<PAGE>
As filed with the Securities and Exchange Commission on November 15, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
Mark One
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
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)
<TABLE>
<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)
</TABLE>
Registrant's telephone number, including area code: (626) 799-5700
----------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- ---------------------
<S> <C>
NONE NONE
</TABLE>
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 [_]
Number of shares of common stock of the registrant outstanding as of October
31, 1999: 22,398,212 shares
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
PART I--FINANCIAL INFORMATION........................................... 3
Item 1. Interim Consolidated Financial Statements................... 4-7
Notes to Interim Consolidated Financial Statements.......... 8-9
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations............... 9-30
Item 3. Quantitative and Qualitative Disclosures of Market Risks.... 30
PART II--OTHER INFORMATION.............................................. 31
Item 1. Legal Proceedings........................................... 31
Item 2. Changes in Securities and Use of Proceeds................... 31
Item 3. Defaults upon Senior Securities............................. 31
Item 4. Submission of Matters to a Vote of Security Holders......... 31
Item 5. Other Information........................................... 31
Item 6. Exhibits and Reports on Form 8-K............................ 31
SIGNATURES.............................................................. 32
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents........................... $ 40,238 $ 161,131
Investment securities available for sale, at fair
value (with amortized cost of $542,873 in 1999 and
$683,335 in 1998) ................................. 526,685 682,436
Loans receivable, net of allowance for loan losses
of $20,533 in 1999 and $16,506 in 1998............. 1,375,073 1,100,579
Investment in Federal Home Loan Bank stock, at
cost............................................... 27,716 32,874
Other real estate owned............................. 2,823 4,600
Investment in affordable housing partnerships....... 24,691 18,602
Premises and equipment, net......................... 22,950 23,406
Premiums on deposits acquired, net.................. 4,156 2,648
Excess of purchase price over fair value of net
assets acquired, net............................... 6,878 3,590
Accrued interest receivable and other assets........ 29,864 28,294
Deferred tax asset.................................. 6,543 --
---------- ----------
TOTAL........................................... $2,067,617 $2,058,160
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Customer deposit accounts........................... $1,465,749 $1,292,937
Securities sold under agreements to repurchase...... 36,000 33,000
Federal Home Loan Bank advances..................... 398,000 563,000
Notes payable....................................... 2,452 1,820
Accrued expenses and other liabilities.............. 16,894 12,871
Deferred income taxes............................... -- 1,259
---------- ----------
Total liabilities................................. 1,919,095 1,904,887
---------- ----------
FAIR VALUE OF NET ASSETS ACQUIRED IN EXCESS OF
PURCHASE PRICE, NET................................ 2,132 2,443
STOCKHOLDER'S EQUITY
Common stock (par value of $0.001 per share)
Authorized -- 50,000,000 shares
Issued and outstanding -- 22,399,495 shares and
23,775,000 shares in 1999 and 1998,
respectively..................................... 22 24
Additional paid in capital.......................... 96,485 109,976
Accumulated other comprehensive loss:
Unrealized losses on securities available for
sale, net of tax................................. (9,906) (888)
Retained earnings................................... 59,789 41,718
---------- ----------
Total stockholders' equity........................ 146,390 150,830
---------- ----------
TOTAL........................................... $2,067,617 $2,058,160
========== ==========
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees........... $28,590 $21,334 $77,607 $62,473
Investment securities available for sale... 8,426 7,002 27,470 17,195
Investment securities held for trading..... 67 -- 81 --
Short-term investments..................... 383 3,581 2,194 10,829
Federal Home Loan Bank stock............... 356 260 1,149 677
------- ------- ------- -------
Total interest and dividend income........ 37,822 32,177 108,501 91,174
------- ------- ------- -------
INTEREST EXPENSE
Customer deposit accounts.................. 12,977 12,511 36,298 37,576
Short-term borrowings...................... 54 2,029 596 5,536
Federal Home Loan Bank advances............ 6,180 3,808 19,428 8,582
------- ------- ------- -------
Total interest expense.................... 19,211 18,348 56,322 51,694
------- ------- ------- -------
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES................................ 18,611 13,829 52,179 39,480
PROVISION FOR LOAN LOSSES................... 1,320 1,264 4,006 4,589
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES..................................... 17,291 12,565 48,173 34,891
------- ------- ------- -------
NONINTEREST INCOME
Loan fees.................................. 419 571 1,545 1,710
Branch fees................................ 889 644 2,500 1,890
Letters of credit fees and commissions..... 1,062 824 3,101 1,865
Net gain on sales of investment securities
available for sale........................ -- 908 685 1,316
Net gain on sales of investment securities
held for trading.......................... 841 -- 1,266 --
Net gain on sale of investment in
affordable housing partnerships........... -- -- 402 --
Net gain on sale of branch................. -- -- 676 --
Amortization of fair value of net assets
acquired in excess of purchase price...... 104 104 312 312
Other operating income..................... 229 99 616 334
------- ------- ------- -------
Total noninterest income.................. 3,544 3,150 11,103 7,427
------- ------- ------- -------
NONINTEREST EXPENSE
Compensation and employee benefits......... 4,773 4,527 13,910 13,140
Net occupancy.............................. 1,571 1,259 4,272 3,695
Data processing............................ 383 315 1,073 953
Amortization of premiums on deposits
acquired and excess of purchase price over
fair value of net assets acquired......... 452 310 1,120 931
Amortization of investment in affordable
housing partnerships...................... 866 255 2,053 762
Deposit insurance premiums and regulatory
assessments............................... 223 205 638 628
Other real estate owned operations, net.... 198 (5) (63) (202)
Other operating expenses................... 2,171 1,490 6,031 4,443
------- ------- ------- -------
Total noninterest expense................. 10,637 8,356 29,034 24,350
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.... 10,198 7,359 30,242 17,968
PROVISION FOR INCOME TAXES.................. 3,169 2,671 10,101 6,435
------- ------- ------- -------
NET INCOME.................................. $ 7,029 $ 4,688 $20,141 $11,533
======= ======= ======= =======
BASIC EARNINGS PER SHARE.................... $ 0.31 $ 0.20 $ 0.88 $ 0.49
DILUTED EARNINGS PER SHARE.................. $ 0.31 $ 0.20 $ 0.88 $ 0.49
AVERAGE NUMBER OF SHARES OUTSTANDING --
BASIC..................................... 22,392 23,775 22,901 23,775
AVERAGE NUMBER OF SHARES OUTSTANDING --
DILUTED................................... 22,448 23,775 22,917 23,775
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Comprehensive Retained Comprehensive Stockholders'
Stock Capital Income (Loss) Earnings Income Equity
------ ---------- ------------- -------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1998
Comprehensive income... $24 $109,976 $(1,138) $23,690 $132,552
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
Comprehensive income...
Net income for the
period............... 20,141 20,141 20,141
Other comprehensive
loss, net of tax.....
Net change in
unrealized losses on
securities, net of
tax................. (9,018) (9,018) (9,018)
-------
Comprehensive income... $11,123
=======
Net issuance under
restricted stock award
plan of 99,495
shares................ 1,051 1,051
Repurchase of common
stock................. (2) (14,542) (14,544)
Dividends declared on
common stock.......... (2,070) (2,070)
--- -------- ------- ------- --------
BALANCE, SEPTEMBER 30,
1999.................. $22 $ 96,485 $(9,906) $59,789 $146,390
=== ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Year
Ended Ended
September 30, December 31,
1999 1998
------------- ------------
(In thousands)
<S> <C> <C>
Disclosure of reclassification amounts:
Unrealized holding (losses) gains arising during
period, net of tax benefit (expense) of $4,294 in
1999 and $(595) in 1998............................ $(8,562) $1,109
Less: Reclassification adjustment for gains included
in net income, net of tax expense of $229 in 1999
and $461 in 1998................................... (456) (859)
------- ------
Net change in unrealized losses on securities, net
of tax benefit (expense) of $4,523 in 1999 and
$(134) in 1998..................................... $(9,018) $ 250
======= ======
</TABLE>
See accompanying notes to interim consolidated financial statements.
