<PAGE>
As filed with the Securities and Exchange Commission on August 9, 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 June 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 July
31, 1999: 22,468,000 shares
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<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>
June 30, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents........................... $ 71,028 $ 161,131
Investment securities available for sale, at fair
value (with amortized cost of $589,925 in 1999 and
$683,335 in 1998).................................. 582,485 682,436
Loans receivable, net of allowance for loan losses
of $20,019 in 1999 and
$16,506 in 1998.................................... 1,324,504 1,100,579
Investment in Federal Home Loan Bank stock, at
cost............................................... 27,330 32,874
Other real estate owned............................. 3,034 4,600
Investment in affordable housing partnerships....... 23,228 18,602
Premises and equipment, net......................... 23,029 23,406
Premiums on deposits acquired, net.................. 4,501 2,648
Excess of purchase price over fair value of net
assets acquired, net............................... 7,006 3,590
Accrued interest receivable and other assets........ 28,982 28,294
Deferred tax asset.................................. 2,156 --
---------- ----------
TOTAL........................................... $2,097,283 $2,058,160
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Customer deposit accounts........................... $1,433,882 $1,292,937
Securities sold under agreements to repurchase...... -- 33,000
Federal Home Loan Bank advances..................... 498,000 563,000
Notes payable....................................... 3,502 1,820
Accrued expenses and other liabilities.............. 13,775 12,871
Deferred income taxes............................... -- 1,259
---------- ----------
Total liabilities................................. 1,949,159 1,904,887
---------- ----------
FAIR VALUE OF NET ASSETS ACQUIRED IN EXCESS OF
PURCHASE PRICE, NET................................ 2,236 2,443
STOCKHOLDER'S EQUITY
Common stock (par value of $0.001 per share)
Authorized -- 50,000,000 shares
Issued and outstanding -- 22,468,000 shares and
23,775,000 shares in 1999 and 1998,
respectively..................................... 22 24
Additional paid in capital.......................... 97,109 109,976
Accumulated other comprehensive loss:
Unrealized losses on securities, net of tax....... (4,676) (888)
Retained earnings................................... 53,433 41,718
---------- ----------
Total stockholders' equity........................ 145,888 150,830
---------- ----------
TOTAL........................................... $2,097,283 $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 Six Months
Ended June 30, Ended June 30,
--------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees........... $25,759 $20,771 $49,017 $41,138
Investment securities available for sale... 9,266 5,500 19,044 10,193
Investment securities held for trading..... 14 -- 14 --
Short-term investments..................... 606 3,916 1,811 7,249
Federal Home Loan Bank stock............... 373 228 793 417
------- ------- ------- -------
Total interest and dividend income........ 36,018 30,415 70,679 58,997
------- ------- ------- -------
INTEREST EXPENSE
Customer deposit accounts.................. 11,827 12,560 23,321 25,065
Short-term borrowings...................... 194 1,858 542 3,507
Federal Home Loan Bank advances............ 6,660 2,744 13,248 4,774
------- ------- ------- -------
Total interest expense.................... 18,681 17,162 37,111 33,346
------- ------- ------- -------
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES................................ 17,337 13,253 33,568 25,651
PROVISION FOR LOAN LOSSES................... 1,486 1,583 2,686 3,325
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES..................................... 15,851 11,670 30,882 22,326
------- ------- ------- -------
NONINTEREST INCOME
Loan fees.................................. 598 632 1,126 1,139
Branch fees................................ 883 669 1,611 1,246
Letters of credit fees and commissions..... 1,058 579 2,040 1,041
Net gain on sales of investment securities
available for sale........................ 304 271 684 408
Net gain on sales of investment securities
held for trading.......................... 407 -- 425 --
Net gain on sales of investment in
affordable housing partnerships........... -- -- 402 --
Net gain on sale of branch................. 676 -- 676 --
Amortization of fair value of net assets
acquired in excess of purchase price...... 105 104 208 208
Other operating income..................... 196 103 387 235
------- ------- ------- -------
Total noninterest income.................. 4,227 2,358 7,559 4,277
------- ------- ------- -------
NONINTEREST EXPENSE
Compensation and employee benefits......... 4,463 4,210 9,137 8,613
Net occupancy.............................. 1,337 1,200 2,701 2,436
Data processing............................ 358 330 690 638
Amortization of premiums on deposits
acquired and excess
of purchase price over fair value of net
assets acquired........................... 358 311 668 621
Amortization of investment in affordable
housing partnerships...................... 777 281 1,187 507
Deposit insurance premiums and regulatory
assessments............................... 208 213 416 423
Other real estate owned operations, net.... 23 (115) (261) (195)
Other operating expenses................... 2,056 1,507 3,859 2,951
------- ------- ------- -------
Total noninterest expense................. 9,580 7,937 18,397 15,994
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.... 10,498 6,091 20,044 10,609
PROVISION FOR INCOME TAXES.................. 3,398 2,262 6,932 3,764
------- ------- ------- -------
NET INCOME.................................. $ 7,100 $ 3,829 $13,112 $ 6,845
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER SHARE........ $ 0.31 $ 0.16 $ 0.57 $ 0.29
AVERAGE NUMBER OF SHARES OUTSTANDING........ 22,764 23,775 23,159 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 (Losses) 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............... 13,112 13,112 13,112
Other comprehensive
income, net of tax...
