposit accounts, which include checking, money market and
savings accounts, are presumed to have equal book and fair values because the
interest rates paid on these accounts are based on prevailing market rates.
The fair value of time deposits is based upon the discounted value of
contractual cash flows, which is estimated using current rates offered for
deposits of similar remaining terms. The fair value of short-term borrowings
approximates book value due to their short maturities. The fair value of FHLB
advances is estimated by discounting the cash flows through maturity or the
next repricing date based on current rates offered by the FHLB for borrowings
with similar maturities.
36
<PAGE>
The Asset/Liability Committee is authorized to utilize a wide variety of
off-balance sheet financial techniques to assist in the management of interest
rate risk. Derivative positions are integral components of the Bank's
asset/liability management strategy. Therefore, the Bank does not believe it
is meaningful to separately analyze the derivatives components of its risk
management activities in isolation from their related positions. The Bank uses
derivative instruments, primarily interest rate swap and cap agreements, as
part of its management of asset and liability positions in connection with its
overall goal of minimizing the impact of interest rate fluctuations on the
Bank's net interest margin or its stockholders' equity. These contracts are
entered into for purposes of reducing the Bank's interest rate risk and not
for trading purposes.
Interest rate swaps were designated for purposes of converting fixed rate
loans to floating rate assets while interest rate cap agreements were
designated as hedges against certain securities in the available-for-sale
portfolio. The total gross notional amount of the interest rate swaps on
December 31, 1998 was $28.5 million. The net unrealized loss of the swap
agreement portfolio was $1.5 million compared to net unrealized loss of $941
thousand on December 31, 1997. This increase of approximately $577 thousand in
net unrealized loss reflects a decrease in interest rates when comparing
December 31, 1998 to December 31, 1997.
Interest rate caps are used as hedges against market fluctuations in the
Bank's available-for-sale securities portfolio. The total gross notional
amount of interest rate cap agreements on December 31, 1998 was $36.0 million.
The net unrealized loss of the cap agreement portfolio was $580 thousand
compared to net unrealized loss of $569 thousand on December 31, 1997. These
cap agreements are primarily linked to the three-month LIBOR.
The following table summarizes the expected maturities, weighted average pay
and receive rates, and the unrealized gains and losses of the Bank's interest
rate contracts on December 31, 1998. The fair values reflected in the table
are based on quoted market prices from broker dealers making a market for
these derivatives.
<TABLE>
<CAPTION>
Expected Maturity
-----------------------------------
Average
After Unrealized Expected
1999 2000 2001 2002 2002 Total Gain (Loss) Maturity
---- ---- ------- ------- ----- ------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate swap
agreements:
Notional amount......... $-- $-- $10,000 $18,500 $-- $28,500 $(1,518) 3.5 Years
Weighted average receive
rate................... --% --% 5.69% 5.70% --% 5.70%
Weighted average pay
rate................... --% --% 6.46% 6.45% --% 6.46%
Interest rate cap
agreements:
Notional amount......... $-- $-- $18,000 $18,000 $-- $36,000 $ (580) 3.1 Years
LIBOR cap rate.......... --% --% 6.50% 7.00% --% 6.75%
</TABLE>
Year 2000
Many computer programs were designed and developed using only two digits in
date fields, resulting in the inability to recognize the year 2000 or years
thereafter. This "Year 2000" issue creates risks for the Bank from unforseen
or unanticipated problems in its internal computer systems as well as from
computer systems of the Federal Reserve Bank, correspondent banks, customers,
and vendors. Failures of these systems or untimely corrections could have a
material adverse impact on the Bank's ability to conduct its business and
results of operations.
The Bank's computer systems and programs are designed and supported by
companies specifically in the business of providing such products and
services. The Bank has formed a Year 2000 committee comprised of certain of
the Bank's officers to address the "Year 2000" issue. The committee's Year
2000 plan includes holding awareness seminars; evaluating existing hardware,
software, ATMs, vaults, alarm systems, communication systems, and other
electrical devices; testing critical application programs and systems, both
internally and externally; establishing a contingency plan; and upgrading
hardware and software as necessary.
37
<PAGE>
As of December 31, 1998, the Bank has successfully completed the awareness
and assessment phases of the Year 2000 plan and is currently in the
remediation, testing and validation phases of the plan. The plan is on
schedule. All of the Bank's critical systems were programmed, serviced or
provided by outside system vendors. The systems that were identified in the
assessment phase as critical to the Bank's operations have been remediated and
substantially tested by the end of 1998, and will be certified as compliant by
the end of the first quarter of 1999. This meets the Federal Financial
Institutions Examination Council's ("FFIEC") time frame for year 2000
progress. The Bank has been reviewing and coordinating relationships with
vendors, borrowers, and other third parties to ensure that their systems will
be "Year 2000" compliant. The vendors have informed the Bank that their "Year
2000" projects are on schedule and progress is being monitored by Bank
personnel. The Bank has made arrangements with another outside vendor to
assume the data processing of the Bank in the event the current vendor does
not meet this schedule. In addition, as discussed below, manual data
processing of business functions is part of the Bank's contingency plan.
In addition to these software applications, much of the Bank's hardware and
network infrastructure will need to be replaced as part of the "Year 2000"
plan. The Bank has developed a detailed project plan for the replacement. The
principal elements are the replacement of the router network and the
replacement or upgrading of personal computers. The router network has already
been replaced and the replacement or upgrading of personal computers is
expected to be completed by June 30, 1999. The hardware and network
infrastructure replacement cost of $510 thousand represents the largest
portion of the "Year 2000" plan initial total budget of $882 thousand. The
Bank has incurred $417 thousand in "Year 2000" expenses to date. In January
1999, the budget was updated and now totals $1.0 million.
Non-information technology systems are expected to function well in 2000 and
beyond; none have been identified with "Year 2000" problems. The Bank's
environmental systems have been reviewed by the Bank's administrative services
personnel and vendor indications have been received in writing for all such
systems. In addition, the Bank is seeking a written indication of "Year 2000"
compliance from the local energy company. No such indications have been
received from the telecommunications companies on which the Bank depends.
An expected reasonable "worst case" scenario is that, notwithstanding the
testing and certification of all the Bank's critical systems beforehand, a
problem is discovered in the year 2000 that impacts the core accounting
systems. In this event, the Bank would be required to perform many business
functions manually until such time as the responsible vendor corrects the
problem. Such manual processing of functions is provided for in the Bank's
contingency plans, which are currently being reviewed by the Bank. The
contingency plan provides for changing outside vendors if current vendors
cannot meet their schedules to be "Year 2000" compliant and for manual
processing and other action by the Bank in the event a problem is not
discovered in a critical system that has previously been tested and certified
as compliant. The target date for the completion of this review is March 31,
1999 and is currently on schedule. In October 1998, the Bank tested the
transition from computer-performed operations to "offline" manual operations
at all branch locations. The test was conducted while an outside vendor shut
down the Bank's system to perform "Year 2000" repairs. During the shut down,
the transition to manual procedures worked as planned. Other elements of the
Bank's contingency plan will be tested during 1999, as is the case with wire
transfer operations which were successfully tested at the Bank's offsite
contingency location during January 1999.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISKS
For quantitative and qualitative disclosures regarding market risks in the
Company's portfolio, see, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Asset Liability and Market Risk
Management."
38
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements of the Company, see "Supplementary Financial
Information," and "Consolidated Financial Statements and Notes," including the
"Independent Auditor's Report" thereon, in the 1998 Annual Report, which is
incorporated herein by reference. See "ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K" below for financial statements filed as a
part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as hereinafter noted, the information concerning directors and
executive officers of the Company is incorporated by reference from the
section entitled "Election of Directors" of the Company's Proxy Statement,
which is filed as Exhibit No. 99 to this Annual Report on Form 10-K. For
information concerning executive officers of the Company, see "ITEM 4(A).
EXECUTIVE OFFICERS OF THE REGISTRANT."
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
from the section entitled "Compensation of Directors and Executive Officers"
of the Company's Proxy Statement, which is filed as Exhibit No. 99 to this
Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
Management is incorporated by reference from the sections entitled "Principal
Shareholders," and "Election of Directors" of the Company's Proxy Statement,
which is filed as Exhibit No. 99 to this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated by reference from the section entitled "Certain Transactions" of
the Company's Proxy Statement, which is filed as Exhibit No. 99 to this Annual
Report on Form 10-K.
39
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
(1) The following financial statements included in the registrant's 1998
Annual Report to Shareholders are incorporated herein by reference. Page
number references are to the 1998 Annual Report to Shareholders.
<TABLE>
<CAPTION>
Page
----
<S> <C>
East West Bancorp, Inc. and Subsidiary:
Report of Management.................................................. 41
Independent Auditors' Report.......................................... 42
Consolidated Balance Sheets at December 31, 1998 and 1997............. 43
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997, and 1996................................................. 44
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1998, 1997, and 1996........................ 45
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.................................................. 46
Notes to Consolidated Financial Statements............................ 48
</TABLE>
(2) The following additional information for the years 1998, 1997 and 1996
is submitted herewith:
All schedules are omitted because they are not applicable, not material or
because the information is included in the financial statements or the notes
thereto.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of 1998.
(c) Exhibits
40
<PAGE>
REPORT OF MANAGEMENT
To our Shareholders:
The management of East West Bancorp, Inc. is responsible for the
accompanying financial statements and all other financial information
contained in this Annual Report. The financial statements have been prepared
in conformity with generally accepted accounting principles and include
amounts which are based on management's best estimates and judgments and give
due consideration to materiality. All other financial information appearing
throughout this Annual Report is presented in a manner consistent with the
financial statements.
Management has established and maintains a system of internal controls that
provides reasonable assurance that the underlying financial records are
reliable for preparing the financial statements, and that assets are
safeguarded from unauthorized use. The systems of controls are continually
monitored by the internal auditors. Management believes that, as of December
31, 1998, the internal control environment is adequate to provide reasonable
assurance as to the integrity and reliability of the financial statements and
related financial information contained in the Annual Report.
The Board of Directors oversees management's internal control and financial
reporting responsibilities through its Audit Committee, which is comprised
entirely of outside directors. The Audit Committee meets periodically with
management and internal and independent auditors to assure that each is
carrying out their responsibilities.
The financial statements have been audited by independent auditors Deloitte
& Touche LLP. Their role is to render an independent professional opinion on
management's financial statements based upon performance of procedures they
deem appropriate under generally accepted auditing standards.
<TABLE>
<S> <C>
Dominic Ng Julia Gouw
Chairman, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
</TABLE>
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
East West Bancorp, Inc. and Subsidiaries
San Marino, California
We have audited the accompanying consolidated balance sheets of East West
Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
February 2, 1999
Los Angeles, California
42
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Assets
- ------
Cash and cash equivalents.............................. $ 161,131 $ 347,601
Investment securities available for sale, at fair value
(with amortized cost of $683,335 and $376,138 at
December 31, 1998 and 1997, respectively)............. 682,436 374,810
Loans receivable, net of allowance for loan losses of
$16,506 and $12,273 at December 31, 1998 and 1997,
respectively.......................................... 1,100,579 934,850
Investment in Federal Home Loan Bank stock, at cost.... 32,874 13,881
Other real estate owned................................ 4,600 3,217
Real estate investment................................. 18,602 14,388
Premises and equipment, net............................ 23,406 24,192
Premiums on deposits acquired, net..................... 2,648 3,692
Excess of purchase price over fair value of net assets
acquired, net......................................... 3,590 3,787
Accrued interest receivable and other assets........... 28,294 13,921
---------- ----------
TOTAL................................................ $2,058,160 $1,734,339
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Customer deposit accounts.............................. $1,292,937 $1,235,072
Securities sold under agreements to repurchase......... 33,000 139,000
Federal Home Loan Bank advances........................ 563,000 211,000
Notes payable.......................................... 1,820 1,615
Accrued expenses and other liabilities................. 12,871 9,461
Deferred income taxes.................................. 1,259 2,781
---------- ----------
Total liabilities.................................... 1,904,887 1,598,929
---------- ----------
FAIR VALUE OF NET ASSETS ACQUIRED IN EXCESS OF PURCHASE
PRICE, NET............................................ 2,443 2,858
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY
Common stock (par value of $0.001 per share)
Authorized -- 50,000,000 shares
Issued and outstanding -- 23,775,000 shares........... 24 24
Additional paid in capital............................. 109,976 109,976
Accumulated other comprehensive losses:
Unrealized losses on securities, net of tax........... (888) (1,138)
Retained earnings...................................... 41,718 23,690
---------- ----------
Total stockholders' equity........................... 150,830 132,552
---------- ----------
TOTAL................................................ $2,058,160 $1,734,339
========== ==========
</TABLE>
See notes to consolidated financial statements.