6
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1999 1998
------------ ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................... $ 20,141 $ 11,533
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of premiums......................... 1,347 1,412
Depreciation and amortization........................ 1,640 1,626
Net loan fees deferred............................... 1,752 1,929
Deferred tax benefit................................. (2,458) (1,965)
Provision for loan losses............................ 4,006 4,589
Provision for other real estate owned losses......... 102 301
Net gains on sales of investment securities and other
assets.............................................. (2,037) (2,296)
Federal Home Loan Bank stock dividends............... (1,233) (615)
Proceeds from sale of loans held for sale............ 43,135 63,457
Originations of loans held for sale.................. (33,972) (67,615)
Increase in accrued interest receivable and other
assets.............................................. (1,570) (10,593)
Increase in accrued expenses and other liabilities... 4,023 5,630
------------ ---------
Total adjustments................................... 14,735 (4,140)
------------ ---------
Net cash provided by operating activities........... 34,876 7,393
------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net disbursements of loans........................... (99,554) (111,871)
Purchases of:
Investment securities available for sale............. (419,612) (586,738)
Loans receivable..................................... (188,072) (19,514)
Federal Home Loan Bank stock......................... (1,808) (10,646)
Investment in affordable housing partnerships........ (7,975) (1,219)
Premises and equipment............................... (1,226) (903)
Proceeds from sale, maturity, redemption or repayment
of:
Investment securities available for sale............. 560,727 455,685
Federal Home Loan Bank stock......................... 8,200 --
Other real estate owned.............................. 2,628 2,533
Investment in affordable housing partnerships........ 3,267 --
Premises and equipment............................... 2 10
Principal repayments on foreclosed property.......... 100 --
Payment for purchase of First Central Bank, net of
cash received....................................... (5,295) --
------------ ---------
Net cash used in investing activities............... (148,618) (272,663)
------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits............................... $ 97,311 $ 17,931
Deposits acquired from First Central Bank............ 92,569 --
Deposits sold to People's Bank of California......... (17,068) --
Proceeds from Federal Home Loan Bank advances........ 13,043,000 982,820
Repayment of Federal Home Loan Bank advances......... (13,208,000) (809,520)
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase.. 3,000 (74,800)
Repayments of notes payable on affordable housing
investments......................................... (2,400) (1,615)
Repurchase of common stock........................... (13,493) --
Dividends paid on common stock....................... (2,070) --
------------ ---------
Net cash (used in) provided by financing
activities......................................... (7,151) 114,816
------------ ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS............. (120,893) (150,454)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 161,131 347,601
------------ ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 40,238 $ 197,147
============ =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................................ $ 55,640 $ 51,392
Income tax payments, net............................. 14,050 7,295
Noncash investing and financing activities:
Other real estate acquired through foreclosure....... 1,320 5,510
Loans made to facilitate sales of other real estate
owned............................................... 650 1,027
Investment in affordable housing partnerships
acquired through notes payable...................... 3,033 --
Net change in unrealized losses on securities
available for sale, net of tax...................... (9,018) 155
Mortgage loans held to maturity securitized to
investment securities available for sale............ -- 35,875
</TABLE>
See accompanying notes to interim consolidated financial statements.
7
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30,1999 and 1998
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of East West
Bancorp, Inc. (the "Company") and its wholly-owned subsidiary bank, East West
Bank and subsidiaries (the "Bank"). All material intercompany transactions and
accounts have been eliminated.
The interim consolidated financial statements are unaudited and reflect all
adjustments which, in the opinion of management, are necessary for a fair
statement of financial condition and results of operations for the interim
periods. All adjustments are of a normal and recurring nature. Results for the
period ended September 30, 1999 are not necessarily indicative of results
which may be expected for any other interim period or for the year as a whole.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes included in the Company's annual
report for the year ended December 31, 1998.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
2. STOCKHOLDERS' EQUITY
Earnings Per Share
The actual number of shares outstanding at September 30, 1999, was
22,399,495. Basic earnings per share are calculated on the basis of the
weighted number of shares outstanding during the period. Diluted earnings per
share are calculated on the basis of the weighted average number of shares
outstanding during the period plus shares issuable upon the assumed exercise
of outstanding common stock options and warrants. All 1998 per share
information in the financial statements and in Management's Discussion and
Analysis has been restated to give retroactive effect to the 118,875 for
550,000 reverse stock split effective June 11, 1998.
Quarterly Dividends
During 1999, the Company's Board of Directors initiated regular quarterly
common stock cash dividends of $0.03 per share. Quarterly cash dividends were
paid on or about February 16, 1999, May 11, 1999 and August 18, 1999 to
shareholders of record at February 2, 1999, May 5, 1999 and August 4, 1999,
respectively. For the nine months ended September 30, 1999, cash dividends
totaling $2.1 million have been paid to the Company's shareholders.
Stock Repurchase Programs
On January 25, 1999, the Company's Board of Directors authorized the Company
to repurchase up to $7.0 million of its common stock. During the first quarter
of 1999, the Company repurchased 725,000 shares of its common stock for a
total of $7.0 million which completed the first stock repurchase program. On
March 29, 1999, the Company's Board of Directors initiated a second stock
repurchase program, authorizing the repurchase of up to an additional $7.0
million of common stock. The Company has also completed the second stock
repurchase program repurchasing 700,000 shares for a total of $7.0 million. On
August 13, 1999, the Company's Board of Directors initiated a third stock
repurchase program, authorizing the repurchase of up to an additional $7.0
million of common stock. As of September 30, 1999, the Company has repurchased
50,000 shares of its common stock for approximately $503 thousand in
conjunction with its third stock repurchase program.
8
<PAGE>
3. BRANCH SALE
On May 21, 1999, the Company completed the sale of its Irvine Branch to
People's Bank of California. Total assets purchased and total liabilities
assumed by People's Bank were $83 thousand and $17.1 million, respectively.
The purchase price was 4.25% of outstanding deposits assumed as of May 21,
1999 or $725 thousand. The net gain on sale recorded by the Company on this
transaction was $676 thousand.
4. FIRST CENTRAL BANK ACQUISITION
On May 28, 1999, the Company completed its $13.5 million acquisition of
First Central Bank, N.A. in an all-cash transaction. First Central Bank, with
assets of $102 million, was a national bank with three branches in Southern
California, specializing in serving the banking needs of the Chinese-American
community.
The acquisition was accounted for under the purchase method of accounting,
and accordingly, all assets and liabilities were adjusted to and recorded at
their estimated fair values as of the acquisition date. The estimated tax
effect of differences between tax bases and market values has been reflected
in deferred income taxes. The Company recorded total goodwill of approximately
$3.5 million, which is being amortized using the straight-line method over 15
years.
5. AMERICAN INTERNATIONAL BANK ACQUISITION
On September 17, 1999, the Company signed a definitive agreement to purchase
American International Bank ("AIB") for approximately $33.8 million in an all-
cash transaction. Completion of the merger is anticipated in the first quarter
of 2000 and is subject to regulatory and AIB shareholder approval. American
International Bank, with assets of $211 million as of September 30, 1999, is a
state-chartered bank with eight branches in Southern California. AIB
specializes in servicing small-to-medium sized companies involved in
international trade and other areas, as well as offering a full range of
personal banking products and services to a predominantly Chinese-American
customer base.
ITEM 2. 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. and its subsidiaries (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 1998 annual report on Form 10-K for the year ended December
31, 1998, and the accompanying interim unaudited consolidated financial
statements and notes thereto.
In addition to historical information, this discussion includes certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 which involve inherent risks and uncertainties.
A number of important factors could cause the Company's actual results and
performance in future periods to differ materially from those discussed in
such forward-looking statements. These factors include, but are not limited
to, the effect of interest rate and currency exchange fluctuations,
competition in the financial services market for both deposits and loans; the
Company's ability to efficiently incorporate acquisitions into its operations;
the Company's ability to successfully address "Year 2000" issues during the
assimilation process; the ability of the Company to increase its customer
base; and regional and general economic conditions. Given these uncertainties,
the reader is cautioned not to place undue reliance on such forward-looking
statements. The Company expressly disclaims any obligation to update or revise
any forward-looking statements contained herein to reflect any changes in the
Company's expectations of results or any change in events.
9
<PAGE>
Quarterly Cash Dividend
On July 21, 1999, the Company announced that the Board of Directors had
declared a regular quarterly cash dividend of $0.03 per share. The dividend
payment was made on or about August 18, 1999 to shareholders of record at
August 4, 1999.
Stock Repurchase Programs
On August 13, 1999, the Company's Board of Directors initiated a third stock
repurchase program authorizing the repurchase of up to an additional $7.0
million of common stock.
As of September 30, 1999, the Company had completed its second stock
repurchase program, repurchasing 700,000 shares of common stock for a total of
$7.0 million. For the nine months ended September 30, 1999, the Company has
repurchased a total of 1,475,000 shares amounting to $14.5 million.
Acquisition of American International Bank
On September 17, 1999, the Company announced that it has signed a definitive
agreement to purchase American International Bank for approximately $33.8
million in an all-cash transaction. The merger is anticipated to be completed
in the first quarter of 2000 subject to regulatory and AIB shareholder
approval.
Results of Operations
East West Bancorp, Inc, parent company of East West Bank (the "Bank")
reported third quarter 1999 net income of $7.0 million, or $0.31 per basic and
diluted share, compared to $4.7 million, or $0.20 per basic and diluted share,
reported during the third quarter of 1998. The Company's annualized return on
average total assets increased to 1.34% for the quarter ended September 30,
1999, from 1.02% for the same period in 1998. The annualized return on average
stockholders' equity increased to 19.37% for the third quarter of 1999,
compared with 13.12% for the third quarter of 1998.
Net income for the nine months ended September 30, 1999 increased to $20.1
million, or $0.88 per basic and diluted share, from $11.5 million, or $0.49
per basic and diluted share, for the first nine months of 1998. The annualized
return on average total assets increased to 1.30% for the first nine months of
1999, compared with 0.89% for the first nine months of 1998. The annualized
return on average stockholders' equity increased to 18.19% for the first three
quarters of 1999, compared with 11.13% for the same period in 1998.