Net change in
unrealized losses on
securities, net of
tax................. (3,788) (3,788) (3,788)
-------
Comprehensive income... $ 9,324
=======
Repurchase of common
stock................. (2) (12,867) (12,869)
Dividends declared on
common stock.......... (1,397) (1,397)
--- -------- ------- ------- --------
BALANCE, JUNE 30,
1999.................. $22 $ 97,109 $(4,676) $53,433 $145,888
=== ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 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 $(1,766) in
1999 and $595 in 1998................................ $(3,340) $1,109
Less: Reclassification adjustment for gains included
in net income, net of tax expense of $237 in 1999 and
$461 in 1998......................................... (448) (859)
------- ------
Net change in unrealized losses on securities, net of
tax benefit (expense) of $2,002 in 1999 and $(134) in
1998................................................. $(3,788) $ 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>
Six Months Ended June
30,
----------------------
1999 1998
----------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $ 13,112 $ 6,845
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of premiums.......................... 799 895
Depreciation and amortization......................... 1,088 1,086
Net loan fees deferred................................ 1,246 1,040
Deferred tax benefit.................................. (1,525) (726)
Provision for loan losses............................. 2,686 3,325
Provision for other real estate owned losses.......... 22 179
Net gain on sales of investment securities and other
assets............................................... (2,673) (1,168)
Federal Home Loan Bank stock dividends................ (847) (383)
Proceeds from sale of loans held for sale............. 37,462 45,246
Originations of loans held for sale................... (29,047) (42,870)
Increase in accrued interest receivable and other
assets............................................... (688) (3,901)
Increase (decrease) in accrued expenses and other
liabilities.......................................... 904 (80)
----------- ---------
Total adjustments.................................... 9,427 2,643
----------- ---------
Net cash provided by operating activities............ 22,539 9,488
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net disbursements of loans............................ (78,166) (72,667)
Purchases of:
Investment securities available for sale.............. (331,760) (364,753)
Loans receivable...................................... (156,768) (6,530)
Federal Home Loan Bank stock.......................... (1,808) (3,820)
Investment in affordable housing partnerships......... (5,647) (469)
Premises and equipment................................ (751) (549)
Proceeds from sale, maturity, redemption or repayment
of:
Investment securities available for sale.............. 426,478 268,230
Federal Home Loan Bank stock.......................... 8,200 --
Other real estate owned............................... 2,295 1,342
Investment in affordable housing partnerships......... 3,267 --
Premises and equipment................................ 2 --
Principal repayments on foreclosed property............ 100 --
Payment for purchase of First Central Bank, net of cash
received.............................................. (5,413) --
----------- ---------
Net cash used in investing activities................ (139,971) (179,216)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits................................ $ 65,444 $ 4,209
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......... 5,129,900 763,608
Repayment of Federal Home Loan Bank advances.......... (5,194,900) (717,608)
Net (decrease) increase in federal funds purchased and
securities sold under agreements to repurchase....... (33,000) 16,953
Repayments of notes payable on affordable housing
investments.......................................... (1,350) --
Repurchase of common stock............................ (12,869) --
Dividends paid on common stock........................ (1,397) --
----------- ---------
Net cash provided by financing activities............ 27,329 67,162
----------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............. (90,103) (102,566)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 161,131 347,601
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 71,028 $ 245,035
=========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid......................................... $ 37,063 $ 32,397
Income tax payments, net.............................. 10,400 5,245
Noncash investing and financing activities:
Other real estate acquired through foreclosure........ 1,130 4,039
Loans made to facilitate sales of other real estate
owned................................................ 650 582
Investment in affordable housing partnerships acquired
through notes payable................................ 3,033 --
Net change in unrealized losses on securities, net of
tax.................................................. (3,788) 828
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 Six Months Ended June 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 June 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 June 30, 1999, was 22,468,000.