43
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees...... $ 85,806 $ 72,577 $ 62,706
Investment securities available for
sale................................. 40,902 34,515 34,170
------------ ------------ -----------
Total interest and dividend income.. 126,708 107,092 96,876
------------ ------------ -----------
INTEREST EXPENSE
Customer deposit accounts............. 49,499 48,394 49,716
Federal Home Loan Bank advances....... 14,777 5,441 3,170
Federal funds purchased and securities
sold under agreements to repurchase.. 6,767 8,811 4,382
------------ ------------ -----------
Total interest expense.............. 71,043 62,646 57,268
------------ ------------ -----------
NET INTEREST INCOME..................... 55,665 44,446 39,608
PROVISION FOR LOAN LOSSES............... 5,356 5,588 4,398
------------ ------------ -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................ 50,309 38,858 35,210
------------ ------------ -----------
NONINTEREST INCOME
Loan fees............................. 2,389 1,688 1,779
Branch fees........................... 2,579 2,091 1,702
Letters of credit fees and
commissions.......................... 2,785 1,166 453
Net gains on sales of investment
securities available for sale........ 1,320 2,717 492
Amortization of fair value of net
assets acquired in excess of purchase
price................................ 415 415 415
Other operating income................ 539 416 730
------------ ------------ -----------
Total noninterest income............ 10,027 8,493 5,571
------------ ------------ -----------
NONINTEREST EXPENSE
Compensation and employee benefits.... 17,281 15,732 12,884
Net occupancy......................... 4,974 4,646 4,110
Data processing....................... 1,245 1,239 1,069
Amortization of premiums on deposits
acquired and excess of purchase price
over fair value of net assets
acquired............................. 1,241 1,241 1,241
Deposit insurance premiums and
regulatory assessments............... 825 148 2,721
SAIF recapitalization assessment...... -- -- 7,040
Other real estate owned operations,
net.................................. (380) 300 1,061
Other operating expenses.............. 7,440 5,704 4,963
------------ ------------ -----------
Total noninterest expense........... 32,626 29,010 35,089
------------ ------------ -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES.................................. 27,710 18,341 5,692
PROVISION FOR INCOME TAXES.............. 9,682 7,330 2,486
------------ ------------ -----------
NET INCOME.............................. $ 18,028 $ 11,011 $ 3,206
============ ============ ===========
BASIC AND DILUTED EARNINGS PER SHARE.... $ 0.76 $ 0.46 $ 0.13
AVERAGE NUMBER OF SHARES OUTSTANDING.... 23,775 23,775 23,775
</TABLE>
See notes to consolidated financial statements.
44
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Comprehensive Retained Comprehensive Stockholders'
Stock Capital Income (Losses) Earnings Income Equity
------ ---------- --------------- -------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1996................... $24 $109,976 $(1,183) $ 9,473 $118,290
Comprehensive income
Net income for the
year.................. 3,206 $ 3,206 3,206
Other comprehensive
income, net of tax
Net change in
unrealized losses on
securities, net of
tax................. 879 879 879
-------
Comprehensive income.... 4,085
--- -------- ------- ------- ------- --------
BALANCE, DECEMBER 31,
1996................... 24 109,976 (304) 12,679 122,375
Comprehensive income
Net income for the
year.................. 11,011 11,011 11,011
Other comprehensive
income, net of tax
Net change in
unrealized losses on
securities, net of
tax................. (834) (834) (834)
-------
Comprehensive income.... 10,177
--- -------- ------- ------- ------- --------
BALANCE, DECEMBER 31,
1997................... 24 109,976 (1,138) 23,690 132,552
Comprehensive income
Net income for the
year.................. 18,028 18,028 18,028
Other comprehensive
income, net of tax
Net change in
unrealized losses on
securities, net of
tax................. 250 250 250
-------
Comprehensive income.... $18,278
--- -------- ------- ------- ------- --------
BALANCE, DECEMBER 31,
1998................... $24 $109,976 $ (888) $41,718 $150,830
=== ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Disclosure of reclassification amount for December 31:
Unrealized holding gains arising during period, net of
tax expense of $595 in 1998, $531 in 1997, and $897
in 1996.............................................. $1,109 $ 797 $1,156
Less: Reclassification adjustment for gains included
in net income, net of tax expense of $461 in 1998,
$1,086 in 1997, and $215 in 1996..................... (859) (1,631) (277)
------ ------ ------
Net change in unrealized losses on securities, net of
tax (expense) or benefit of ($134) in 1998, $555 in
1997, and ($682) in 1996............................. $ 250 $ (834) $ 879
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
45
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................. $ 18,028 $ 11,011 $ 3,206
Adjustments to reconcile net income to net
cash provided by operating activities:
Net amortization of premiums.............. 2,377 1,166 2,101
Depreciation and amortization............. 2,162 2,019 1,658
Net loan fees deferred.................... 2,377 1,529 2,030
Deferred tax provision.................... (1,690) (1,633) 1,347
Provision for loan losses................. 5,356 5,588 4,398
Provision for other real estate owned
losses................................... 341 412 702
Net gains on sales of investment
securities and other assets.............. (2,685) (3,729) (1,613)
Federal Home Loan Bank stock dividends.... (921) (641) (559)
Proceeds from sale of loans held for
sale..................................... 92,729 73,205 88,849
Originations of loans held for sale....... (91,987) (62,885) (55,409)
Increase in accrued interest receivable
and other assets......................... (14,373) (934) (4,498)
Increase in accrued expenses and other
liabilities.............................. 3,410 420 1,080
--------- --------- ---------
Total adjustments....................... (2,904) 14,517 40,086
--------- --------- ---------
Net cash provided by operating
activities............................. 15,124 25,528 43,292
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net disbursements of loans.................. (169,644) (128,184) (113,451)
Purchase of:
Premises and equipment.................... (1,389) (2,365) (2,439)
Federal Home Loan Bank stock.............. (18,072) (3,166) --
Loans..................................... (41,230) (8,098) (14,438)
Investment securities available for sale.. (883,989) (638,295) (459,601)
Real estate investment.................... (3,411) (12,983) --
Proceeds from sale, maturity, redemption or
repayment of:
Investment securities available for sale.. 612,182 714,207 406,593
Premises and equipment.................... 13 3 75
Interest-bearing deposits in other banks.. -- -- 98
Other real estate owned................... 1,695 5,194 5,527
Principal repayments on foreclosed
properties................................. -- 4 118
--------- --------- ---------
Net cash used in investing activities... (503,845) (73,683) (177,518)
--------- --------- ---------
</TABLE>
(Continued)
See notes to consolidated financial statements.
46
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
----------- --------- --------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits..................... $ 57,865 $ 52,186 $ 25,417
Proceeds from Federal Home Loan Bank
advances.................................. 4,150,821 313,397 --
Repayment of Federal Home Loan Bank
advances.................................. (3,798,820) (157,397) (6,000)
Net increase (decrease) in federal funds
purchased and securities sold under
agreements to repurchase.................. (106,000) (105,000) 224,309
Repayment of notes payable on real estate
investment................................ (1,615) -- --
----------- --------- --------
Net cash provided by financing
activities............................ 302,251 103,186 243,726
----------- --------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................. (186,470) 55,031 109,500
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR........................................ 347,601 292,570 183,070
----------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR....... $ 161,131 $ 347,601 $292,570
=========== ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.............................. $ 70,565 $ 61,677 $ 57,156
Income tax payments, net................... 10,225 10,050 1,389
Noncash investing and financing activities:
Other real estate acquired through
foreclosure............................. 4,706 6,710 5,754
Loans made to facilitate sales of other
real estate owned....................... 1,488 1,690 2,368
Mortgage loans held to maturity
securitized to investment securities
available for sale...................... 35,875 43,466 --
Real estate investment acquired through
notes payable........................... 1,820 1,615 --
Net change in unrealized losses on
securities, net of tax.................. 250 (834) 879
</TABLE>
See notes to consolidated financial statements.
47
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
East West Bancorp, Inc., a registered bank holding company (the "Company"),
offers a full range of banking services to individuals and small to large
businesses through its subsidiary bank, East West Bank and its subsidiaries
(the "Bank"), which operates 23 branches located throughout California. The
Company specializes in financing international trade and lending for
commercial, construction, and residential real estate projects. The Company's
revenues are derived from providing financing for residential and commercial
real estate and business customers, as well as investing activities. Funding
for lending and investing activities is obtained through acceptance of
customer deposits, Federal Home Loan Bank advances and other borrowing
activities.
In June 1998, the Articles of Incorporation of the Bank were amended to
decrease the authorized common shares of the Bank from 200,000,000 shares to
50,000,000 shares. The amendment was made in conjunction with the 118,875 for
550,000 reverse stock split effective June 11, 1998.
On June 12, 1998, previous shareholders of the Bank sold all of the Bank's
common stock to various institutional and accredited investors. No person or
group of persons acting in concert was permitted to purchase more than 9.9% of
the number of outstanding shares of the Bank's common stock immediately after
the sale. Since there was not a control group in this transaction, generally
accepted accounting principles did not require the assets and liabilities of
the Bank to be revalued.
On August 27, 1998, at the direction of the Board of Directors of the Bank,
the Company was incorporated under the laws of the State of Delaware for the
purpose of becoming a bank holding company by acquiring all of the outstanding
common stock of the Bank. This reorganization, which was accounted for in a
manner similar to a pooling of interests and completed on December 30, 1998,
will provide the Company with greater operating and financial flexibility and
permit expansion into a broader range of financial services and other business
activities.
Basis of Presentation -- The consolidated financial statements are prepared
in accordance with generally accepted accounting principles and general
practices within the banking industry and have been restated for the
reorganization. The following is a summary of significant principles used in
the preparation of the accompanying financial statements. In preparing the
financial statements, management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities and the disclosure of income
and expenses for the periods presented in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
Principles of Consolidation -- The financial statements include the accounts
of the Company and the Bank. All material intercompany transactions and
accounts have been eliminated in consolidation.
Investment Securities -- Investment securities available for sale are
reported at estimated fair value, with unrealized gains and losses, net of the
related tax effect, excluded from operations and reported as a separate
component of other comprehensive income. Amortization of premiums and
accretion of discounts on debt securities are recorded as yield adjustments on
such securities using the effective interest method. The specific
identification method is used for purposes of determining cost in computing
realized gains and losses on investment securities sold.
Derivative Financial Instruments -- The Company is a party to certain
derivative transactions, including interest rate swaps and interest rate caps.