Components of Net Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
(In millions) (In millions)
<S> <C> <C> <C> <C>
Net interest income............... $ 18.6 $ 13.8 $ 52.2 $ 39.5
Provision for loan losses......... (1.3) (1.3) (4.0) (4.6)
Noninterest income................ 3.5 3.2 11.1 7.4
Noninterest expense............... (10.6) (8.4) (29.0) (24.4)
Provision for income taxes........ (3.2) (2.6) (10.2) (6.4)
--------- -------- -------- --------
Net income...................... $ 7.0 $ 4.7 $ 20.1 $ 11.5
========= ======== ======== ========
Annualized return on average total
assets........................... 1.34% 1.02% 1.30% 0.89%
========= ======== ======== ========
</TABLE>
Net income increased 50% and 75%, respectively, for the three and nine
months ended September 30, 1999 compared with corresponding periods in 1998.
The increases in third quarter and year-to-date 1999 net income is largely
attributable to the growth in the Company's loan and investment securities
portfolios, and to the reduction in the Company's cost of funds. Further,
sustained growth in noninterest-related revenues, as well as continuing
efforts to manage operational expenses, have also contributed to the increase
in net income.
10
<PAGE>
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 for the third quarter of
1999 totaled $18.6 million, a 35% increase over net interest income of $13.8
million for the same period in 1998. For the first nine months of 1999, net
interest income increased to $52.2 million, reflecting a 32% increase from
$39.5 million for the first nine months of 1998.
Total interest and dividend income during the quarter ended September 30,
1999 increased 18% to $37.8 million compared with $32.2 million during the
same period in 1998. Similarly, year-to-date interest and dividend income
increased 19% to $108.5 million, from $91.2 million during the first nine
months of 1998. The increase in interest and dividend income is due primarily
to the growth in average earning assets of 14% and 19%, respectively, during
the three and nine months ended September 30, 1999. Growth in the Company's
loan and investment portfolios, partially offset by a decrease in short-term
investments, propelled the net increase in average earning assets. The net
growth in average earning assets was funded largely by increases in FHLB
advances and time deposits. Additionally, a 49% growth in noninterest-bearing
demand deposits during the three- and nine-month periods ended September 30,
1999 also provided another funding source to the Company.
The overall yield on earning assets increased to 7.56% and 7.33%, from 7.32%
and 7.31%, respectively, for the third quarter and first nine months of 1999.
Although a marked decrease in the average prime rate resulted in lower loan
yields for both periods, yields on investment securities increased over the
same periods due to purchases of fixed rate securities during the second half
of 1998.
Total interest expense during the third quarter of 1999 increased 5% to
$19.2 million compared with $18.3 million for the same period a year ago. For
the first nine months of 1999, total interest expense increased 9% to $56.3
million, from $51.7 million for the first three quarters of 1998. The increase
in third quarter and year-to-date 1999 interest expense is primarily
attributable to increases in average FHLB advances and time deposits,
partially offset by a decrease in average short-term borrowings. Additionally,
a reduction in the cost of funds for all categories of interest-bearing
liabilities was another significant factor in the year-to-date 1999 increase
in interest expense.
Net interest margin, defined as taxable equivalent net interest income
divided by average earning assets, increased 57 basis points to 3.72% for the
third quarter of 1999, compared with 3.15% for the third quarter of 1998. For
the first nine months of 1999, the net interest margin was 3.52%, a 35 basis
point increase from the net interest margin of 3.17% for the same period a
year ago. An increase in the overall yield on average earning assets,
compounded by a significant decline in the cost of funds, contributed to the
increase in the Company's net interest margin. The Company's overall cost of
funds decreased 36 and 37 basis points to 4.24% and 4.21%, respectively, for
the three and nine months ended September 30, 1999.
11
<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 for the three months ended September
30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------------
1999 1998
---------------------------- ----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Interest-earning assets:
Short-term investments............ $ 25,074 $ 383 6.11% $ 239,740 $ 3,581 5.97%
Taxable investment securities
(2)(3)........................... 570,422 8,493 5.96 511,459 7,002 5.48
Loans receivable (2)(4)........... 1,379,199 28,590 8.29 986,596 21,334 8.65
FHLB stock........................ 27,606 356 5.16 20,681 260 5.03
---------- ------- ---------- -------
Total interest-earning assets.... 2,002,301 37,822 7.56 1,758,476 32,177 7.32
------- ---- ------- ----
Noninterest-earning assets:
Cash and due from banks........... 38,870 25,032
Allowance for loan losses......... (20,477) (14,994)
Other assets...................... 72,545 63,562
---------- ----------
Total assets..................... $2,093,239 $1,832,076
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
- -----------------------------------
Interest-bearing liabilities:
Checking accounts................. $ 93,914 $ 295 1.26 $ 78,601 $ 270 1.37
Money market accounts............. 62,926 503 3.20 26,872 256 3.81
Savings deposits.................. 213,544 945 1.77 218,194 1,373 2.52
Time deposits..................... 965,306 11,234 4.66 838,916 10,612 5.06
Short-term borrowings............. 2,873 54 7.52 140,188 2,029 5.79
FHLB advances..................... 472,910 6,180 5.23 293,425 3,808 5.19
---------- ------- ---------- -------
Total interest-bearing
liabilities..................... 1,811,473 19,211 4.24 1,596,196 18,348 4.60
------- ---- ------- ----
Noninterest-bearing liabilities:
Demand deposits................... 121,176 81,153
Other liabilities................. 15,457 11,817
Stockholders' equity.............. 145,133 142,910
---------- ----------
Total liabilities and
stockholders' equity............ $2,093,239 $1,832,076
========== ==========
Interest rate spread............... 3.32% 2.72%
==== ====
Net interest income and net
interest margin................... $18,611 3.72% $13,829 3.15%
======= ==== ======= ====
</TABLE>
- -------
(1) Annualized.
(2) Includes amortization of premiums and accretion of discounts on loans
receivable and investment securities. Also includes the amortization of
deferred loan fees.
(3) Average balances exclude unrealized gains or losses on available for sale
securities.
(4) Average balances include nonperforming loans.
12
<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 for the nine months ended September 30,
1999 and 1998:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------------
1999 1998
---------------------------- ----------------------------
Average Average
Yield/ Yield/
Average Rate Average Rate
Balance Interest (1) Balance Interest (1)
---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Interest-earning assets:
Short-term
investments........... $ 49,921 $ 2,194 5.86% $ 245,100 $10,829 5.89%
Taxable investment
securities (2)(3)..... 636,918 27,551 5.77 420,312 17,195 5.45
Loans receivable
(2)(4)................ 1,257,768 77,607 8.23 980,618 62,473 8.49
FHLB stock............. 29,878 1,149 5.13 16,774 677 5.38
---------- ------- ---------- -------
Total interest-earning
assets............... 1,974,485 108,501 7.33 1,662,804 91,174 7.31
------- ---- ------- ----
Noninterest-earning
assets:
Cash and due from
banks................. 32,352 23,646
Allowance for loan
losses................ (18,598) (13,649)
Other assets........... 69,717 58,761
---------- ----------
Total assets.......... $2,057,956 $1,731,562
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing
liabilities:
Checking accounts...... $ 85,981 $ 765 1.19 $ 77,638 $ 836 1.44
Money market accounts.. 49,046 1,128 3.07 24,529 702 3.82
Savings deposits....... 218,524 3,024 1.85 212,087 3,976 2.50
Time deposits.......... 903,495 31,381 4.63 847,854 32,062 5.04
Short-term borrowings.. 14,786 596 5.37 129,426 5,536 5.70
FHLB advances.......... 510,345 19,428 5.08 214,927 8,582 5.32
---------- ------- ---------- -------
Total interest-bearing
liabilities.......... 1,782,177 56,322 4.21 1,506,461 51,694 4.58
------- ---- ------- ----
Noninterest-bearing
liabilities:
Demand deposits........ 110,237 73,795
Other liabilities...... 17,880 13,145
Stockholders' equity... 147,662 138,161
---------- ----------
Total liabilities and
stockholders'
equity............... $2,057,956 $1,731,562
========== ==========
Interest rate spread.... 3.12% 2.73%
==== ====
Net interest income and
net interest margin.... $52,179 3.52% $39,480 3.17%
======= ==== ======= ====
</TABLE>
- -------
(1) Annualized.
(2) Includes amortization of premiums and accretion of discounts on loans
receivable and investment securities. Also includes the amortization of
deferred loan fees.
(3) Average balances exclude unrealized gains or losses on available for sale
securities.
(4) Average balances include nonperforming loans.