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. The basic earnings per share is equal to
the diluted earnings per share due to the fact that the average market price
of the options and warrants is less than their exercise price for the six
months ended June 30, 1999.
Quarterly Dividends
An initial quarterly cash dividend of $0.03 per share was paid on or about
February 16, 1999 to shareholders of record at February 2, 1999. A second
quarterly cash dividend of $0.03 per share was paid on or about May 11, 1999
to shareholders of record at May 5, 1999.
Stock Repurchase Program
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 its common stock. During the quarter ended June 30, 1999, in
conjunction with its second stock repurchase program, the Company repurchased
582,000 shares of its common stock for approximately $5.9 million. The Company
is holding the repurchased shares as treasury shares to be reissued in
connection with the Company's incentive stock plan and its employee stock
purchase plan.
8
<PAGE>
3. 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, is 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.
4. 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.
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 to
differ materially from those discussed in such forward-looking statements.
These factors include, but are not limited to, economic conditions and
competition in the geographic and business areas in which the Company
operates, demographic changes, inflation or deflation, fluctuations in
interest rates, changes in business strategy or development plans, and changes
in legislation and governmental regulation. Given these uncertainties, the
reader is cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the results of any revisions to any of the forward-
looking statements contained herein to reflect future events or developments.
Quarterly Cash Dividend
On April 19, 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 May 11, 1999 to shareholders of record at May 5,
1999.
Branch Sale
On May 21, 1999, the Company announced the sale of its Irvine branch to
People's Bank of California. The branch, located at 4860 Irvine Boulevard,
with deposits of approximately $17 million, was sold at a net gain of $676
thousand.
9
<PAGE>
Completion of First Central Bank Acquisition
On May 28, 1999, the Company announced the completion of its $13.5 million
acquisition of First Central Bank, N.A. in an all-cash transaction. Total
goodwill recorded by the Company for this transaction was approximately $3.5
million.
First Central Bank, with assets of $102 million, is a national bank with
three branches in Southern California, specializing in serving the banking
needs of the Chinese-American community. The Company intends to consolidate
the First Central Bank branches into its branch network in September 1999.
Specifically, the two branch locations of First Central Bank will be closed
and combined with nearby East West Bank branches, while one branch of East
West Bank will be closed and combined with a nearby First Central Bank branch.
Stock Repurchase Programs
As of July 31, 1999, the Company had repurchased $5.9 million or 582,000
shares of the total $7.0 million authorized by the Company's Board of
Directors for the second stock repurchase program.
Results of Operations
East West Bancorp, Inc, parent company of East West Bank (the "Bank")
reported second quarter 1999 net income of $7.1 million, or $0.31 per basic
and diluted share, compared to $3.8 million, or $0.16 per basic and diluted
share, reported during the second quarter of 1998. The Company's annualized
return on average total assets increased to 1.38% for the quarter ended June
30, 1999, from 0.89% for the same period in 1998. The annualized return on
average stockholders' equity increased to 19.26% for the second quarter of
1999, compared with 11.08% for the second quarter of 1998. Included in net
income for the second quarter of 1999 is a one-time pretax gain of $676
thousand on the sale of the Company's Irvine branch. Excluding this gain,
earnings for the second quarter of 1999 would have totaled approximately $6.7
million, or $0.29 per basic and diluted share.