These contracts are entered into for purposes of reducing the Company's
interest rate risk and not for trading purposes.
Interest rate swaps are entered into for the purposes of modifying the
interest rate characteristics of certain loans within the Company's loan
portfolio. The interest rate swaps involve no exchange of principal either at
48
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
inception or upon maturity; rather, they involve the periodic exchange of
interest payments arising from an underlying notional principal amount.
Interest rate swaps are accounted for using settlement accounting and are
reported at their initial cost, and unrealized gains or losses resulting from
changes in their fair value are not recorded in the financial statements.
Revenues or expenses associated with these agreements are accounted for on an
accrual basis and are recognized as an adjustment to interest income on loans
receivable, based on the interest rates currently in effect for such
contracts.
The Company purchased interest rate caps for purposes of hedging against
fluctuations in the fair value of the Company's investment securities
available-for-sale portfolio. The interest rate caps involve the payment of a
one-time premium to a counterparty who, if interest rates rise above a
predetermined level, will make payments to the Company at an agreed-upon rate
for the term of the agreement or until such time as interest rates fall below
the cap level. The premiums paid for the interest rate caps are amortized to
interest income on investments over the term of the agreements. The interest
rate caps are reported at their estimated fair value, with unrealized gains
and losses recognized as a separate component of other comprehensive income
(net of tax effects) consistent with the hedged securities. Amounts receivable
on the cap agreements are accrued and recognized as interest income on
investments.
Upon termination or sale of a hedged item or if a hedge otherwise ceases to
be effective, the related derivative financial instrument is accounted for at
fair value, with resulting gains or losses being recorded in earnings,
together with the gain or loss upon termination or sale of the hedged item, if
applicable. If such derivative instruments are subsequently redesignated as a
hedge, their fair value upon redesignation becomes their new cost basis which
is amortized into income over the remaining life of the instrument.
Loans Receivable -- Loans receivable, which management has the intent and
ability to hold for the foreseeable future or until maturity, are stated at
their outstanding principal, reduced by an allowance for loan losses and net
deferred loan fees or costs on originated loans and unamortized premiums or
discounts on purchased loans. Discounts or premiums on purchased loans are
amortized to income using the interest method over the remaining period to
contractual maturity adjusted for anticipated prepayments. Interest on loans
is calculated using the simple-interest method on daily balances of the
principal amount outstanding. Accrual of interest is discontinued on a loan
when management believes, after considering economic and business conditions
and collection efforts, that the borrower's financial condition is such that
collection of interest is doubtful. Generally, loans are placed on nonaccrual
status when they become 90 days past due. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received or the
loan has been placed back on accrual status when the borrower has demonstrated
the ability to repay the loan.
Loans held for sale are carried at the lower of aggregate cost or market
value. Origination fees on loans held for sale, net of certain costs of
processing and closing the loans, are deferred until the time of sale and are
included in the computation of the gain or loss from the sale of the related
loans. A valuation allowance is established if the market value of such loans
is lower than their cost and operations are charged for valuation adjustments.
Nonrefundable fees and direct costs associated with the origination or
purchase of loans are deferred and netted against outstanding loan balances.
The deferred net loan fees and costs are recognized in interest income as an
adjustment to yield over the loan term using the effective interest method.
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due (principal and interest) according to the contractual
terms of the loan agreement. Impaired loans are measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as an expedient, at
49
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent, less costs to sell.
Provision and Allowance for Loan Losses -- The determination of the balance
in the allowance for loan losses is based on an analysis of the loan portfolio
and reflects an amount that, in management's judgment, is adequate to provide
for probable losses after giving consideration to estimated losses on
specifically identified impaired loans, as well as the characteristics of the
loan portfolio, current economic conditions, past credit loss experience and
such other factors as deserve current recognition in estimating credit losses.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Consumer and other homogeneous smaller
balance loans are reviewed on a collective basis for impairment.
Other Real Estate Owned -- Other real estate owned represents real estate
acquired through foreclosure and is recorded at fair value at the time of
foreclosure. Loan balances in excess of fair value of the real estate acquired
at the date of foreclosure are charged against the allowance for loan losses.
After foreclosure, valuations are periodically performed by management and the
real estate is carried at the lower of carrying value or fair value less costs
to sell. Any subsequent operating expenses or income, reduction in estimated
values, and gains or losses on disposition of such properties are charged to
current operations. Revenue recognition upon disposition of the property is
dependent on the sale having met certain criteria relating to the buyer's
initial investment in the property sold.
Real Estate Investment -- The Company owns seventeen different limited
partnership interests in projects of affordable housing for lower income
tenants. Four of the investments in which the Company has significant
influence are recorded using the equity method of accounting. The remaining
investments are being amortized using the level-yield method over the life of
the related tax credits. The tax credits are being recognized in the
consolidated financial statements to the extent they are utilized on the
Company's tax returns.
Premises and Equipment -- Company premises and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization
are computed based on the straight-line method over the estimated useful lives
of the various classes of assets. The ranges of useful lives for the principal
classes of assets are as follows:
<TABLE>
<S> <C>
Buildings and building
improvements........... 25 years
Furniture, fixtures and
equipment.............. 3 to 10 years
Leasehold improvements.. Term of lease or useful life, whichever is shorter
</TABLE>
Intangible Assets -- Excess of purchase price over fair value of net assets
acquired and fair value of net assets acquired in excess of purchase price,
also known as goodwill, are amortized using the straight-line method over 25
years. Premiums on deposits represent the intangible value of depositor
relationships resulting from deposit liabilities assumed in acquisitions and
are amortized using the straight-line method over 10 years. Goodwill and
premiums on deposits are assessed quarterly for other than temporary
impairment and are written down for any permanent impairment identified.
Stock of Federal Home Loan Bank of San Francisco -- As a member of the
Federal Home Loan Bank ("FHLB") of San Francisco, the Company is required to
own common stock in the FHLB of San Francisco based upon the Company's balance
of residential mortgage loans and outstanding FHLB advances. FHLB stock is
carried at cost and may be sold back to FHLB at its carrying value. Both cash
and stock dividends received are reported as dividend income.
Securities Sold Under Agreements to Repurchase -- The Company enters into
sales of securities under repurchase agreements with primary dealers, which
provide for the repurchase of the same security with
50
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
substantially the same terms as the security sold. The repurchase agreements
are typically collateralized by mortgage-backed securities that are normally
held by a third party custodian. In the event that the fair market value of
the securities decreases below the carrying amount of the related repurchase
agreement, the counterparty is required to designate an equivalent value of
additional securities. These agreements are accounted for as financings, and
the obligations of the Company to repurchase the securities are reflected as
liabilities. The securities underlying the agreements remain in the asset
accounts in the consolidated balance sheets.
Income Taxes -- Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of assets
and liabilities and their financial reporting amounts at each year-end, based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
Related Party Transactions -- The Company has entered into certain related
party transactions with its affiliates in the normal course of business. These
transactions are conducted at market terms.
Accounting for Stock-Based Compensation -- The Company accounts for its
stock option plan under Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation. This Statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. These standards include the recognition of compensation
expense over the vesting period of the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also permits entities to
continue to apply the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and provides pro
forma net income and pro forma net earnings per share disclosures as if the
fair-value based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure requirements of SFAS No. 123 in the footnotes
to its consolidated financial statements.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- The Company adopted SFAS No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, on a prospective basis beginning January 1, 1997. The Statement
establishes criteria based on legal control to determine whether a transfer of
a financial asset is a sale or a secured borrowing. A sale is recognized when
the Company relinquishes control over a financial asset and is compensated for
such asset. The difference between the net proceeds received and the carrying
amount of the financial asset(s) being sold or securitized is recognized as a
gain or loss on sale. The adoption of the new Statement did not have a
material impact on the consolidated financial position or results of
operations of the Company.
Earnings Per Share -- Effective December 31, 1997, the Company adopted SFAS
No. 128, Earnings Per Share, which establishes new requirements for computing
and presenting earnings per share ("EPS"). Basic EPS is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock, or resulted from issuance
of common stock that would be shared in earnings of the Company. All EPS
presented have been restated in accordance with the provisions of SFAS No.
128. Further, the basic and diluted earnings per share and the presentation of
common stock and additional paid in capital have been adjusted to reflect the
118,875 for 550,000 reverse stock split, which was effective June 11, 1998.
Comprehensive Income -- Effective January 1, 1998, the Company adopted SFAS
No. 130, Reporting Comprehensive Income. Under the provisions of SFAS No. 130,
an entity that provides a full set of financial statements is required to
report comprehensive income in the presentation of its financial statements.
The term "comprehensive income" describes the total of all components of
comprehensive income including net income. "Other comprehensive income" refers
to revenues, expenses, and gains and losses that are included in
51
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
comprehensive income but are excluded from net income as they have been
recorded directly in equity under the provisions of other Financial Accounting
Standard Board statements. The Company presents the comprehensive income
disclosure as a part of the statements of changes in stockholders' equity, by
identifying each element of other comprehensive income, including net income.
All comparative financial statements presented reflect the application of the
provisions of SFAS No. 130.
Disclosures about Segments of an Enterprise and Related Information --
Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. This statement establishes
standards for the way that public business enterprises report information
about operating segments in both annual and interim financial reports issued
to shareholders. The statement also establishes standards for related
disclosures about products and services, geographic areas, and major
customers.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities -- In June
1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued and is effective for fiscal years beginning after June
15, 1999. SFAS No. 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. Management of the Company has not yet determined whether
the adoption of this standard will have a material impact on the Company's
results of operations or financial position when adopted.
Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise -- In October
1998, SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise, was issued and is effective for the first fiscal quarter beginning
after December 15, 1998. SFAS No. 134 amends SFAS No. 65, Accounting for
Certain Mortgage Banking Activities, which establishes accounting and
reporting standards for certain activities of mortgage banking enterprises and
other enterprises that conduct operations that are substantially similar. SFAS
No. 134 requires that after the securitization of mortgage loans held for
sale, the resulting mortgage-backed securities and other retained interests
should be classified in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, based on the company's ability and
intent to sell or hold those investments. Management of the Company does not
believe the statement will have a material impact on the Company's results of
operations or financial position when adopted.
Reclassifications -- Certain reclassifications have been made to the prior
year financial statements to conform to the current year presentation.
52
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, amounts due from banks, and short-
term investments with maturities of less than three months. Short-term
investments, which include federal funds sold and securities purchased under
agreements to resell, are recorded at cost, which approximates market.
Information concerning securities purchased under agreements to resell is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Balance at year-end...................................... $124,000 $313,000
Average balance during the year.......................... 216,832 202,621
Maximum month-end balance during the year................ 263,700 322,000
Weighted average interest rate during the year........... 5.82% 5.82%
Weighted average interest rate at end of year............ 5.82% 6.30%
</TABLE>
Securities purchased under agreements to resell are collateralized by
mortgage-backed securities, mortgage or commercial loans. The collateral is
normally held by a third party custodian. The purchase is overcollateralized
to ensure against unfavorable market price movements. In the event that the
fair market value of the securities decreases below the carrying amount of the
related repurchase agreement, the counterparty is required to designate an
equivalent value of additional securities. The counterparties to these
agreements are nationally recognized investment banking firms that meet credit
eligibility criteria and with whom a master repurchase agreement has been duly
executed.
At December 31, 1997, the Bank had a $13.0 million federal funds line
commitment with an affiliate. This line was collateralized by loans with a
total market value of 130% of the commitment amount. At December 31, 1997,
$10.0 million of the line commitment had been drawn. This line was repaid
during 1998.