13
<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>
Three Months Ended Nine Months Ended
September 30, 1999 vs. 1998 September 30, 1999 vs. 1998
----------------------------- -----------------------------
Total Changes Due to Total Changes Due to
Change Volume (1) Rates (1) Change Volume (1) Rates (1)
------- ---------- --------- ------- ---------- ---------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short-term investments.. $(3,198) $(3,281) $ 83 $(8,635) $(8,578) $ (57)
Taxable investment
securities............. 1,491 847 644 10,356 9,319 1,037
Loans receivable, net... 7,256 8,098 (842) 15,134 17,031 (1,897)
FHLB stock.............. 96 89 7 472 502 (30)
------- ------- ----- ------- ------- -------
Total interest
income............... $ 5,645 $ 5,753 $(108) $17,327 $18,274 $ (947)
======= ======= ===== ======= ======= =======
INTEREST-BEARING
LIABILITIES:
Checking accounts....... $ 25 $ 45 $ (20) $ (71) $ 115 $ (186)
Money market accounts... 247 281 (34) 426 530 (104)
Savings deposits........ (428) (29) (399) (952) 125 (1,077)
Time deposits........... 622 1,326 (704) (681) 2,812 (3,493)
Short-term borrowings... (1,975) (2,841) 866 (4,940) (4,638) (302)
FHLB advances........... 2,372 2,345 27 10,846 11,227 (381)
------- ------- ----- ------- ------- -------
Total interest
expense.............. $ 863 $ 1,127 $(264) $ 4,628 $10,171 $(5,543)
======= ======= ===== ======= ======= =======
CHANGE IN NET INTEREST
INCOME................. $ 4,782 $ 4,626 $ 156 $12,699 $ 8,103 $ 4,596
======= ======= ===== ======= ======= =======
</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 totaled $1.3 million for the quarters ended
September 30, 1999 and 1998. For the first nine months of 1999, the provision
for loan losses decreased 16% to $4.0 million, compared to $4.6 million for
the corresponding period in 1998. The decreased provision for loan losses
recorded in the current year reflects continued stability in the Company's
asset quality, as manifested by improvements in nonperforming asset ratios,
when compared to 1998. For further information regarding net credit losses and
the allowance for loan losses, see the "Allowance for Loan Losses" section of
this report.
14
<PAGE>
Noninterest Income
Components of Noninterest Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1999 1998 1999 1998
--------- --------- --------- --------
(In millions) (In millions)
<S> <C> <C> <C> <C>
Loan fees........................... $ 0.42 $ 0.57 $ 1.54 $ 1.71
Branch fees......................... 0.89 0.64 2.50 1.89
Letters of credit fees and
commissions........................ 1.06 0.83 3.10 1.87
Net gains on sales of securities
available for sale................. -- 0.91 0.68 1.32
Net gains on sales of securities
held for trading................... 0.84 -- 1.27 --
Gain on sale of affordable housing
investments........................ -- -- 0.40 --
Gain on sale of branch.............. -- -- 0.68 --
Amortization of negative
intangibles........................ 0.10 0.10 0.31 0.31
Other............................... 0.23 0.10 0.62 0.33
--------- --------- --------- --------
Total............................. $ 3.54 $ 3.15 $ 11.10 $ 7.43
========= ========= ========= ========
</TABLE>
Noninterest income includes revenues earned from sources other than interest
income. These sources include: ancillary fees on loans, service charges and
fees on deposit accounts, fees and commissions generated from trade finance
activities and the issuance of letters of credit, and net gains on sales of
trading securities, investment securities available for sale, and affordable
housing investments.
Noninterest income for the three months ended September 30, 1999 increased
13% to $3.5 million, compared with $3.2 million for the three months ended
September 30, 1998. For the first nine months of 1999, noninterest income
increased 50% to $11.1 million, from $7.4 million for the first three quarters
of 1998. Included in year-to-date noninterest income are a one-time $676
thousand gain on sale of a branch and a $402 thousand gain on sale of an
investment in affordable housing partnerships. Excluding these non-recurring
sources of revenue, noninterest income increased 35% to $10.0 million for the
first nine months of 1999 when compared to the same period in 1998. The
increase in noninterest income for the quarter and year-to-date compared with
the prior year is primarily due to growth in fee-based service income,
including letters of credit fees and commissions and branch fees.
Letters of credit fees and commissions amounted to $1.1 million for the
third quarter of 1999 compared to $824 thousand for the third quarter of 1998.
This 29% increase is attributed primarily to a $201 thousand increase in
issuance and maintenance fees related to standby letters of credit. The
remainder of the increase is attributed to trade finance activities which
experienced growth of 32% and 42%, respectively, in the number of transactions
processed for the three months and the nine months ended September 30, 1999 in
comparison to the same periods a year ago. For the nine months ended September
30, 1999, letters of credit fees and commissions increased 66% to $3.1
million, compared with $1.9 million for the same period in 1998.
Branch fees, which represent revenues derived from branch operations,
amounted to $889 thousand for the third quarter of 1999, a 38% increase from
the $664 thousand earned during the third quarter of 1998. This was primarily
due to higher revenues derived from analysis charges on commercial deposit
accounts, increased fees related to transaction accounts, and higher revenues
from the sale of nonproprietary mutual funds. For the nine months ended
September 30, 1999, branch fees increased 32% to $2.5 million, compared with
$1.9 million for the same period in 1998.
Other contributions to noninterest income include $841 thousand and $1.3
million, respectively, of net gain on sales of investment securities held for
trading for the three- and nine-month periods ended September 30, 1999. There
were no gains on sales of trading securities during the same periods in 1998.
For the nine months ended September 30, 1999, net gain on sales of available
for sale securities decreased to $684 thousand,
15
<PAGE>
compared with $1.3 million for the corresponding period in 1998. There were no
sales of investment securities available for sale during the third quarter of
1999. For the 1998 third quarter, net gain on sales of available for sale
securities amounted to $908 thousand.
Noninterest Expense
Components of Noninterest Expense
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
(In millions) (In millions)
<S> <C> <C> <C> <C>
Compensation and other employee
benefits........................ $ 4.77 $ 4.53 $ 13.91 $ 13.14
Net occupancy.................... 1.57 1.26 4.27 3.70
Data processing.................. 0.38 0.32 1.07 0.95
Amortization of positive
intangibles..................... 0.45 0.31 1.12 0.93
Amortization of affordable
housing investments............. 0.87 0.25 2.05 0.76
Deposit insurance premiums and
regulatory assessments.......... 0.22 0.21 0.64 0.63
Other real estate owned
operations, net................. 0.20 (0.01) (0.06) (0.20)
Other............................ 2.18 1.49 6.03 4.44
--------- --------- -------- --------
Total.......................... $ 10.64 $ 8.36 $ 29.03 $ 24.35
========= ========= ======== ========
Efficiency ratio............... 42% 46% 41% 49%
========= ========= ======== ========
</TABLE>
Noninterest expense increased 27% to $10.6 million for the three months
ended September 30, 1999, from $8.4 million for the three months ended
September 30, 1998. Noninterest expense totaled $29.0 million for the first
three quarters of 1999, compared with $24.4 million for the same period in
1998. Noninterest expense is comprised primarily of compensation and employee
benefits, occupancy and other operating expenses. Compensation and employee
benefits increased 5% to $4.8 million for the third quarter of 1999, compared
with $4.5 million for the third quarter of 1998. This primarily reflects the
Company's continuing growth which includes the acquisition of First Central
Bank at the end of May 1999. For the nine months ended September 30, 1999,
compensation and employee benefits increased to $13.9 million from $13.1
million for the same period a year earlier. In addition to the acquisition of
First Central Bank, the impact of annual salary and related cost increases for
existing employees, as well as increases in incentive compensation tied to the
Company's performance, further contributed to the year-to-date increase in
compensation and employee benefits.
Occupancy expenses increased 25% and 16% to $1.6 million and $4.3 million,
respectively, for the three and nine months ended September 30, 1999. The
increase in occupancy expenses for both periods primarily reflects four months
of operations for the branches and administrative offices of First Central
Bank, an overhead factor which was not present during 1998. Additionally, the
impact of normal rent adjustments in existing leases, as well as increased
expenses related to the outsourcing of computer hardware maintenance further
contributed to the rise in occupancy expenses.
The amortization of investments in affordable housing partnerships increased
to $866 thousand for the third quarter of 1999, compared with $255 thousand
for the third quarter of 1998. For the nine months ended September 30, 1999,
amortization of investments in affordable housing partnerships totaled $2.1
million, compared to $762 thousand for the same period in 1998. The increase
in amortization reflects the impact of additional investment purchases made
since the third quarter of 1998. Total investments in affordable housing
partnerships amounted to $24.7 million as of September 30, 1999, compared with
$14.8 million as of September 30, 1998.
The amortization of positive intangibles, which include premiums on deposits
acquired and excess of purchase price over fair value of net assets acquired
("goodwill"), increased 46% and 20%, respectively, during the three and nine
months ended September 30, 1999 when compared to the same periods in 1998. The
increase
16
<PAGE>
in amortization expense for both periods is due entirely to the monthly
amortization of goodwill and deposit premium recorded as a result of the First
Central Bank acquisition. The amounts of goodwill and deposit premium recorded
by the Company totaled approximately $3.5 million and $2.5 million,
respectively, and are being amortized straight line over 15 and 7 years,
respectively.
Net expenses related to OREO operations, which include writedowns and net
gains and losses on sales of OREO properties, increased by $203 thousand
during the third quarter of 1999 when compared to the third quarter of 1998.
For the nine months ended September 30, 1999, net income generated from OREO
operations totaled $63 thousand compared to $202 thousand for the same period
in 1998. This decrease in net OREO income for both periods is primarily due to
significantly lower rental income recorded in 1999 compared to 1998.