Net income for the six months ended June 30, 1999 increased to $13.1
million, or $0.57 per basic and diluted share, from $6.8 million, or $0.29 per
basic and diluted share, for the first six months of 1998. The annualized
return on average total assets increased to 1.29% for the first half of 1999,
compared with 0.81% for the first half of 1998. The annualized return on
average stockholders' equity increased to 17.61% for the first half of 1999,
compared with 10.08% for the same period in 1998.
Components of Net Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
(In millions) (In millions)
<S> <C> <C> <C> <C>
Net interest income.............. $ 17.3 $ 13.3 $ 33.6 $ 25.7
Provision for loan losses........ (1.5) (1.6) (2.7) (3.3)
Noninterest income............... 4.2 2.4 7.5 4.3
Noninterest expense.............. (9.6) (7.9) (18.4) (16.0)
Provision for income taxes....... (3.3) (2.4) (6.9) (3.9)
--------- --------- -------- --------
Net income..................... $ 7.1 $ 3.8 $ 13.1 $ 6.8
========= ========= ======== ========
Annualized return on average
total assets.................... 1.38% 0.89% 1.29% 0.81%
========= ========= ======== ========
</TABLE>
Net income increased 85% and 92%, respectively, for the second quarter and
the first six months of 1999 compared with corresponding periods in 1998. The
increases in second 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 second quarter of
1999 totaled $17.3 million, a 31% increase over net interest income of $13.3
million for the same period in 1998. For the first six months of 1999, net
interest income increased to $33.6 million, also a 31% increase from $25.7
million for the first half of 1998.
Total interest and dividend income during the quarter ended June 30, 1999
increased 18% to $36.0 million compared with $30.4 million during the same
period in 1998. Similarly, year-to-date interest and dividend income increased
20% to $70.7 million, from $59.0 million during the first half of 1998. The
increase in interest and dividend income is derived primarily from an increase
in average interest-earning assets of 19% and 21%, respectively, during the
second quarter and the first six months of 1999. Growth in the Company's
average loan and investment portfolios, partially offset by a decrease in
average short-term investments, propelled the net increase in average
interest-earning assets. The net growth in average earning assets was funded
largely by an increase in FHLB advances, which increased $325.9 million, or
161%, and $354.3 million, or 202%, respectively, during the second quarter and
the first six months of 1999.
Despite a 75 basis point decline in the average prime rate, when comparing
the first half of 1999 to the first half of 1998, the overall yield on average
earning assets during the first six months of 1999 only declined 8 basis
points to 7.23%, from 7.31% for the same period a year ago, due primarily to
higher interest income on investment securities. The impact of this prime rate
reduction for the second quarter was even less perceptible, with the overall
yield on average earning assets decreasing only 2 basis points to 7.31% for
the 1999 second quarter, compared with 7.33% for the second quarter of 1998.
Loan yields decreased 29 and 22 basis points, respectively, for the second
quarter and the first six months of 1999, due to the decrease in the average
prime rate. The decrease in loan yields was offset by an increase in yields on
investment securities which increased 22 basis points to 5.77% for the second
quarter of 1999, from 5.55% for the same quarter in 1998. For the first half
of 1999, yields on investment securities increased 27 basis points to 5.72%,
compared with 5.45% for the same period a year earlier. The increase in yields
on investment securities was due, in part, to purchases of fixed-rate
mortgage-backed securities during the second half of 1998.
Total interest expense during the second quarter of 1999 increased 9% to
$18.7 million compared with $17.2 million for the same period a year ago. For
the first half of 1999, total interest expense increased 11% to $37.1 million,
from $33.3 million for the first half of 1998. The increase in second quarter
and year-to-date 1999 interest expense is primarily attributable to the
increase in average FHLB advances, partially offset by a decrease in average
short-term borrowings and a reduction in the cost of funds for all categories
of interest-bearing liabilities.
Net interest margin, defined as taxable equivalent net interest income
divided by average earning assets, increased 33 basis points to 3.52% for the
second quarter of 1999, compared with 3.19% for the second quarter of 1998.
For the first six months of 1999, the net interest margin was 3.43%, a 25
basis point increase from the net interest margin of 3.18% for the same period
a year ago. Despite a slight decline in the overall yield on average earning
assets, the increase in the Company's net interest margin is primarily due to
the decline in the cost of funds. The Company's overall cost of funds
decreased 37 basis points to 4.20% for both the second quarter and the first
half of 1999, from 4.57% for the same periods in 1998.