The Company is required to maintain a percentage of its deposits as reserves
at the Federal Reserve Bank. The daily average reserve balance requirement was
approximately $5.7 million and $3.8 million at December 31, 1998 and 1997,
respectively.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
An analysis of the available-for-sale investment securities portfolio is
presented as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
As of December 31, 1998
Mortgage-backed securities....... $683,335 $471 $(1,370) $682,436
As of December 31, 1997
Mortgage-backed securities....... $376,138 $188 $(1,516) $374,810
</TABLE>
The scheduled maturities of investment securities available for sale at
December 31, 1998 are presented as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
--------- ---------
(In thousands)
<S> <C> <C>
Due within one year...................................... $ 4,009 $ 3,985
Due after one year through five years.................... -- --
Due after five years through ten years................... 15,471 15,481
Due after ten years...................................... 663,855 662,970
-------- --------
Total.................................................. $683,335 $682,436
======== ========
</TABLE>
53
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Expected maturities of mortgage-backed securities can differ from
contractual maturities because borrowers have the right to prepay obligations.
In addition, such factors as prepayments and interest rates may affect the
yield on the carrying value of mortgage-backed securities.
Proceeds from sales of securities during 1998, 1997 and 1996 were $279.5
million, $622.0 million and $290.9 million, respectively, with related gross
realized gains of $1.4 million, $3.3 million and $1.0 million, and gross
realized losses of $31 thousand, $543 thousand, and $482 thousand,
respectively.
At December 31, 1998 and 1997, investment securities with a carrying value
of $636.3 million and $338.7 million, respectively, were pledged to secure
public deposits, securities sold under agreements to repurchase, FHLB
advances, interest rate swap agreements and for other purposes required or
permitted by law.
4. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative positions are integral components of the Company's asset and
liability management activities. Therefore, the Company does not believe it is
meaningful to separately analyze the derivatives component of its risk
management activities in isolation from related positions.
The Company uses derivative instruments, primarily interest rate swap and
cap agreements, as part of its management of asset and liability positions in
connection with its overall goal of minimizing the impact of interest rate
fluctuations on the Company's net interest margin or its stockholders' equity.
Derivatives are used as hedges against market fluctuations in the Company's
available-for-sale securities portfolio, and to effectively convert certain
fixed rate commercial real estate loans to floating rate assets. At December
31, 1998 and 1997, all interest rate swaps were designated for purposes of
converting fixed rate loans to floating rate, and interest rate cap agreements
were designated as hedges against the available-for-sale securities portfolio.
54
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table reflects summary information on derivative contracts
used to hedge the Company's interest rate risk as of December 31, 1998 and
1997. Amounts included in the estimated fair value column do not include gains
or losses from changes in the value of the underlying asset or liability being
hedged. Notional amounts are not exchanged but serve as a point of reference
for calculating payments and do not represent exposure to credit or market
risk. Amounts shown as unamortized premiums paid for interest rate swaps
represent the cost basis of such instruments resulting from a prior mark-to-
market adjustment upon sale of a previously hedged item, and subsequent
redesignation to the current hedged item.
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------
Unamortized Gross Gross Estimated
Notional Premium Unrealized Unrealized Fair
Amount Paid Gains Losses Value
-------- ----------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest rate swap
agreements:
Maturing on November 13,
2002, pay 6.31% fixed
and receive 3-month
LIBOR.................. $14,000 $382 $-- $(935) $(553)
Maturing on January 17,
2002, pay 6.89%
fixed and receive 3-
month LIBOR............ 4,500 -- -- (217) (217)
Maturing on October 10,
2001, pay 6.46%
fixed and receive 3-
month LIBOR............ 10,000 -- -- (366) (366)
Interest rate cap
agreements:
Maturing on October 24,
2002, 7.00%
LIBOR cap.............. 18,000 442 -- (354) 88
Maturing on April 10,
2001, 6.50%
LIBOR cap.............. 18,000 231 -- (226) 5
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------
Unamortized Gross Gross Estimated
Notional Premium Unrealized Unrealized Fair
Amount Paid Gains Losses Value
-------- ----------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest rate swap
agreements:
Maturing on November 13,
2002, pay 6.31% fixed
and receive 3-month
LIBOR.................. $14,000 $478 $-- $(629) $(151)
Maturing on May 22,
1998, pay 6.06%
fixed and receive 3-
month LIBOR............ 8,000 -- -- (7) (7)
Maturing on January 17,
2002, pay 6.89%
fixed and receive 3-
month LIBOR............ 4,500 -- -- (146) (146)
Maturing on October 10,
2001, pay 6.46%
fixed and receive 3-
month LIBOR............ 10,000 -- -- (159) (159)
Interest rate cap
agreements:
Maturing on October 24,
2002, 7.00%
LIBOR cap.............. 18,000 559 -- (369) 190
Maturing on April 10,
2001, 6.50%
LIBOR cap.............. 18,000 330 -- (200) 130
</TABLE>
The estimated fair values of derivative financial instruments were
determined using quoted market prices from dealers.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments but does not expect
any counterparties to fail to meet their obligations. The Company deals only
with highly rated counterparties. The current credit exposure of derivatives
is represented by the estimated fair value of contracts having positive fair
values at the reporting date.
55
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of loans receivable:
<TABLE>
<CAPTION>
December 31
--------------------
1998 1997
---------- --------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential, one to four units....................... $ 270,444 $356,478
Residential, multifamily............................. 167,545 144,147
Commercial and industrial real estate................ 358,850 269,028
Construction......................................... 78,922 27,020
---------- --------
Total real estate loans............................ 875,761 796,673
---------- --------
Other loans:
Business, commercial................................. 223,318 138,408
Automobile........................................... 4,972 5,259
Other consumer....................................... 15,156 9,137
---------- --------
Total other loans.................................. 243,446 152,804
---------- --------
Total gross loans................................ 1,119,207 949,477
Unearned fees, premiums and discounts, net............. (2,122) (2,354)
Allowance for loan losses.............................. (16,506) (12,273)
---------- --------
Loans receivable, net............................ $1,100,579 $934,850
========== ========
</TABLE>
Loans held for sale were $9.0 million and 6.9 million at December 31, 1998
and 1997, respectively. These loans are accounted for at the lower of
aggregate cost or market. Accrued interest on loans receivable amounted to
$6.8 million and $5.6 million at December 31, 1998 and 1997, respectively.
An analysis of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year........................ $12,273 $10,084 $ 8,735
Provision for loan losses......................... 5,356 5,588 4,398
Recoveries........................................ 1,543 737 522
Chargeoffs........................................ (2,666) (4,136) (3,571)
------- ------- -------
Balance, end of year.............................. $16,506 $12,273 $10,084
======= ======= =======
</TABLE>
The following is a summary of interest foregone on nonaccrual and
restructured loans for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Interest income that would have been recognized had
the loans performed in accordance with their
original terms..................................... $1,057 $1,403 $1,325
Less: Interest income recognized on nonaccrual and
restructured loans................................. (890) (1,129) (839)
------ ------ ------
Interest foregone on nonaccrual and restructured
loans.............................................. $ 167 $ 274 $ 486
====== ====== ======
</TABLE>
There were no commitments to lend additional funds to borrowers whose loans
are included above.
56
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table provides information on impaired loans for the periods
indicated:
<TABLE>
<CAPTION>
As of and for the Year
Ended
-------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Recorded investment with related allowance...... $ 745 $ 3,055 $ 1,432
Recorded investment with no related allowance... 9,239 14,539 13,070
------- ------- -------
Total recorded investment..................... 9,984 17,594 14,502
Allowance on impaired loans..................... (350) (1,550) (256)
------- ------- -------
Net recorded investment in impaired loans..... $ 9,634 $16,044 $14,246
======= ======= =======
Average total recorded investment in impaired
loans.......................................... $10,522 $18,763 $15,027
</TABLE>
Loans serviced for others amounted to approximately $195.5 million and
$203.1 million at December 31, 1998 and 1997, respectively. Total loans
serviced for an affiliate of the Bank totaled $2.9 million at December 31,
1997. Upon the change of ownership in June 1998, the Company continues to
service loans for this former affiliate.
Credit Risk and Concentration -- Substantially all of the Company's real
estate loans are secured by real properties located in California. In
addition, although most of the Company's trade finance activities are related
to trade with Asia, all of the Company's loans are made to companies domiciled
in the United States. Consequently, the Company does not believe it has
significant credit exposure to economic conditions in Asia.
6. REAL ESTATE INVESTMENT
The Company has invested in 17 limited partnerships that were formed to
develop and operate several apartment complexes designed as high-quality
affordable housing for lower income tenants throughout the country. The
Company's ownership in each limited partnership varies from 1% to 19.8%. Four
of the investments are being accounted for using the equity method of
accounting, since the Company exercises significant control over the
partnership. The remaining investments are being amortized on a level yield
method over the life of the related tax credits. Each of the partnerships must
meet the regulatory requirements for affordable housing for a minimum 15 year
compliance period to fully utilize the tax credits. If the partnerships cease
to qualify during the compliance period, the credit may be denied for any
period in which the project is not in compliance and a portion of the credit
previously taken is subject to recapture with interest.
The remaining federal tax credits to be utilized over a multiple-year period
is $20.6 million as of December 31, 1998. The Company's usage of tax credits
approximated $1.7 million and $337 thousand during 1998 and 1997,
respectively. Investment amortization amounted to $1.0 million and $210
thousand for the years ended December 31, 1998 and 1997, respectively.
Notes Payable -- The Company financed the purchase of certain real estate
tax credits in partnerships of which multiple properties are currently under
construction. This transaction was financed with nonrecourse notes which are
collateralized by the Company's partnership interest in the real estate
investment tax credits. The notes are payable upon demand and if defaulted,
interest will be imposed at an annual rate equal to the lesser of 16% per
annum or the higher rate permitted by applicable law. No interest is due if
the notes are paid on demand. The Company has no liabilities in addition to
the notes payable indicated above or any contingent liabilities to the
partnership.