Other operating expenses include advertising and public relations, telephone
and postage, stationery and supplies, bank and item processing charges,
insurance, legal and other professional fees. Other operating expenses for the
third quarter of 1999 increased 46% to $2.2 million, compared with $1.5
million for the third quarter of 1998. For the nine months ended September 30,
1999, other operating expenses increased 36% to $6.0 million, compared with
$4.4 million for the nine months ended September 30, 1998. The increase in
other operating expenses for both periods can be attributed to the Company's
growth, which includes the acquisition of First Central Bank as well as
organic expansion. Further, various expenses directly related to the Company's
change in status from a privately held institution to a public company have
also contributed to the increase in other operating expenses. These expenses
include, but are not limited to, legal fees, investor relations expenses,
Delaware corporation franchise fees, SEC and NASDAQ filing fees, and stock
transfer agent fees.
Continuing efforts to closely manage operational expenses have resulted in a
significant improvement in the Company's efficiency ratio, which represents
noninterest expense (excluding the amortization of intangibles and investments
in affordable housing partnerships) divided by the aggregate of net interest
income before provision for loan losses and noninterest income (excluding the
amortization of intangibles). For the third quarter of 1999, the Company's
efficiency ratio improved to 42%, as compared to 46% for the third quarter of
1998. For the nine months ended September 30, 1999, the efficiency ratio
improved to 41%, compared with 49% for the same period in 1998.
Provision for Income Taxes
The provision for income taxes increased 19% to $3.2 million during the
third quarter of 1999, compared with $2.7 million for the third quarter of
1998, primarily due to higher pretax income partially offset by tax credits
from qualified affordable housing investments. Tax credits utilized in the
third quarter of 1999 totaled $743 thousand, compared to $422 thousand for the
third quarter of 1998. The third quarter 1999 provision reflects an effective
tax rate of 31.1%, compared with an effective tax rate of 36.3% for the third
quarter 1998.
For the nine months ended September 30, 1999, the provision for income taxes
totaled $10.1 million, a 57% increase from the $6.4 million income tax expense
recorded for the same period a year ago. The effective tax rate of 33.4% for
the first three quarters of 1999 reflects tax credits of $2.2 million,
compared with an effective tax rate of 35.8% for the first three quarters of
1998 reflecting tax credits of $1.3 million.
Balance Sheet Analysis
The Company's total assets at September 30, 1999 increased to $2.07 billion,
a slight increase of $9.5 million when compared to December 31, 1998. The
increase in total assets was comprised primarily of a $274.5 million growth in
loans receivable, partially offset by decreases in short-term investments of
$114.0 million and investment securities available for sale of $155.8 million.
The increase in total assets was funded by an increase of $172.8 million in
deposits, partially offset by a decrease in FHLB advances of $165.0 million.
17
<PAGE>
Investment Securities Held for Trading
Investment securities held for trading are investment grade securities which
are generally held by the Company for a period of seven days or less. Net
gains on sales of trading securities amounted to $841 thousand and $1.3
million for the three and nine months ended September 30, 1999. There were no
purchases and sales of investment securities held for trading during 1998.
There were no outstanding investment securities held for trading at September
30, 1999.
Investment Securities Available for Sale
Investment securities available for sale of $526.7 million as of September
30, 1999 represents a decrease of $155.8 million, or 23%, compared to the
December 31, 1998 balance of $682.4 million. Total repayments on mortgage-
backed securities, including calls and redemptions, totaled $383.0 million for
the first nine months of 1999. Proceeds from such repayments were utilized to
purchase additional mortgage-backed securities and to fund loan originations
and purchases. There were no sales of available for sale securities during the
three months ended September 30, 1999. For the nine months ended September 30,
1999, the Bank recorded net gains totaling $685 thousand on sales of available
for sale securities. Proceeds from sales of securities were applied towards
the repayment of FHLB advances as well as funding a portion of the loan
originations and loan purchases made during the first nine months of 1999.
The following table sets forth the amortized cost and the estimated fair
values of investment securities available for sale as of September 30, 1999
and December 31, 1998:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
As of September 30, 1999:
U.S. Treasury securities............. $ 1,997 $ -- $ (40) $ 1,957
U.S. Government agency securities.... 75,605 -- (4,510) 71,095
Mortgage-backed securities........... 465,071 48 (11,689) 453,430
Obligations of states and political
subdivisions........................ 200 3 -- 203
-------- ----- -------- --------
Total investment securities
available for sale................ $542,873 $ 51 $(16,239) $526,685
======== ===== ======== ========
As of December 31, 1998:
U.S. Treasury securities............. $ -- $ -- $ -- $ --
U.S. Government agency securities.... -- -- -- --
Mortgage-backed securities........... 683,335 471 (1,370) 682,436
Obligations of states and political
subdivisions........................ -- -- -- --
-------- ----- -------- --------
Total investment securities
available for sale................ $683,335 $ 471 $ (1,370) $682,436
======== ===== ======== ========
</TABLE>
Loans
The Company continued to experience strong loan demand during the third
quarter of 1999. Net loans receivable at September 30, 1999 totaled $1.38
billion, representing a $274.5 million or 25% increase from December 31, 1998.
The increase in loans was funded, in large part, through repayments and sales
of mortgage-backed securities and, to a lesser extent, through the liquidation
of lower-yielding short-term investments.
The Company continues to focus its lending efforts on originating
multifamily and commercial loan products, as evidenced by the composition of
the growth in loans during the first nine months of 1999. Excluding the $55.0
million in loans acquired from First Central Bank, gross loans receivable
increased $222.1 million, or 20%, from December 31, 1998. This growth is
comprised of increases in multifamily loans of $125.6 million or 75%,
commercial real estate loans of $74.3 million or 21%, construction loans of
$18.3 million or 23%, and commercial business loans, including trade finance
products, of $9.5 million or 4%. Management anticipates continued strong loan
demand in these categories throughout the remainder of 1999.
18
<PAGE>
Partially offsetting the increases in the multifamily and commercial loan
categories is a decline of $10.6 million, or 4%, in single family residential
loans, which excludes the $4.8 million of single family loans acquired from
First Central Bank. This decrease is consistent with the Bank's strategy of
de-emphasizing the retention 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.
The following table sets forth the composition of the loan portfolio as of
the dates indicated:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998 September 30, 1998
------------------- ------------------- -------------------
Balance Percent Balance Percent Balance Percent
---------- ------- ---------- ------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential, one to
four units............ $ 264,645 19.0% $ 270,444 24.2% $ 287,659 27.6%
Residential,
multifamily........... 302,197 21.6 167,545 15.0 154,804 14.8
Commercial and
industrial real
estate................ 467,067 33.5 358,850 32.0 332,552 31.8
Construction........... 99,525 7.1 78,922 7.0 65,990 6.3
---------- ----- ---------- ----- ---------- -----
Total real estate
loans................ 1,133,434 81.2 875,761 78.2 841,005 80.5
---------- ----- ---------- ----- ---------- -----
Other loans:
Business, commercial... 236,629 16.9 223,318 20.0 183,415 17.6
Automobile............. 5,142 0.4 4,972 0.4 5,086 0.5
Other consumer......... 20,587 1.5 15,156 1.4 14,576 1.4
---------- ----- ---------- ----- ---------- -----
Total other loans..... 262,358 18.8 243,446 21.8 203,077 19.5
---------- ----- ---------- ----- ---------- -----
Total gross loans.... 1,395,792 100.0% 1,119,207 100.0% 1,044,082 100.0%
========== ===== ========== ===== ========== =====
Unearned fees, premiums
and discounts, net..... (186) (2,122) (2,600)
Allowance for loan
losses................. (20,533) (16,506) (15,810)
---------- ---------- ----------
Loans receivable,
net.................. $1,375,073 $1,100,579 $1,025,672
========== ========== ==========
</TABLE>
Nonperforming Assets
Nonaccrual loans, which include loans 90 days or more past due, totaled $5.8
million at September 30, 1999, compared with $9.8 million at December 31,1998,
and $9.4 million at September 30, 1998. Nonaccrual loans as a percentage of
total loans outstanding were 0.42% at September 30, 1999, 0.88% at December
31, 1998, and 0.90% at September 30, 1998. Loans totaling $2.9 million were
placed on nonaccrual status during the three months ended September 30, 1999.
The increase in nonaccrual loans was partially offset by $944 thousand in
payoffs, $1.4 million in loans brought current and two loans totaling $154
thousand that were transferred to other real estate owned. The increase in
nonaccrual loans during the third quarter of 1999 is comprised primarily of
$1.2 million in residential single family loans and $1.6 million in commercial
loans. For the nine months ended September 30, 1999, nonaccrual loans
decreased by $3.9 million due to payoffs totaling $5.5 million, loans brought
current totaling $2.9 million, gross chargeoffs totaling $158 thousand and
loans transferred to other real estate owned totaling $312 thousand. These
were offset by $4.8 million of loans placed on nonaccrual status during the
nine months ended September 30, 1999.
Restructured loans or loans that have had their original terms modified
totaled $6.1 million at September 30, 1999, representing an increase of $124
thousand from the $5.9 million reported at December 31, 1998. The net increase
in restructured loans since December 31, 1998 reflects the addition of two
commercial loans partially offset by payments received.
Other real estate owned ("OREO") includes properties acquired through
foreclosure or through full or partial satisfaction of loans. Other real
estate owned totaled $2.8 million, $4.6 million and $5.1 million at
19
<PAGE>
September 30, 1999, December 31, 1998 and September 30, 1998, respectively.