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 June 30,
1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended June 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....................... $ 39,665 $ 606 6.11% $ 267,648 $ 3,916 5.85%
Taxable investment securities (2)(3)......... 643,255 9,280 5.77 396,375 5,500 5.55
Loans receivable (2)(4)...................... 1,259,692 25,759 8.18 980,378 20,771 8.47
FHLB stock................................... 28,912 373 5.16 15,564 228 5.86
---------- ------- ---------- -------
Total interest-earning assets............... 1,971,524 36,018 7.31 1,659,965 30,415 7.33
------- ---- ------- ----
Noninterest-earning assets:
Cash and due from banks...................... 29,766 21,545
Allowance for loan losses.................... (18,461) (13,661)
Other assets................................. 79,388 58,723
---------- ----------
Total assets................................ $2,062,217 $1,726,572
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing liabilities:
Checking accounts............................ $ 84,034 $ 245 1.17 $ 77,734 $ 287 1.48
Money market accounts........................ 46,023 351 3.05 24,441 236 3.86
Savings deposits............................. 220,772 1,059 1.92 213,359 1,349 2.53
Time deposits................................ 886,165 10,172 4.59 851,087 10,688 5.02
Short-term borrowings........................ 15,035 194 5.16 132,347 1,858 5.62
FHLB advances................................ 528,530 6,660 5.04 202,582 2,744 5.42
---------- ------- ---------- -------
Total interest-bearing liabilities.......... 1,780,559 18,681 4.20 1,501,550 17,162 4.57
------- ---- ------- ----
Noninterest-bearing liabilities:
Demand deposits.............................. 110,453 73,001
Other liabilities............................ 23,784 13,753
Stockholders' equity......................... 147,421 138,268
---------- ----------
Total liabilities and stockholders' equity.. $2,062,217 $1,726,572
========== ==========
Interest rate spread.......................... 3.11% 2.76%
==== ====
Net interest income and net interest margin... $17,337 3.52% $13,253 3.19%
======= ==== ======= ====
</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 six months ended June 30, 1999
and 1998:
<TABLE>
<CAPTION>
Six Months Ended June 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........... $ 62,551 $ 1,811 5.79% $ 247,825 $ 7,249 5.85%
Taxable investment
securities (2)(3)..... 665,911 19,058 5.72 373,930 10,193 5.45
Loans receivable
(2)(4)................ 1,196,045 49,017 8.20 977,753 41,138 8.42
FHLB stock............. 31,033 793 5.11 14,788 417 5.64
---------- ------- ---------- -------
Total interest-earning
assets............... 1,955,540 70,679 7.23 1,614,296 58,997 7.31
------- ---- ------- ----
Noninterest-earning
assets:
Cash and due from
banks................. 29,039 22,941
Allowance for loan
losses................ (17,642) (12,966)
Other assets........... 73,076 56,200
---------- ----------
Total assets.......... $2,040,013 $1,680,471
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Interest-bearing
liabilities:
Checking accounts...... $ 81,883 $ 470 1.15 $ 77,148 $ 566 1.47
Money market accounts.. 42,057 625 2.97 23,339 446 3.82
Savings deposits....... 221,056 2,079 1.88 208,983 2,603 2.49
Time deposits.......... 872,077 20,147 4.62 852,428 21,450 5.03
Short-term borrowings.. 20,842 542 5.20 123,956 3,507 5.66
FHLB advances.......... 529,373 13,248 5.01 175,028 4,774 5.46
---------- ------- ---------- -------
Total interest-bearing
liabilities.......... 1,767,288 37,111 4.20 1,460,882 33,346 4.57
------- ---- ------- ----
Noninterest-bearing
liabilities:
Demand deposits........ 104,676 70,023
Other liabilities...... 19,111 13,818
Stockholders' equity... 148,938 135,748
---------- ----------
Total liabilities and
stockholders'
equity............... $2,040,013 $1,680,471
========== ==========
Interest rate spread.... 3.03% 2.74%
==== ====
Net interest income and
net interest margin.... $33,568 3.43% $25,651 3.18%
======= ==== ======= ====
</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 June Six Months Ended June 30,
30, 1999 vs. 1998 1999 vs. 1998
--------------------------- ---------------------------
Changes Due to Changes Due to