57
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
----------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Land....................................................... $ 9,796 $ 9,796
Office buildings........................................... 11,084 11,084
Leasehold improvements..................................... 2,595 2,201
Furniture, fixtures and equipment.......................... 9,731 8,989
------- -------
33,206 32,070
Accumulated depreciation and amortization.................. (9,800) (7,878)
------- -------
Total.................................................... $23,406 $24,192
======= =======
</TABLE>
8. CUSTOMER DEPOSIT ACCOUNTS
Customer deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
December 31
---------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Demand deposits........................................ $ 103,118 $ 67,258
Checking accounts...................................... 78,923 78,305
Money market accounts.................................. 39,536 21,152
Savings deposits....................................... 219,390 205,872
---------- ----------
440,967 372,587
---------- ----------
Time deposits:
Less than $100,000................................... 465,045 500,031
$100,000 or greater.................................. 386,925 362,454
---------- ----------
851,970 862,485
---------- ----------
Total deposits......................................... $1,292,937 $1,235,072
========== ==========
</TABLE>
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
$100,000 Less
or Than
Greater $100,000 Total
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
1999.............................................. $373,753 $428,185 $801,938
2000.............................................. 11,934 30,007 41,941
2001.............................................. 1,051 4,198 5,249
2002.............................................. 187 861 1,048
2003 and thereafter............................... -- 1,794 1,794
-------- -------- --------
Total........................................... $386,925 $465,045 $851,970
======== ======== ========
</TABLE>
58
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accrued interest payable was $582 thousand and $1.0 million at December 31,
1998 and 1997, respectively. Interest expense on customer deposits by account
type is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Checking accounts.................................... $ 1,072 $ 1,173 $ 1,070
Money market accounts................................ 1,010 622 402
Savings deposits..................................... 5,048 5,192 5,078
Time deposits:
Less than $100,000.................................. 23,234 24,771 27,078
$100,000 or greater................................. 19,135 16,636 16,088
------- ------- -------
Total.............................................. $49,499 $48,394 $49,716
======= ======= =======
</TABLE>
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within 90
days from the transaction date. Information concerning these agreements is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
Balance at year-end.............................. $ 33,000 $ 139,000
Average balance during the year.................. $ 118,588 $ 157,054
Highest month-end balance during the year........ $ 191,635 $ 300,000
Weighted average interest rate during the year... 5.62% 5.61%
Weighted average interest rate at end of year.... 5.75% 6.08%
Mortgage-backed securities underlying the
agreements at
year-end:
Amortized cost................................... $ 37,240 $ 147,167
Estimated fair value............................. $ 37,225 $ 146,832
</TABLE>
10. FEDERAL HOME LOAN BANK ADVANCES
FHLB advances and weighted average interest rates are summarized as follows:
<TABLE>
<CAPTION>
December 31
----------------------------
1998 1997
------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Maturing during Year Ending December 31,
1998.......................................... $ -- -- % $180,000 5.61%
1999.......................................... 291,000 4.77 17,000 5.71
2000.......................................... 17,000 5.71 14,000 5.94
2003.......................................... 255,000 5.09 -- --
-------- ---- -------- ----
Total........................................ $563,000 4.95% $211,000 5.64%
======== ==== ======== ====
</TABLE>
Fixed interest rate advances amounted to $563.0 million and $165.0 million
at December 31, 1998, and 1997, respectively. Variable interest rate advances
amounted to $46.0 million at December 31, 1997. Some advances are secured by
certain real estate loans with remaining principal balances of approximately
$382.7 million and $434.7 million at December 31, 1998 and 1997, respectively.
59
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1998 1997 1996
------- ------- ------
(In thousands)
<S> <C> <C> <C>
Current income tax expense:
Federal........................................... $ 8,801 $ 6,732 $1,419
State............................................. 2,571 2,231 (280)
------- ------- ------
Total current.................................... 11,372 8,963 1,139
------- ------- ------
Deferred income tax expense:
Federal........................................... (1,837) (1,413) 390
State............................................. 147 (220) 957
------- ------- ------
Total deferred................................... (1,690) (1,633) 1,347
------- ------- ------
Provision for income taxes......................... $ 9,682 $ 7,330 $2,486
======= ======= ======
</TABLE>
The difference between the effective tax rate implicit in the consolidated
financial statements and the statutory federal income tax rate can be
attributed to the following:
<TABLE>
<CAPTION>
Year Ended
December 31
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax provision at statutory rate............. 35.0% 35.0% 35.0%
State franchise taxes, net of federal tax effect........... 6.4 7.1 7.7
Low income housing tax credit.............................. (6.1) (1.8) --
Other, net................................................. (0.4) (0.3) 1.0
---- ---- ----
Effective income tax rate.................................. 34.9% 40.0% 43.7%
==== ==== ====
</TABLE>
60
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax (assets) liabilities are presented below:
<TABLE>
<CAPTION>
December 31
-----------------
1998 1997
-------- -------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Core deposit premium.................................... $ 1,998 $ 2,309
Depreciation............................................ 3,269 3,424
FHLB stock dividends.................................... 2,478 1,937
Deferred loan fees...................................... 3,099 2,312
Other, net.............................................. 1,701 794
-------- -------
Total gross deferred tax liabilities.................. 12,545 10,776
-------- -------
Deferred tax assets:
Bad debt deduction...................................... (6,359) (2,883)
Purchased loan discounts................................ (1,599) (882)
Deferred compensation accrual........................... (553) (551)
California franchise tax................................ (894) (746)
Unrealized loss on securities........................... (592) (759)
Other, net.............................................. (1,289) (2,174)
-------- -------
Total gross deferred tax assets........................... (11,286) (7,995)
-------- -------
Net deferred tax liabilities.......................... $ 1,259 $ 2,781
======== =======
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
Credit Extensions -- In the normal course of business, there are various
outstanding commitments to extend credit which are not reflected in the
accompanying consolidated financial statements. The Company does not
anticipate losses as a result of these transactions; however, the commitments
are a component of the allowance for loan losses.
Loan commitments are agreements to lend to a customer provided there is no
violation of any condition established in the agreement. Commitments generally
have fixed expiration dates or other termination clauses. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future funding requirements.
The Company uses the same credit policies in making commitments and
conditional obligations as it does in extending loan facilities to customers.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Company
upon extension of credit is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties. As of December 31, 1998 and 1997, undisbursed loan commitments
amounted to $226.3 million and $157.2 million, respectively. In addition, the
Company committed to fund mortgage loan applications in process amounting to
$17.8 million and $14.4 million as of December 31, 1998 and 1997,
respectively.
Commercial letters of credit are issued to facilitate domestic and foreign
trade transactions while standby letters of credit are issued to make payments
on behalf of customers when certain specified future events occur. As of
December 31, 1998 and 1997, commercial and standby letters of credit totaled
$182.8 million and $87.7 million, respectively.
61
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Litigation -- The Company is a party to various legal proceedings arising in
the normal course of business. While it is difficult to predict the ultimate
outcome of such litigation, the Company does not expect that such litigation
will have a material adverse effect on its financial position and results of
operations.
Lease Commitments -- The Company conducts a portion of its operations
utilizing leased premises and equipment under operating leases. Rental expense
amounted to $1.4 million, $1.1 million and $1.3 million for the years ended
December 31, 1998, 1997, and 1996, respectively.
Future minimum rental payments under noncancelable leases are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------ (In thousands)
<S> <C>
1999.......................................................... $1,268
2000.......................................................... 1,250
2001.......................................................... 972
2002.......................................................... 894
2003.......................................................... 720
Thereafter.................................................... 2,835
------
Total....................................................... $7,939
======
</TABLE>
During December 1996, the Bank, as tenant, entered into a lease agreement
with an affiliate for the Los Angeles Chinatown branch. The term of the lease
is for a period of 15 years, with an option to extend for an additional term
of 5 years. Rent expense relating to this lease totaled $56 thousand and $77
thousand for the years ended December 31, 1998 and 1997, respectively.
13. STOCKHOLDERS' EQUITY
Stock Incentive Plan
The Company adopted the 1998 Stock Incentive Plan (the "Plan") on June 25,
1998. Under the Plan, the Company may grant options not to exceed 1,902,000
shares of common stock over a ten-year period. The options awarded under the
Plan are granted with a four-year or three-year vesting period and a ten-year
contractual life. At December 31, 1998, 40,000 options had been granted to
nonemployee directors under the Plan.
A summary of the status of the Company's stock options as of December 31,
1998 and changes during the year ended December 31, 1998 is presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
--------- --------
<S> <C> <C>
Outstanding at beginning of year......................... -- $ --
Granted.................................................. 1,716,850 10.00
Forfeited................................................ (1,700) 10.00
--------- ------
Outstanding at end of year............................... 1,715,150 $10.00
========= ======
Options exercisable at December 31, 1998................. None
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan, and accordingly, no compensation cost has been
recognized in the consolidated financial statements for the fair value of
stock options granted. Had the Company determined compensation cost based on
the fair value at the grant date consistent with SFAS No. 123, the Company's
net income of $18.0 million would have been reduced to the
62
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
pro forma amount of approximately $17.5 million. The reported basic and
diluted EPS of $0.76 would have been reduced to the pro forma EPS of $0.74 for
the year ended December 31, 1998.
The weighted-average grant-date fair value of options granted during the
year ended December 31, 1998 was $4.08. The fair value of the options was
estimated using the Black-Scholes option-pricing model assuming a 0.12% annual
dividend yield, an expected stock price volatility of 30.38%, a risk-free
interest rate of 4.82% and an expected life of 6.5 years.
The Company's basic earnings per share is equal to the diluted earnings per
share due to the fact that the average market price of the options and
warrants is less than their exercise price for the year ended December 31,
1998.
Stock Purchase Plan
The Company adopted the 1998 Employee Stock Purchase Plan (the "Purchase
Plan") providing eligible employees of the Company and its subsidiaries
participation in the ownership of the Company through the right to purchase
shares of the Company's common stock at a discount. The price at which each
share covered by an option under the Purchase Plan may be purchased is the
lower of (i) 85% of the fair market value of a share of the Company's common
stock on the first day of the applicable option period, and (ii) 85% of the
fair market value of a share of the Company's common stock on the last day of
that option period. The Purchase Plan covers a total of 1,000,000 shares of
the Company's common stock and the offering period will begin in April 1999.
Warrants
In connection with the securities offering and change in ownership of the
Bank, warrants to purchase 475,500 shares of common stock of the Bank were
issued to the placement agent in June 1998. The warrants are exercisable for a
five-year period at an exercise price of $10 per share.
14. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies, including the
Federal Deposit Insurance Corporation ("FDIC"). Failure to meet minimum
capital requirements can initiate certain mandatory actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures
of the assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
As of December 31, 1998 and 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain specific total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table below. There are no conditions or events
since that notification which management believes have changed the category of
the Bank.
63
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Bank's actual and required capital ratios at December 31, 1998 and 1997
are presented as follows:
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
------------------------
Total Capital (to Risk-
Weighted Assets)............ $164,429 11.4% $115,145 8.0% $143,931 10.0%
Tier I Capital (to Risk-
Weighted Assets)............ $147,923 10.3% $ 57,572 4.0% $ 86,359 6.0%
Tier I Capital (to Average
Assets)..................... $147,923 7.4% $ 80,215 4.0% $100,269 5.0%
As of December 31, 1997:
------------------------
Total Capital (to Risk-
Weighted Assets)............ $141,343 13.4% $ 84,571 8.0% $105,714 10.0%
Tier I Capital (to Risk-
Weighted Assets)............ $129,070 12.2% $ 42,286 4.0% $ 63,428 6.0%
Tier I Capital (to Average
Assets)..................... $129,070 8.0% $ 64,677 4.0% $ 80,846 5.0%
</TABLE>
15. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan for the benefit of its
employees. The Company's contributions to the plan are determined annually by
the Board of Directors in accordance with plan requirements. For tax purposes,
eligible participants may contribute up to a maximum of 15% of their
compensation, not to exceed the dollar limit imposed by the Internal Revenue
Service. For the plan years ended December 31, 1998, 1997, and 1996, the
Company contributed $400 thousand, $239 thousand, and $176 thousand,
respectively.
64
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
December 31
---------------------------------------------
1998 1997
---------------------- ---------------------
Carrying Carrying Estimated
or Contract Estimated or Contract Fair
Amount Fair Value Amount Value
----------- ---------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents.. $ 161,131 $ 161,131 $347,601 $347,601
Investment securities
available for sale........ 682,436 682,436 374,810 374,810
Loans receivable, net...... 1,100,579 1,111,253 934,850 949,303
FHLB stock................. 32,874 32,874 13,881 13,881
Accrued interest
receivable................ 10,002 10,002 8,155 8,155
Liabilities:
Customer deposit accounts:
Demand accounts.......... $ 440,967 $ 440,967 $372,587 $372,587
Time deposits............ 851,970 852,045 862,485 862,290
Securities sold under
agreements to repurchase.. 33,000 33,016 139,000 139,025
FHLB advances.............. 563,000 565,115 211,000 211,084
Accrued interest payable... 2,738 2,738 2,261 2,261
Off-balance sheet financial
instruments:
Commercial letters of
credit.................... 14,954 19 13,260 17
Standby letters of credit.. 167,809 1,895 74,477 1,157
Commitments to extend
credit.................... 226,344 1,066 157,221 909
Derivatives:
Interest rate swaps...... 382 (1,136) 478 (463)
Interest rate caps....... 93 93 320 320
</TABLE>
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.