For the nine months ended September 30, 1999, six properties with a combined
book value of $670 thousand were added to OREO and fourteen properties with a
total book value of $2.2 million were sold. Net gains amounting to $384
thousand were recognized on OREO sales during the nine months ended September
30, 1999.
The following table sets forth information regarding nonaccrual loans,
restructured loans and other real estate owned as of the dates indicated:
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
1999 1999 1999 1998 1998
------------- -------- --------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans........ $ 5,843 $ 5,508 $ 3,983 $ 9,762 $ 9,415
Loans past due 90 days
or more but not on
nonaccrual............. -- -- -- 129 --
------- ------- ------- ------- -------
Total nonperforming
loans................ 5,843 5,508 3,983 9,891 9,415
------- ------- ------- ------- -------
Restructured loans...... 6,060 7,249 6,154 5,936 6,430
Other real estate owned,
net.................... 2,823 3,034 3,585 4,600 5,088
------- ------- ------- ------- -------
Total nonperforming
assets............... $14,726 $15,791 $13,722 $20,427 $20,933
======= ======= ======= ======= =======
Total nonperforming
assets to total
assets................. 0.71% 0.75% 0.69% 0.99% 1.12%
Allowance for loan
losses to nonperforming
loans.................. 351.41 363.45 440.87 166.88 167.92
Nonperforming loans to
total gross loans...... 0.42 0.41 0.34 0.88 0.90
</TABLE>
Loans classified as impaired totaled $21.7 million at September 30, 1999,
compared with $10.0 million at December 31, 1998. Specific reserves on
impaired loans were $1.3 million and $350 thousand as of September 30, 1999
and December 31, 1998, respectively. Total chargeoffs associated with impaired
loans as of September 30, 1999 amounted to $1.9 million. The Bank's average
recorded investment in impaired loans for the nine months ended September 30,
1999 was $23.5 million. During the nine months ended September 30, 1999, gross
interest income that would have been recorded on impaired loans, had they
performed in accordance with their original terms, totaled $1.7 million. Of
this amount, actual interest recognized on impaired loans, on a cash basis,
was $1.2 million.
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 chargeoffs 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 values, identification of problem and potential problem
loans, and other relevant data. While management believes that the allowance
for loan losses is adequate at September 30, 1999, future additions to the
allowance will be subject to continuing evaluation of inherent risks in the
loan portfolio.
20
<PAGE>
At September 30, 1999, the allowance for loan losses amounted to $20.5
million, or 1.47% of total loans, compared with $16.5 million, or 1.47% of
total loans, at December 31, 1998, and $15.8 million, or 1.51% of total loans,
at September 30, 1998. The following table summarizes activity in the
allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Allowance balance at
beginning of period......... $ 20,019 $ 14,213 $ 16,506 $ 12,273
Allowance from acquisition... -- -- 1,150 --
Provision for loan losses.... 1,320 1,264 4,006 4,589
Actual chargeoffs:
1-4 family residential real
estate.................... 2 90 24 187
Multifamily real estate.... -- 368 39 480
Commercial and industrial
real estate............... -- -- -- 60
Business, commercial....... 1,025 (85) 1,626 1,689
Automobile................. 10 -- 10 116
Other...................... 2 -- 2 3
---------- ---------- ---------- ----------
Total chargeoffs......... 1,039 373 1,701 2,535
---------- ---------- ---------- ----------
Recoveries:
1-4 family residential real
estate.................... 16 56 16 157
Multifamily real estate.... 119 1 190 1
Commercial and industrial
real estate............... -- 370 26 846
Business, commercial....... 97 272 326 445
Automobile................. -- 7 14 34
Other...................... 1 -- -- --
---------- ---------- ---------- ----------
Total recoveries......... 233 706 572 1, 483
---------- ---------- ---------- ----------
Net chargeoffs
(recoveries).......... 806 (333) 1,129 1,052
---------- ---------- ---------- ----------
Allowance balance at end of
period...................... $ 20,533 $ 15,810 $ 20,533 $ 15,810
========== ========== ========== ==========
Average net loans
outstanding................. $1,379,199 $ 986,596 $1,257,768 $ 980,618
========== ========== ========== ==========
Total gross loans outstanding
at end of period............ $1,395,792 $1,044,082 $1,395,792 $1,044,082
========== ========== ========== ==========
Net chargeoffs (recoveries)
to average loans............ 0.06% (0.03)% 0.09% 0.11%
Allowance for loan losses to
total gross loans at end of
period...................... 1.47 1.51 1.47 1.51
</TABLE>
The provision for loan losses totaled $4.0 million for the nine months ended
September 30, 1999, compared with $4.6 million for the same period in 1998.
Net chargeoffs totaled $806 thousand for the third quarter of 1999, compared
to net recoveries of $333 thousand for the third quarter of 1998. As a
percentage of average loans outstanding, net chargeoffs (recoveries) were
0.06% and (0.03)%, respectively, for the three months ended September 30, 1999
and 1998. Net chargeoffs amounted to $1.1 million for the nine months ended
September 30, 1999 and 1998. As a percentage of average loans outstanding, net
chargeoffs were 0.09% and 0.11%, respectively, for the nine months ended
September 30, 1999 and 1998. This improvement in year-to-date chargeoff
experience was partly achieved through the Company's ongoing efforts to
implement more stringent underwriting parameters and administration
procedures, and aggressive collection efforts with troubled debtors. Another
significant factor contributing to the improvement of the Company's chargeoff
experience is the continuance of a prosperous economy. Management recognizes
these factors and adjusts the loan loss provision accordingly.
The Company 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
21
<PAGE>
analyses, which include historical loss analyses, peer group comparisons, and
analyses based on the federal regulatory interagency policy for loan and lease
losses. The Company also performs an analysis to quantify the potential impact
on asset quality created by customer preparedness or lack thereof to "Year
2000" technology requirements.
The classification migration model utilizes net losses incurred by the
Company 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 Company'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.
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>
September 30, December 31,
1999 1998
--------------- ---------------
Amount Percent Amount Percent
------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1-4 family residential real estate.............. $ 427 19.0% $ 500 24.2%
Multifamily real estate......................... 2,046 21.6 2,435 15.0
Commercial and industrial real estate........... 2,601 33.5 1,373 32.0
Construction.................................... 1,623 7.1 2,339 7.0
Business, commercial............................ 10,191 16.9 7,679 20.0
Automobile...................................... 26 0.4 45 0.4
Consumer and other.............................. 28 1.5 22 1.4
Year 2000 exposure.............................. 900 600
Unallocated..................................... 2,691 1,513
------- ----- ------- -----
Total....................................... $20,533 100.0% $16,506 100.0%
======= ===== ======= =====
</TABLE>
The allowance for loan losses of $20.5 million at September 30, 1999
exceeded the Company's estimated allowance requirement by $3.6 million. The
estimated allowance requirement, excluding the potential "Year 2000 exposure",
as of September 30, 1999 was $16.9 million as compared to $14.4 million as of
December 31, 1998. Notwithstanding the unallocated allowance of $2.7 million
at September 30, 1999, the Company continues to record loan loss provisions on
a monthly basis to compensate for growth in the various loan portfolios and
the continuing shift in the overall portfolio towards commercial loan
products.
As of September 30, 1999, the Company has earmarked $900 thousand of the
unallocated allowance to absorb any potential exposure to "Year 2000" issues.
The remaining unallocated allowance at September 30, 1999 is $2.7 million
compared to the $1.5 million unallocated allowance at December 31, 1998. These
amounts represent 13% and 9% of the total allowance for loan losses at
September 30, 1999 and December 31, 1998, respectively. The maintenance of the
unallocated portion of the allowance is considered necessary for the reasons
outlined in the preceding paragraph. Management believes that the maintenance
of the unallocated portion of the allowance is considered prudent not only to
mitigate the uncertainties associated with the Bank's increasing loan
portfolios, but also to compensate for the attendant estimation risk
associated with the classification migration and individual loan review
analysis methodologies.
Deposits
Deposits of $1.47 billion at September 30, 1999, represented an increase of
$172.8 million or 13% over December 31, 1998. The increase in deposits
reflects $92.6 million in deposits acquired through First Central
22
<PAGE>
Bank in May 1999, partially offset by $17.1 million of deposits sold to
People's Bank of California in connection with the sale of the Company's
Irvine branch during the same month. Excluding these transactions, deposits at
September 30, 1999 grew $97.3 million or 8% over December 31, 1998. This
growth in deposits is comprised primarily of increases in time deposits of
$76.3 million or 9% and noninterest-bearing demand deposits of $13.9 million
or 14%. The increase in time deposits during the first nine months of 1999 is
due to various promotions associated with the Chinese New Year holiday and the
Year 2000.
Although the Company occasionally promotes certain time deposit products,
its efforts are largely concentrated in increasing the volume of low-cost
transaction accounts which generate higher fee income and are a less costly
source of funds in comparison to time deposits. The average balance of non-
time deposit accounts, which include noninterest-bearing demand accounts,
interest-bearing checking accounts, savings deposits and money market
accounts, increased $75.7 million or 20% during the nine months ended
September 30, 1999, compared with the same period in 1998. This increase was
comprised of a $36.4 million or 49% increase in noninterest-bearing demand
accounts, a $24.5 million or 100% increase in money market accounts, a $6.4
million or 3% increase in savings deposits, and an $8.3 million or 11%
increase in interest-bearing checking accounts.