Investment Securities and Derivative Instruments -- The fair value is based
on quoted market price from securities brokers or dealers in the respective
instruments.
Loans and Accrued Interest Receivable -- Fair values are estimated for
portfolios of loans with similar financial characteristics, primarily fixed
and adjustable rate interest terms. The fair values of fixed rate mortgage
loans are based upon discounted cash flows utilizing applicable risk-adjusted
spreads relative to the current pricing for 15- and 30-year conventional loans
as well as anticipated prepayment schedules. The fair values of adjustable
rate mortgage loans are based upon discounted cash flows utilizing discount
rates that approximate
65
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the risk-adjusted pricing of available mortgage-backed securities having
similar rates and repricing characteristics as well as anticipated prepayment
schedules. No adjustments have been made for changes in credit within the loan
portfolio. It is management's opinion that the allowance for loan losses
pertaining to performing and nonperforming loans results in a fair valuation
of such loans. The carrying amount of accrued interest receivable approximates
fair value due to its short term nature.
FHLB Stock -- The carrying amount approximates fair value, as the stock may
be sold back to the Federal Home Loan Bank at carrying value.
Deposits and Accrued Interest Payable -- The fair values of deposits are
estimated based upon the type of deposit products. Demand accounts, which
include passbooks and transaction accounts, are presumed to have equal book
and fair values, since the interest rates paid on these accounts are based on
prevailing market rates. The estimated fair values of time deposits are based
upon the contractual discounted cash flows estimated in current rate for the
deposits over the remaining terms. The carrying amount of accrued interest
payable approximates fair value due to its short term nature.
Securities Sold Under Agreements to Repurchase -- The fair values are
estimated by discounting the amounts contractually due under such agreements
using the prevailing federal funds rate at each reporting date.
FHLB Advances -- The fair values of FHLB advances are estimated based on the
discounted value of contractual cash flows, using rates currently offered by
the Federal Home Loan Bank of San Francisco for fixed-rate credit advances
with similar remaining maturities at each reporting date.
Commitments to Extend Credit, Commercial and Standby Letters of Credit --
The fair values of commitments are estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the counterparty's credit standing.
The fair value estimates presented herein are based on pertinent information
available to management as of each reporting date. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
17. RELATED PARTY TRANSACTIONS
One of the Bank's directors is a guarantor of an extension of credit to two
corporations in which the director is an executive officer and the beneficial
owner of over 10% of a class of equity securities of the two corporations. At
December 31, 1998, the total approved commitment amounted to $1.1 million with
an outstanding balance of $987 thousand.
18. SEGMENT INFORMATION
The Company has four reportable segments: retail banking, commercial
lending, treasury and residential lending. The retail banking segment is
responsible for generating retail and commercial loans and deposits from the
23 branch locations in California. The commercial lending segment generates
commercial loans and deposits from its production offices in northern and
southern California. The treasury department is responsible for managing the
Company's investments, liquidity, and interest rate risk. Residential lending
is responsible for the portfolio of single-family and multifamily loans.
The Company's reportable segments are strategic business units that offer
financial products and services. They are managed separately because the
retail branches focus primarily on retail operations, but some of the
66
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
branches do generate commercial loans and deposits. The commercial lending
segment specifically generates commercial loans and deposits by the efforts of
commercial lending officers.
Segment information for the year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Retail Commercial Residential
Banking Lending Treasury Lending Adjustments Total
-------- ---------- -------- ----------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income......... $ 17,036 $ 29,496 $ 40,901 $ 37,368 $ 1,907 $ 126,708
Charge for funds used... (10,530) (17,032) (36,871) (31,423) -- (95,856)
-------- -------- -------- -------- -------- ----------
Interest spread on
funds used............ 6,506 12,464 4,030 5,945 1,907 30,852
-------- -------- -------- -------- -------- ----------
Interest expense........ (43,253) (1,324) (26,466) -- -- (71,043)
Credit on funds
provided............... 61,317 1,950 32,589 -- -- 95,856
-------- -------- -------- -------- -------- ----------
Interest spread on
funds provided........ 18,064 626 6,123 -- -- 24,813
-------- -------- -------- -------- -------- ----------
Net interest income... $ 24,570 $ 13,090 $ 10,153 $ 5,945 $ 1,907 $ 55,665
======== ======== ======== ======== ======== ==========
Depreciation and
amortization........... $ 1,571 $ 115 $ 4 $ 14 $ 458 $ 2,162
Segment profit.......... 3,227 12,200 8,605 3,678 -- 27,710
Segment assets.......... 248,291 410,775 839,309 433,538 126,247 2,058,160
</TABLE>
Segment information for the year ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Retail Commercial Residential
Banking Lending Treasury Lending Adjustments Total
-------- ---------- -------- ----------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income......... $ 8,516 $ 16,822 $ 34,515 $ 46,067 $ 1,172 $ 107,092
Charge for funds used... (5,258) (9,775) (32,768) (38,888) -- (86,689)
-------- -------- -------- -------- ------- ----------
Interest spread on
funds used............ 3,258 7,047 1,747 7,179 1,172 20,403
-------- -------- -------- -------- ------- ----------
Interest expense........ (47,895) (500) (14,251) -- -- (62,646)
Credit on funds
provided............... 66,098 956 19,635 -- -- 86,689
-------- -------- -------- -------- ------- ----------
Interest spread on
funds provided........ 18,203 456 5,384 -- -- 24,043
-------- -------- -------- -------- ------- ----------
Net interest income... $ 21,461 $ 7,503 $ 7,131 $ 7,179 $ 1,172 $ 44,446
======== ======== ======== ======== ======= ==========
Depreciation and
amortization........... $ 1,421 $ 98 $ 4 $ 19 $ 477 $ 2,019
Segment profit.......... 2,706 4,454 7,135 4,046 -- 18,341
Segment assets.......... 136,072 303,999 715,291 509,757 69,220 1,734,339
</TABLE>
67
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment information for the year ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Retail Commercial Residential
Banking Lending Treasury Lending Adjustments Total
------- ---------- -------- ----------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income......... $ 3,813 $ 11,855 $ 34,170 $ 46,620 $ 418 $ 96,876
Charge for funds used... (2,531) (7,997) (30,992) (38,850) -- (80,370)
------- -------- -------- -------- ------- ----------
Interest spread on
funds used............ 1,282 3,858 3,178 7,770 418 16,506
------- -------- -------- -------- ------- ----------
Interest expense........ (49,081) (635) (7,552) -- -- (57,268)
Credit on funds
provided............... 69,923 829 9,618 -- -- 80,370
------- -------- -------- -------- ------- ----------
Interest spread on
funds provided........ 20,842 194 2,066 -- -- 23,102
------- -------- -------- -------- ------- ----------
Net interest income... $22,124 $ 4,052 $ 5,244 $ 7,770 $ 418 $ 39,608
======= ======== ======== ======== ======= ==========
Depreciation and
amortization........... $ 1,118 $ 58 $ 4 $ 20 $ 458 $ 1,658
Segment profit.......... (4,759) 2,441 3,324 4,686 -- 5,692
Segment assets.......... 70,965 224,242 692,199 579,865 54,276 1,621,547
</TABLE>
19. EAST WEST BANCORP, INC. (PARENT COMPANY ONLY)
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998
--------------
(In thousands)
<S> <C>
ASSETS
Dividends receivable from subsidiary............................. $ 42
Investment in subsidiary......................................... 150,830
--------
Total assets................................................. $150,872
========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable................................................. $ 42
--------
Total liabilities............................................ 42
--------
STOCKHOLDERS' EQUITY
Common stock (par value $0.001 per share)
Authorized -- 50,000,000 shares
Issued and outstanding -- 23,775,000 shares.................... 24
Additional paid in capital....................................... 109,976
Accumulated other comprehensive loss:
Unrealized losses on securities, net of tax.................... (888)
Retained earnings................................................ 41,718
--------
Total stockholders' equity................................... 150,830
--------
Total liabilities and stockholders' equity................... $150,872
========
</TABLE>
68
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the
year ended
December 31,
1998
--------------
(In thousands)
<S> <C>
Dividends received from subsidiary............................. $ 73
-------
Total income............................................... 73
Other expense.................................................. 73
-------
Total expense.............................................. 73
Income before income taxes and equity in undistributed income
of subsidiary................................................. --
Income taxes................................................... --
Equity in undistributed income of subsidiary................... 18,028
-------
Net income................................................. $18,028
=======
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the
year ended
December 31,
1998
--------------
(In thousands)
<S> <C>
Cash flows from operating activities
Net income..................................................... $ 18,028
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed income of subsidiary................. (18,028)
Incerease in dividends receivable from subsidiary............ (42)
Increase in accounts payable................................. 42
--------
Net cash flows from operating activities....................... --
Cash flows from investing activities........................... --
Cash flows from financing activities........................... --
--------
Net increase in cash and cash equivalents...................... --
Cash and cash equivalents at beginning of year................. --
--------
Cash and cash equivalents at end of year....................... $ --
========
</TABLE>
20. SUBSEQUENT EVENTS (UNAUDITED)
On January 20, 1999, the Company's Board of Directors initiated a regular
quarterly cash dividend of $0.03 per share, payable on or about February 16,
1999 to shareholders of record at February 2, 1999.
On January 25, 1999, the Company's Board of Directors authorized the
repurchase of up to $7 million of the Company's common stock. Shares will be
repurchased from time to time in the open market or through private
transactions. On January 29, 1999, the Company purchased 150,000 shares of
treasury stock at $9.75 per share totaling approximately $1.5 million.
On January 29, 1999, the Company's Board of Directors announced its
intention to acquire First Central Bank for $13.7 million in an all cash
transaction. Completion of the merger is anticipated in the second quarter of
1999 and is subject to regulatory and shareholder approval.
69
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On February 8, 1999, the Company's common stock began trading on the NASDAQ
National Market under the ticker symbol "EWBC".
21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
1998
- ----
Interest and dividend income.... $35,534 $32,177 $30,415 $28,582
Interest expense................ 19,349 18,348 17,162 16,184
Net interest income............. 16,185 13,829 13,253 12,398
Provision for loan losses....... 767 1,264 1,583 1,742
Net interest income after
provision for loan losses...... 15,418 12,565 11,670 10,656
Noninterest income.............. 2,600 3,150 2,358 1,919
Noninterest expense............. 8,276 8,356 7,937 8,057
Income before provision for
income taxes................... 9,742 7,359 6,091 4,518
Provision for income taxes...... 3,247 2,671 2,262 1,502
Net income...................... 6,495 4,688 3,829 3,016
Basic and diluted earnings per
share.......................... 0.27 0.20 0.16 0.13
1997
- ----
Interest and dividend income.... $28,073 $27,234 $25,995 $25,790
Interest expense................ 16,394 16,113 14,978 15,161
Net interest income............. 11,679 11,121 11,017 10,629
Provision for loan losses....... 1,431 1,319 1,407 1,431
Net interest income after
provision for loan losses...... 10,248 9,802 9,610 9,198
Noninterest income.............. 1,862 2,384 2,406 1,841
Noninterest expense............. 7,461 6,965 7,415 7,169
Income before provision for
income taxes................... 4,649 5,221 4,601 3,870
Provision for income taxes...... 1,739 2,134 1,871 1,586
Net income...................... 2,910 3,087 2,730 2,284
Basic and diluted earnings per
share.......................... 0.12 0.13 0.11 0.10
</TABLE>
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: March 22, 1999
EAST WEST BANCORP, INC.
(Registrant)
By /s/ Dominic Ng
_____________________________________
Dominic Ng
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dominic Ng Chairman of the Board, March 22, 1999
____________________________________ President, Chairman, and
Dominic Ng Chief Executive Officer
(principal executive
officer)
/s/ Julia Gouw Executive Vice President, March 22, 1999
____________________________________ Chief Financial Officer, and
Julia Gouw Director (principal
financial and accounting
officer)
/s/ Herman Li Director March 22, 1999
____________________________________
Herman Li
/s/ Jack C. Liu Director March 22, 1999
____________________________________
Jack C. Liu
/s/ Kenneth P. Slosser Director March 22, 1999
____________________________________
Kenneth P. Slosser
/s/ Edward Zapanta Director March 22, 1999
____________________________________
Edward Zapanta
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Description
------- -------------------
<C> <S>
2 Plan of Reorganization and Merger Agreement between East West
Bancorp, Inc., East-West Bank and East West Merger Co., Inc.*
3(i) Certificate of Incorporation of the Registrant*
3(ii) Bylaws of the Registrant*
4.1 Specimen Certificate of Registrant*
4.2 Registration Rights Agreement*
4.3 Warrant Agreement*
10.1 Employment Agreement with Dominic Ng*+
10.2 Employment Agreement with Julia Gouw*+
10.3 Employment Agreement with William Chu*+
10.5 Employment Agreement with Douglas P. Krause*+
10.6 East West Bancorp, Inc. 1998 Stock Incentive Plan and Forms of
Agreements*+
10.7 East West Bancorp, Inc. 1998 Employee Stock Purchase Plan*+
10.8 Agency Agreement*
10.9 Employment Agreement with John Stephan
21 Subsidiaries of the Registrant*
27 Financial Data Schedule
</TABLE>
- --------
* Incorporated by reference from Registrant's Registration Statement on Form
S-4 filed with the Commission on November 13, 1998 (File No. 333-63605).
+ Denotes management contract or compensatory plan or arrangement.
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into on this 10th day of October
1997 by and between EAST-WEST BANK, (hereinafter referred to as "Bank"), and
John Stephan (hereinafter referred to as "Executive").
W I T N E S S E T H
-------------------
WHEREAS, in order to insure the successful management of its business,
Bank desires to avail itself of the experience, skills, abilities and knowledge
of Executive; and
WHEREAS, both the Bank and the Executive desire to embody the terms and
conditions of Executive's employment in this written agreement which supersedes
all prior agreements, whether written or oral; and
WHEREAS, the employment, the duration thereof, the compensation to be
paid to Executive, and other terms and conditions of employment provided in this
Agreement were duly fixed, stated, approved and authorized for and on behalf of
the Bank by action of its Board of Directors at a meeting held on October,
-------
1997, at which meeting a quorum was present and voted, exclusive of Executive.
NOW, THEREFORE, in consideration of the mutual convenants, terms and
conditions, hereinafter set forth, the sufficiency of which is acknowledged, the
parties hereto convenant and agree as follows:
1. TERM
----
Subject to the concurrence of all the appropriate state and/or federal
regulatory agencies, Bank agrees to employ Executive as Executive Vice
President, Retail Banking Director, and Executive hereby accepts employment with
Bank commencing on October 20, 1997 ("Commencement Date") and shall continue for
a period of one (1) year(s) from and after the Commencement Date, unless sooner
terminated or extended pursuant to the provisions of Sections 6 and 7 hereof.
This period of employment shall be referred to herein as "the Term". The Bank
and Executive will commence good faith discussions regarding the renewal or
extension of this Agreement three (3) months prior to expiration of the Term of
this Agreement.
2. DUTIES
------
2.1 Generally. At the commencement of this Agreement Executive
---------
shall serve as Executive Vice President, Retail Banking Director, primarily
responsible for managing the retail branch network, the retail bank marketing,
retail
1
<PAGE>
operations, and residential mortgages, subject to the powers by law vested in
the Board of Directors of Bank and in Bank's shareholders. Executive shall also
serve as a member of Various Committees of the Bank. During the term of this
Employment Agreement, Executive shall perform his/her duties faithfully,
diligently and to the best of his/her ability, consistent with the highest and
best standards of the banking industry and in compliance with all applicable
laws and the Bank's Articles of Association and Bylaws. The Executive may be
assigned, by mutual agreement, other titles and job responsibilities.
2.2 Performance. Executive shall devote substantially his full
-----------
energies, interest, abilities and productive time to the business of the Bank.
Executive shall at all times loyally and conscientiously perform all of these
duties and obligations hereunder and shall at all times strictly adhere to and
obey, and instruct and require all those working under and with him strictly to
adhere and obey, all Bank policies and procedures whether written or oral and
all applicable federal and state laws, statutes, rules and regulations to the
end that the Bank shall at all times be in full compliance with such laws,
statutes, rules and regulations. Executive will be primary place of business
will be located at one of the banks principal offices in the Los Angeles
Metropolitan area.
3. COMPENSATION
------------
3.1 Operating Period. During the Term, Executive shall receive an
----------------
annual base salary in the amount of Two Hundred Thousand ($200,000.00) payable
in accordance with the normal payroll practices of the Bank. Annual salary
increases shall be according to Bank policy which are based on merit and the
Bank's financial performance for the previous year. Annual increases are in the
sole discretion of the Bank.
3.2 Bonus. In addition to the base salary set forth in Section 3.1
-----
hereof, during the Term, Executive may participate in the Bank's Management
Incentive Program with the opportunity to earn an annual bonus, based upon
achievement. Bonus potential is established pursuant to the Management Incentive
Program currently at 30% of calendar year base salary earnings prorated for
service less than the full twelve (12) month cycle. The percentage may be
changed at the sole discretion of the Bank with or without notice. Executive
shall not receive any bonus if employment is terminated prior to Executive
completing any full calendar year; there shall be no proration of bonus
earnings. The Bank, in its sole discretion, may award a pro rata bonus at time
of termination.
4. EXECUTIVE BENEFITS
------------------
2
<PAGE>
4.1 Group Medical and Life Insurance Benefits. During the Term the
-----------------------------------------
Bank shall provide for Executive, at Bank's expense, participation in medical,
dental, accident and health, income continuation and life insurance benefits to
the same extent that such benefits are available to other executives and
eligible employees of the Bank. Dependent coverage may be subject to Executive
contributions. Nothing herein shall imply that the Bank may not reduce,
eliminate or modify existing benefits provisions applicable to all employees.
4.2 Business Expense. Executive shall be entitled to reimbursement by
----------------
the Bank in accordance with Bank policy and procedures, for any ordinary and
necessary business expenses incurred by Executive in the performance of
Executive's duties and in acting for the Bank during the Term, which type of
expenditures shall be determined by the Board of Directors, provided that:
(a) Each such expenditure is of a nature qualifying it as a proper
deduction on the federal and state income tax returns of the Bank as a business
expense and not as deductible compensation to Executive; and
(b) Executive furnishes to the Bank adequate records and other
documentary evidence required by federal and state statutes and regulations
issued by the appropriate taxing authorities for the substantiation of such
expenditures as deductible business expenses of the Bank and not as deductible
compensation to Executive.
4.3 Automobile. Executive shall receive an automobile allowance in
----------
the sum of six hundred Dollars ($600.00) per month during the term of this
agreement.
4.4. 401 (K). Executive may participate in the Bank's 401 (k) Plan
-------
subject to the terms and conditions thereof.
4.5 Vacation. Executive shall be entitled to a vacation, in accordance
--------
with standard Bank policies based on Corporate title and length of service,
each year during the Term, which vacation presently shall be four (4) weeks and
such vacation shall accrue at the rate of 13.33 hours for each month of service
under this Agreement. Any vacation time not used may be accrued for use in
future years, subject to a maximum accrual balance not to exceed 1 1/2 times
annual accrual entitlement.
4.6 LTD (Long Term Disability), Executive will be required to join the
--------------------------
Executive Long Term Disability Plan. The Executive Long Term Disability Plan is
a contributory plan. All premiums will automatically be paid out of payroll
deductions. Participation is mandatory.
3
<PAGE>
4.7 Employee Benefits. Executive shall be entitled to participate in
-----------------
all Bank employee benefits available to all employees, subject to meeting
standard eligibility requirements.
4.8 Benefit Enhancements. Executive will be eligible for all and any
--------------------
benefit enhancements that are made to the executive benefit package.
5. PROPERTY RIGHTS
---------------
5.1 Trade Secrets. During the Term, Executive may have access to and
-------------
become acquainted with various trade secrets which are owned by the Bank and
which may regularly be used in the operation of the Bank. Executive shall not
disclose any such trade secrets, directly or indirectly, or use them in any
way, during the Term or at any time thereafter, except as required pursuant to
the provisions of this Agreement. All such trade secrets, including, but not by
way of limitation, any and all files, records, documents, specifications,
equipment, customer lists and similar items relating to the business of the
Bank, whether prepared by Executive or otherwise coming into Executive's
possession, shall remain the exclusive property of the Bank and shall not be
removed from the premises of the Bank under any circumstances whatsoever without
the prior written consent of the Board of Directors.
5.2 Other Property. Under termination of this Agreement, Executive
--------------
shall immediately deliver to the Board of Directors any and all property in
Executive's possession or under Executive's control belonging to the Bank, in
good condition, ordinary wear and tear and damage by any cause beyond
Executive's reasonable control excepted.
6. ADDITIONAL OBLIGATIONS
----------------------
6.1 Covenant Not to Compete. During the Term, Executive shall not,
-----------------------
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, stockholder, corporate officer of director, or in any other
individual or representative capacity, engage or participate in any business or
activity that is in any way in competition in any manner whatsoever with the
business of the Bank.
7. TERMINATION.
-----------
Pursuant to the provisions of all applicable federal and state statutes and
regulations including California Labor Code Section 2922, it is the specific
intent of the Bank and the Executive that the employment shall be "at will", and
any and all other provisions of this Agreement to the contrary notwithstanding,
Executive's employment hereunder may be terminated as follows:
4
<PAGE>
7.1 Without Cause. In the sole and absolute discretion of the Board
-------------
of Directors for any cause whatsoever; provided, however, that if such
termination occurs during the Term, and is for any cause other than those causes
particularly described in Sections 7.2 or 7.3 hereof, Executive shall receive a
severance payment in the amount equal to six (6) months of the then current
annual salary in full and complete satisfaction of any and all rights which
Executive might enjoy hereunder other than the right, if any, to exercise any of
the stock options vested prior to such termination. In the event that
termination takes place without cause in the first six (6) months of employment,
the severance payment provided herein shall be prorated based upon the length of
service.
7.2 Disability. Upon Executive's medical or psychological disability
----------
whereby Executive is unable to continue his/her duties hereunder, the employment
is terminated. If such termination occurs as a result of such disability,
Executive shall receive severance payment in an amount equal to six (6) months
of the annual base salary in effect hereunder at the date of such termination in
full and complete satisfaction of any and all rights which Executive might enjoy
hereunder other than the right, if any, to exercise any of the stock options
vested prior to such termination.
7.3 With Cause. In the event of the Executive's death or willful
----------
breach or habitual neglect of his/her duties and obligations under this
Agreement, his/her conviction of a felony or the closing of the Bank under order
of regulatory authorities or any other governmental regulator of competent
jurisdiction, in which event Executive or Executive's estate shall not receive
any severance payment.