Borrowings
Short-term borrowings, which consist of federal funds purchased and
securities sold under agreements to repurchase increased 9% to $36.0 million
at September 30, 1999 compared to $33.0 million at December 31, 1998. FHLB
advances totaled $398.0 million as of September 30, 1999, a decrease of $165.0
million or 29% from the December 31, 1998 balance of $563.0 million. The
decrease in FHLB advances resulted primarily from runoffs in short-term
investments and mortgage-backed securities.
Capital Resources
The primary source of capital for the Company is the retention of net after
tax earnings. At September 30, 1999, stockholders' equity totaled $146.4
million, a decrease of $4.4 million or 3% from $150.8 million as of December
31, 1998. The decrease is due primarily to: (i) repurchases of $14.5 million
or 1,475,000 shares of common stock in connection with the Company's stock
repurchase programs; (ii) payment of quarterly 1999 cash dividends totaling
$2.1 million; and (iii) a net increase of $9.0 million in unrealized losses on
available-for-sale securities. These transactions were offset, in part, by net
income of $20.1 million for the nine months ended September 30, 1999.
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 September 30, 1999, the Company's Tier 1 and total
capital ratios were 9.39% and 10.64%, respectively, compared to 10.28% and
11.42%, respectively, at December 31, 1998, and 11.03% and 12.27%,
respectively, at September 30, 1998.
The following table compares the Company's and the Bank's actual capital
ratios at September 30, 1999, to those required by regulatory agencies for
capital adequacy and well-capitalized classification purposes:
<TABLE>
<CAPTION>
Minimum Well
East West East West Regulatory Capitalized
Bancorp Bank Requirements Requirements
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Total Capital (to Risk-
Weighted Assets)............ 10.64% 10.63% 8.0% 10.0%
Tier 1 Capital (to Risk-
Weighted Assets)............ 9.39 9.37 4.0 6.0
Tier 1 Capital (to Average
Assets)..................... 7.03 7.01 4.0 5.0
</TABLE>
23
<PAGE>
ASSET LIABILITY AND MARKET RISK MANAGEMENT
Liquidity
Liquidity management involves the Company'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 Company'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 Company, including adequate cash flow for off-balance sheet instruments.
The Company'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.
Primary uses of funds include withdrawal of and interest payments on deposits,
originations and purchases of loans, purchases of investment securities, and
payment of operating expenses.
For the nine months ended September 30, 1999, the Company experienced a net
cash outflow of $148.6 million from its investing activities primarily due to
the growth in the Company's loan portfolio. The Company also experienced a net
cash outflow of $7.2 million from its financing activities primarily due to a
net repayment of FHLB advances. Partially offsetting the net cash outflows
from investing and financing activities is $34.9 million in net cash provided
by operating activities. Increases in interest income on loans and investment
securities and net proceeds from sales of loans held for sale accounted for
the net cash inflow from operating activities.
As a means of augmenting its liquidity, the Bank has established federal
funds lines with four correspondent banks and several master repurchase
agreements with major brokerage companies. At September 30, 1999, the Bank's
available borrowing capacity includes approximately $3.4 million in repurchase
arrangements, $47.0 million in federal funds line facilities, and $19.5
million in unused FHLB advances. Management believes its liquidity sources to
be stable and adequate. At September 30, 1999, 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 the third quarter of 1999, East West Bank paid dividends
amounting to $1.5 million to East West Bancorp, Inc. For the nine months ended
September 30, 1999, total dividends paid by the Bank to East West Bancorp,
Inc. totaled $16.2 million. As of September 30, 1999, approximately $16.0
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.
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.
24
<PAGE>
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 September 30, 1999, 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 1.3% (11.1)%
+100 1.3% (2.7)%
-100 (4.2)% 3.5%
-200 (9.4)% (3.0)%
</TABLE>
- --------
(1) The percentage change represents net interest income for twelve months in
a stable interest rate environment versus 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 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 September
30, 1999. At September 30, 1999, 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.
25
<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 September 30, 1999. 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
--------------------------------------------------------- Fair value at
After Sept. 30,
1999 2000 2001 2002 2003 2003 Total 1999
---------- ------- ------- -------- ------- -------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Short-term investments.. $ 10,000 $ -- $ -- $ -- $ -- $ -- $ 10,000 $ 10,000
Weighted average rate.. 5.88% -- % -- % -- % -- % -- % 5.88%
Investment securities
available-
for-sale (fixed rate).. $ 51,393 $42,731 $36,451 $ 31,180 $25,058 $115,751 $ 302,563 $ 289,938
Weighted average rate.. 6.09% 6.15% 6.15% 6.15% 6.16% 6.17% 6.15%
Investment securities
available-
for-sale (variable
rate).................. $ 240,310 $ -- $ -- $ -- $ -- $ -- $ 240,310 $ 236,747
Weighted average rate.. 5.85% -- % -- % -- % -- % -- % 5.85%
Total gross loans....... $1,218,152 $57,908 $40,515 $ 31,516 $27,017 $ 20,684 $1,395,792 $1,404,848
Weighted average rate.. 8.21% 7.97% 7.98% 8.22% 8.23% 7.77% 8.18%
Liabilities:
Checking accounts....... $ 92,150 $ -- $ -- $ -- $ -- $ -- $ 92,150 $ 92,150
Weighted average rate.. 1.28% -- % -- % -- % -- % -- % 1.28%
Money market accounts... $ 61,383 $ -- $ -- $ -- $ -- $ -- $ 61,383 $ 61,383
Weighted average rate.. 3.18% -- % -- % -- % -- % -- % 3.18%
Savings deposits........ $ 212,713 $ -- $ -- $ -- $ -- $ -- $ 212,713 $ 212,713
Weighted average rate.. 1.77% -- % -- % -- % -- % -- % 1.77%
Time deposits........... $ 918,318 $21,578 $ 1,282 $ 751 $ 2,076 $ 30,000 $ 974,006 $ 975,786
Weighted average rate.. 4.58% 4.54% 5.17% 5.37% 5.33% 7.00% 4.63%
Short-term borrowings... $ 36,000 $ -- $ -- $ -- $ -- $ -- $ 36,000 $ 36,000
Weighted average rate.. 5.33% -- % -- % -- % -- % -- % 5.33%
FHLB advances........... $ 163,000 $ 5,000 $ -- $230,000 $ -- $ -- $ 398,000 $ 399,965
Weighted average rate.. 5.37% 5.16% -- % 5.12% -- % -- % 5.22%
</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.
26
<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.
The Bank enters into interest rate swap agreements for the purposes of
converting fixed rate loans and deposits to floating rate assets and
liabilities. As of September 30, 1999, the total gross notional amount of
interest rate swaps was $58.5 million. This includes two swap agreements
totaling $30.0 million entered into with two financial institutions during
1999. Both agreements are callable after one year and are used to convert
fixed rate certificates of deposit into floating rate liabilities. At
September 30, 1999, the net unrealized loss on the entire swap agreement
portfolio was $994 thousand compared to a net unrealized loss of $1.5 million
at December 31, 1998.
The Bank has also entered into interest rate cap agreements which are
designated 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 September 30, 1999 was $36.0 million. The net unrealized
loss on the cap agreement portfolio was $321 thousand compared to a net
unrealized loss of $580 thousand at December 31, 1998. 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 as of September 30, 1999. 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 $30,000 $58,500 $(994) 6.4 Years
Weighted average receive
rate................... -- % -- % 5.17% 5.19% 7.00% 6.11%
Weighted average pay
rate................... -- % -- % 6.46% 6.45% 5.14% 5.78%
Interest rate cap
agreements:
Notional amount......... $ -- $ -- $18,000 $18,000 $ -- $36,000 $(321) 2.3 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.
27
<PAGE>
As of September 30, 1999, the Bank has successfully completed the awareness,
assessment, remediation, and testing phases of the Year 2000 plan. The plan is
on schedule and the Bank is in the last stage of the implementation phase of
the plan. All of the Bank's critical systems are programmed, serviced or
provided by outside system vendors. All of the systems that were identified in
the assessment phase as critical to the Bank's operations have been tested and
certified as compliant by the various "system owners" of the Bank. This meets
the Federal Financial Institutions Examination Council's ("FFIEC") time frame
for year 2000 progress. The Bank has also been reviewing and coordinating
relationships with "secondary" systems vendors, borrowers, and other third
parties to ensure that their systems will be "Year 2000" compliant. These
vendors have informed the Bank that their "Year 2000" projects are on schedule
and progress is being monitored by Bank personnel. 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 is being 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 in process and is
now 98% complete. The hardware and network infrastructure replacement cost of
$750 thousand represents the largest portion of the "Year 2000" plan total
budget. The Bank has incurred $1.3 million in "Year 2000" expenses to date,
$1.0 million of which was incurred during 1999. Additional expenses relating
to formalized and expanded customer communications, amounting to approximately
$50 thousand, are expected to be incurred through the remainder of the year.