7.4. Severance After The Term of Agreement. In the event that this
-------------------------------------
Agreement expires and no subsequent Employment Agreement is entered into and
Executive remains in the employment of the Bank whereby employment remains "at
will", if the Bank terminates the Executive without cause, as defined above, the
Executive shall receive six (6) months of salary as severance pay in full and
complete satisfaction of any and all rights that Executive may have. If the Bank
terminates the Executive for cause, no severance pay shall be paid to Executive.
7.5. Severance Settlement. Severance payment shall be made in a lump
---------------------
sum, subject to required payroll withholding and IRS Form W-2 reporting.
7.6. Change of Control. If a Change of Control (as defined below)
-----------------
occurs during the term of this Agreement, and if executive is terminated without
cause within twelve (12)
5
<PAGE>
months of such Change of Control, Executive shall receive a severance payment
equal to the total cash compensation received in the prior 24 month period, or
annualized if 24 months has not passed since Executive was hired; this severance
payment shall be in lieu of the severance payment provided in Section 7.1 and
7.4 of this Agreement or under any severance payment to which Executive would
otherwise be entitled to under this Agreement or under any severance program of
general application of the Bank or any entity which might acquire control of
Bank.
"Change of Control" means the transfer of 51% or more of the Bank's outstanding
voting common stock followed within twelve (12) months by replacement of fifty
percent (50%) or more of the members of the Bank's Board of Directors (for
reason other than death or disability), but shall not include (I) any transfer
of stock to another company or entity directly or indirectly controlled or owned
by the current shareholders of the Bank or their immediate family or (ii) any
transfer as a result of a public stock offering of the Bank so long as after
such stock offering no other person or group owns, directly or indirectly, a
greater number of shares than are owned directly or indirectly by the current
shareholders of the Bank or their immediate family. For purposes of the
definition of change of control, a transfer of the Bank's stock shall also be
deemed to occur if the stock of any holding company owning 51% or more of the
Bank is transferred.
7.7. General Release of Claims. As a material inducement to the Bank
-------------------------
to enter into Sections 7.1, 7.2 and 7.4, Executive hereby irrevocably and
unconditionally releases, acquits, and forever discharges the Bank and each of
the Bank's owners, shareholders, predecessors, successors, assigns, agents,
directors, officers, employees, representatives, attorneys, divisions,
subsidiaries, affiliates (and agents, directors, officers, employees,
representatives and attorneys of such divisions, subsidiaries and affiliates),
and all persons acting by, through, under or in concert with any of them
(collectively "Releasees"), or any of them, from any and all complaints, claims,
liabilities, obligations, promises, agreements, controversies, damages, costs,
losses, debts and expenses (including attorney's fees and costs actually
incurred), of any nature whatsoever, including the Age Discrimination in
Employment Act and the Older Workers Benefit Protection Act, known or unknown
("Claim" or "Claims"), which Executive now has, owns, or holds, or claims to
have, own or hold, or which Executive at any time heretofore had, owned, or
held, or claimed to have, own, or hold, or which Executive at any time
hereinafter may have, own, or hold, or claim to have, own, or hold, against each
or any of the Releases.
7.8. Civil Code Section 1542. Executive expressly waives and
-----------------------
relinquishes all rights and benefits afforded by
6
<PAGE>
Section 1542 of the Civil Code of the State of California and does so understand
and acknowledge the significance and consequence of such specific waiver of
Section 1542. Section 1542 of the Civil Code of the State of California states
as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor."
7.9 Indemnification. The Bank agrees to indemnify Executive to the
---------------
fullest extent possible pursuant to California law for any and all acts
performed during the course and scope of Executive's employment. At all times
during the employment, the Bank shall maintain directors and officers liability
insurance coverage for Executive.
8. ACKNOWLEDGMENT.
--------------
Executive hereby acknowledges that this Agreement may be subject to and
contingent upon the prior approval of the regulatory authorities and only to the
extent that any such prior approval is required. If such approval is not
obtained, this contract is null and void and unenforceable.
9. MISCELLANEOUS.
-------------
9.1 Notice. Any and all notices and other communications hereunder
------
shall be in writing and shall be deemed to have been duly given when delivered
personally or forty-eight (48) hours after being mailed, certified or registered
mail, return receipt requested, postage prepaid, to the addresses set forth
below or to such addresses as may from time to time be designated in writing.
East-West Bank,
Attention: Human Resources Director
415 Huntington Drive
San Marino, CA 91108
9.2 Time. Time is of the essence of this Agreement with respect to
----
each and every provision of this Agreement in which time is a factor.
9.3 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Executive and the Bank pertaining to the subject matter hereof, fully
supersedes any and all prior agreements and or understandings between Executive
and any other persons on behalf of the Bank pertaining to the subject matter
hereof and no change in modification of or addition, amendment
7
<PAGE>
or supplement to this Agreement shall be valid unless set forth is writing and
signed and dated by Executive and the Bank.
9.4 Further Assurances. Executive and the Bank, without the necessity
------------------
of any further consideration, agree to execute and deliver such other documents
and take such other action as may be necessary to consummate more effectively
the purposes and subject matter of this Agreement.
9.5 Applicable Law. The existence, validity, construction and
--------------
operational effect of this Agreement, any and all of these covenants,
agreements, representations, warranties, terms and conditions and the rights and
obligations of Executive and the Bank hereunder shall be determined in
accordance with the regulations of the applicable regulatory authorities
provided, however, that any provision of this Agreement which may be prohibited
by law or otherwise held invalid shall be ineffective only to the extent of such
prohibition or invalidity and shall not invalidate or otherwise render
ineffective any or all of the remaining provisions of this Agreement.
9.6 Controversy. In the event of any controversy, claim, or dispute
-----------
between Executive and the Bank arising out of or relating to this Agreement, the
prevailing party shall be entitled to recover as costs from the non-prevailing
party reasonable expenses, including, but not by way of limitation, attorneys'
fees and accountant's fees.
9.7 Arbitration. Any dispute regarding any aspect of this Agreement,
-----------
including but not limited to its formation, performance or breach ("arbitrable
dispute"), shall be submitted to arbitration in Los Angeles County, California,
before a single experienced employment arbitrator licensed to practice law in
California and selected in accordance with the Employment Dispute Resolution
Rules of the American Arbitration Association, as the exclusive forum for
resolving such claims or dispute. The arbitrator shall not have authority to
modify or change the Agreement in any respect. The prevailing party in any such
arbitration shall be awarded its costs, expenses, and actual attorneys' fees
incurred in connection with the arbitration. Bank and Executive shall each be
responsible for payment of one-half the amount of the arbitrator's fee(s). The
arbitrator's decision and/or award will be fully enforceable and subject to an
entry of judgement by the Superior Court of the State of California for the
County of Los Angeles. Should any part to this Agreement hereafter institute any
legal action or administrative proceeding against the other with respect to any
Claim waived by this Agreement or pursue any arbitrable dispute by any method
other than arbitration, the responding party shall recover from the initiating
party all damages, costs, expenses, and attorneys' fees incurred as a result of
such action.
8
<PAGE>
9.8 Headings and Gender. The section headings used in this Agreement
-------------------
are intended solely for the convenience of reference and shall not in any way or
manner amplify, limit, modify or otherwise be used in the interpretation of any
of the provisions of this Agreement and the masculine, feminine or neutral
gender and the singular or plural number shall be deemed to include the others
whenever the context so indicates or requires.
9.9 Successors. The covenants, agreements, representations,
----------
warranties, terms and conditions contained in this Agreement shall be binding
upon and insure to the benefit of the successors and assigns of Executive and
the Bank, provided however, that Executive may not assign any or all of his
rights or duties hereunder except upon the prior written consent of the Board of
Directors in its sole and absolute discretion.
DATED: 10-9, 1997
EAST-WEST BANK
By:
EXECUTIVE
9
<PAGE>
ANNUAL AMENDMENT TO EMPLOYMENT AGREEMENT
This Annual Amendment to the October 20, 1997 Employment
Agreement (hereinafter "Employment Agreement") is entered into on this 1st day
of February, 1998 by and between EAST-WEST BANK (hereinafter referred to as
"Bank"), and John E. Stephan (hereinafter referred to as "Executive").
Pursuant to Section 9.3 of the Employment Agreement between the Bank and
Executive, the following terms and conditions of the Employment agreement are
hereby modified and agreed to, as approved and authorized for and on behalf of
the Bank by action of its Board of Directors at a meeting held on January 22,
1998, at which meeting a quorum was present and voted, exclusive of Executive:
1. TERM
----
Bank agrees to employ Executive as Executive Vice President, and Executive
hereby accepts employment with Bank commencing on February 1, 1998
("Commencement Date") and shall continue for a period of one (1) year from and
after the Commencement Date.
2. DUTIES
------
2.1 Generally. At the commencement of this agreement executive shall
---------
serve as Executive Vice President and Retail Banking Director subject to the
powers by law vested in the Board of Directors of Bank and in Bank's
shareholders. During the term of this Employment Agreement, Executive shall
perform his/her duties faithfully, diligently and to the best of his/her
ability, consistent with the highest and best standards of the banking industry
and in compliance with all applicable laws and the Bank's Articles of
Association and Bylaws.
3. COMPENSATION
------------
3.1 Operating Period. During the Term, Executive shall receive an
----------------
annual base salary in the amount of Two Hundred Four Thousand Dollars
($204,000.00) payable in accordance with the normal payroll practices of the
Bank. Annual salary increases shall be according to Bank policy which are based
on merit and the bank's financial performance for the previous year. Annual
increases are in the sole discretion of the Bank.
4. EXECUTIVE BENEFITS
------------------
4.2 Business Expense Executive shall be entitled to reimbursement by
----------------
the Bank in accordance with Bank policy and procedure, for any ordinary and
necessary business expenses incurred by Executive in the performance of
Executive's duties and in acting for the Bank during the Term, which type of
expenditures shall be determined by the Board of Directors, provided that
executive furnishes to the Bank adequate records and other documentary evidence
for such expenditures.
Except as expressly agreed to herein, the Employment Agreement between the
parties shall remain in force and effect.
Dated: 4-27-98 , 1998
EAST WEST BANK
By:
-----------------
-----------------
Executive
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANK'S
BALANCE SHEET AS OF DECEMBER 31, 1998, AND STATEMENT OF EARNINGS FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 37,131
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 124,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 682,436
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,100,579
<ALLOWANCE> 16,506
<TOTAL-ASSETS> 2,058,160
<DEPOSITS> 1,292,937
<SHORT-TERM> 33,000
<LIABILITIES-OTHER> 18,393
<LONG-TERM> 563,000
0
0
<COMMON> 24
<OTHER-SE> 150,806
<TOTAL-LIABILITIES-AND-EQUITY> 2,058,160
<INTEREST-LOAN> 85,806
<INTEREST-INVEST> 26,405
<INTEREST-OTHER> 13,302
<INTEREST-TOTAL> 126,708
<INTEREST-DEPOSIT> 49,499
<INTEREST-EXPENSE> 71,043
<INTEREST-INCOME-NET> 55,665
<LOAN-LOSSES> 5,356
<SECURITIES-GAINS> 1,320
<EXPENSE-OTHER> 32,626
<INCOME-PRETAX> 27,710
<INCOME-PRE-EXTRAORDINARY> 18,028
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,028
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 8.54
<LOANS-NON> 9,762
<LOANS-PAST> 129
<LOANS-TROUBLED> 5,936
<LOANS-PROBLEM> 1,789
<ALLOWANCE-OPEN> 12,273
<CHARGE-OFFS> 2,666
<RECOVERIES> 1,542
<ALLOWANCE-CLOSE> 16,506
<ALLOWANCE-DOMESTIC> 16,506
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,513
</TABLE>