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 has obtained a written indication of "Year
2000" compliance from the local energy company. Indications of "Year 2000"
readiness have also been received from the telecommunications companies on
which the Bank depends.
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. 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 have been reviewed, updated, and Board-
approved as of June 16, 1999. 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 the "Year 2000" upgrade. During the shut down, the
transition to manual procedures worked as planned. Other elements of the
Bank's contingency plan were 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. The Bank's contingency plan has been
substantially validated by the Internal Audit department in accordance with
the FFIEC's "Year 2000" progress time frame.
Business Segments
The Company has identified four principal operating segments for purposes of
management reporting: retail banking, commercial lending, treasury, and
residential lending. Information related to the Company's remaining
centralized functions have been aggregated and included in "Other." Although
all four operating segments offer financial products and services, they are
managed separately based on each segment's strategic focus. While the retail
banking segment focuses primarily on retail operations through the Company's
branch network, certain designated branches have responsibility for generating
commercial deposits and loans. The commercial lending segment primarily
generates commercial loans and deposits through the efforts of commercial
lending officers
28
<PAGE>
located in the Company's northern and southern California production offices.
The treasury department's primary focus is managing the Company's investments,
liquidity, and interest rate risk; the residential lending segment is mainly
responsible for the Company's portfolio of single family and multifamily
residential loans.
The following tables present the operating results and other key financial
measures for the individual operating segments for the three months and nine
months ended September 30, 1999 and 1998. Operating segment results are based
on the Company's internal management reporting process, which reflects
assignments and allocations of capital, certain operating and administrative
costs and the provision for loan losses. Any future changes in the Company's
management structure or reporting methodologies may result in changes in the
measurement of operating segment results. Results for prior periods will be
restated for comparability in the event of future changes in management
structure or reporting methodologies.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
(unaudited)
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
-------- ---------- -------- ----------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income.......................... $ 8,221 $ 9,534 $ 9,061 $10,443 $ 563 $ 37,822
Charges for funds used................... (4,915) (5,666) (7,925) (7,462) -- (25,968)
-------- ------- -------- ------- ------- ---------
Interest spread on funds used........... 3,306 3,868 1,136 2,981 563 11,854
-------- ------- -------- ------- ------- ---------
Interest expense......................... (10,455) (804) (7,952) -- -- (19,211)
Credit on funds provided................. 15,390 1,468 9,110 -- -- 25,968
-------- ------- -------- ------- ------- ---------
Interest spread on funds provided....... 4,935 664 1,158 -- -- 6,757
-------- ------- -------- ------- ------- ---------
Net interest income.................... $ 8,241 $ 4,532 $ 2,294 $ 2,981 $ 563 $ 18,611
======== ======= ======== ======= ======= =========
Depreciation and amortization............ $ 322 $ 63 $ 2 $ -- $ 192 $ 579
Segment pretax profit.................... 2,340 3,038 2,564 2,256 -- 10,198
Segment assets as of September 30, 1999.. 380,883 448,173 536,694 587,051 114,816 2,067,617
<CAPTION>
Three Months Ended September 30, 1998
(unaudited)
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
-------- ---------- -------- ----------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income.......................... $ 4,472 $ 7,290 $ 10,821 $ 8,889 $ 705 $ 32,177
Charges for funds used................... (2,813) (4,397) (10,689) (7,918) -- (25,817)
-------- ------- -------- ------- ------- ---------
Interest spread on funds used........... 1,659 2,893 132 971 705 6,360
-------- ------- -------- ------- ------- ---------
Interest expense......................... (10,425) (728) (7,195) -- -- (18,348)
Credit on funds provided................. 15,260 1,161 9,396 -- -- 25,817
-------- ------- -------- ------- ------- ---------
Interest spread on funds provided....... 4,835 433 2,201 -- -- 7,469
-------- ------- -------- ------- ------- ---------
Net interest income.................... $ 6,494 $ 3,326 $ 2,333 $ 971 $ 705 $ 13,829
======== ======= ======== ======= ======= =========
Depreciation and amortization............ $ 368 $ 57 $ 1 $ -- $ 114 $ 540
Segment pretax profit.................... 936 3,207 2,317 899 -- 7,359
Segment assets as of September 30, 1998.. 191,161 361,761 711,896 486,276 113,208 1,864,302
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
(unaudited)
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
-------- ---------- -------- ----------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income.......................... $ 20,458 $ 26,876 $ 30,557 $ 28,806 $ 1,804 $ 108,501
Charges for funds used................... (12,056) (15,590) (26,199) (19,681) -- (73,526)
-------- -------- -------- -------- ------- ---------
Interest spread on funds used........... 8,402 11,286 4,358 9,125 1,804 34,975
-------- -------- -------- -------- ------- ---------
Interest expense......................... (29,819) (2,167) (24,336) -- -- (56,322)
Credit on funds provided................. 42,427 3,803 27,296 -- -- 73,526
-------- -------- -------- -------- ------- ---------
Interest spread on funds provided....... 12,608 1,636 2,960 -- -- 17,204
-------- -------- -------- -------- ------- ---------
Net interest income.................... $ 21,010 $ 12,922 $ 7,318 $ 9,125 $ 1,804 $ 52,179
======== ======== ======== ======== ======= =========
Depreciation and amortization............ $ 1,035 $ 192 $ 4 $ -- $ 564 $ 1,795
Segment pretax profit.................... 4,834 10,347 7,733 7,328 -- 30,242
Segment assets as of September 30, 1999.. 380,883 448,173 536,694 587,051 114,816 2,067,617
<CAPTION>
Nine Months Ended September 30, 1998
(unaudited)
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
-------- ---------- -------- ----------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income.......................... $ 12,009 $ 20,447 $ 28,677 $ 28,442 $ 1,599 $ 91,174
Charges for funds used................... (7,562) (12,216) (26,592) (24,326) -- (70,696)
-------- -------- -------- -------- ------- ---------
Interest spread on funds used........... 4,447 8,231 2,085 4,116 1,599 20,478
-------- -------- -------- -------- ------- ---------
Interest expense......................... (31,853) (2,030) (17,811) -- -- (51,694)
Credit on funds provided................. 45,085 3,073 22,538 -- -- 70,696
-------- -------- -------- -------- ------- ---------
Interest spread on funds provided....... 13,232 1,043 4,727 -- -- 19,002
-------- -------- -------- -------- ------- ---------
Net interest income.................... $ 17,679 $ 9,274 $ 6,812 $ 4,116 $ 1,599 $ 39,480
======== ======== ======== ======== ======= =========
Depreciation and amortization............ $ 1, 109 $ 172 $ 3 $ -- $ 342 $ 1,626
Segment pretax profit.................... 1,854 8,123 5,613 2,378 -- 17,968
Segment assets as of September 30, 1998.. 191,161 361,761 711,896 486,276 113,208 1,864,302
</TABLE>
ITEM 3: 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
Consolidated Financial Condition and Results of Operations--Asset Liability
and Market Risk Management."
30
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. 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, based upon the advice
of legal counsel, 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No events have transpired which would make response to this item
appropriate.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No events have transpired which would make response to this item
appropriate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No events have transpired which would make response to this item
appropriate.
ITEM 5. OTHER INFORMATION
No events have transpired which would make response to this item
appropriate.
ITEM 6. ITEM EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Index
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
All other material referenced in this report which is required to be filed
as an exhibit hereto has previously been submitted.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the third quarter of 1999.
31
<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: November 15, 1999
EAST WEST BANCORP, INC.
(Registrant)
By /s/ Julia Gouw
-----------------------------------
JULIA GOUW
Executive Vice President and
Chief Financial Officer
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANK'S
BALANCE SHEET AS OF SEPTEMBER 30, 1999, AND STATEMENT OF EARNINGS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,238
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 526,685
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,375,073
<ALLOWANCE> 20,533
<TOTAL-ASSETS> 2,067,617
<DEPOSITS> 1,465,749
<SHORT-TERM> 36,000
<LIABILITIES-OTHER> 21,478
<LONG-TERM> 398,000
0
0
<COMMON> 22
<OTHER-SE> 148,368
<TOTAL-LIABILITIES-AND-EQUITY> 2,067,617
<INTEREST-LOAN> 77,607
<INTEREST-INVEST> 27,470
<INTEREST-OTHER> 3,343
<INTEREST-TOTAL> 108,501
<INTEREST-DEPOSIT> 36,298
<INTEREST-EXPENSE> 56,322
<INTEREST-INCOME-NET> 52,179
<LOAN-LOSSES> 4,006
<SECURITIES-GAINS> 685
<EXPENSE-OTHER> 29,034
<INCOME-PRETAX> 30,242
<INCOME-PRE-EXTRAORDINARY> 20,141
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,141
<EPS-BASIC> 0.88
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 3.52
<LOANS-NON> 5,843
<LOANS-PAST> 0
<LOANS-TROUBLED> 6,060
<LOANS-PROBLEM> 11,434
<ALLOWANCE-OPEN> 16,506
<CHARGE-OFFS> 1,701
<RECOVERIES> 572
<ALLOWANCE-CLOSE> 20,533
<ALLOWANCE-DOMESTIC> 20,533
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,691
</TABLE>