Total Rates Total Rates
Change Volume (1) (1) Change Volume (1) (1)
------- ---------- ------- ------- ---------- -------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short-term investments.. $(3,310) $(3,337) $ 27 $(5,437) $(5,419) $ (18)
Taxable investment
securities............. 3,780 3,426 354 8,865 7,959 906
Loans receivable, net... 4,988 5,917 (929) 7,878 9,185 (1,307)
FHLB stock.............. 145 196 (51) 376 458 (82)
------- ------- ------- ------- ------- -------
Total interest
income............... $ 5,603 $ 6,202 $ (599) $11,682 $12,183 $ (501)
======= ======= ======= ======= ======= =======
INTEREST-BEARING
LIABILITIES:
Checking accounts....... $ (42) $ 23 $ (65) $ (96) $ 35 $ (131)
Money market accounts... 115 208 (93) 179 358 (179)
Savings deposits........ (290) 47 (337) (524) 150 (674)
Time deposits........... (516) 441 (957) (1,303) 494 (1,797)
Short-term borrowings... (1,664) (1,647) (17) (2,965) (2,917) (48)
FHLB advances........... 3,916 4,415 (499) 8,474 9,665 (1,191)
------- ------- ------- ------- ------- -------
Total interest
expense.............. $ 1,519 $ 3,487 $(1,968) $ 3,765 $ 7,785 $(4,020)
======= ======= ======= ======= ======= =======
CHANGE IN NET INTEREST
INCOME................. $ 4,084 $ 2,715 $ 1,369 $ 7,917 $ 4,398 $ 3,519
======= ======= ======= ======= ======= =======
</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 of $1.5 million for the second quarter of 1999
approximates the $1.6 million provision recorded for the same period in 1998.
For the first half of 1999, the provision for loan losses decreased 19% to
$2.7 million, compared to $3.3 million for the first half of 1998. The
decreased provision for loan losses recorded in the current year reflects
continued stability in the Company's asset quality, as manifested by lower net
chargeoffs and 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>
Six
Three Months Ended Months Ended
June 30, June 30,
------------------- -------------
1999 1998 1999 1998
--------- --------- ------ ------
(In millions) (In millions)
<S> <C> <C> <C> <C>
Loan fees................................ $ 0.60 $ 0.63 $ 1.13 $ 1.14
Branch fees.............................. 0.88 0.67 1.61 1.25
Letters of credit fees and commissions... 1.06 0.58 2.04 1.04
Net gain on sales of securities available
for sale................................ 0.30 0.27 0.68 0.41
Net gain on sales of securities held for
trading................................. 0.41 -- 0.43 --
Gain on sale of affordable housing
investments............................. -- -- 0.40 --
Gain on sale of branch................... 0.68 -- 0.68 --
Amortization of negative intangibles..... 0.10 0.10 0.21 0.21
Other.................................... 0.20 0.11 0.38 0.23
--------- --------- ------ ------
Total.................................. $ 4.23 $ 2.36 $ 7.56 $ 4.28
========= ========= ====== ======
</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 June 30, 1999 increased to
$4.2 million, from $2.4 million for the three months ended June 30, 1998.
Noninterest income for the second quarter of 1999 includes a one-time gain on
sale of the Company's Irvine branch amounting to $676 thousand. Excluding this
gain, noninterest income increased 51% to $3.6 million for the second quarter
of 1999 when compared to the second quarter of 1998. Noninterest income for
the first half of 1999 increased to $7.6 million, from $4.3 million for the
first half of 1998. Excluding the gain on sale of the Irvine branch and the
$402 thousand gain on sale of an investment in affordable housing partnerships
recorded during the 1999 first quarter, noninterest income increased 52% to
$6.5 million for the first six 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
second quarter of 1999 compared to $579 thousand for the second quarter of
1998. This increase of $479 thousand or 83% is attributed primarily to a $295
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 59% and 48%, respectively, in the
number of transactions processed for the three months and the six months ended
June 30, 1999 in comparison to the same periods a year ago. For the six months
ended June 30, 1999, letters of credit fees and commissions increased 96% to
$2.0 million, compared with $1.0 million for the same period in 1998.
Branch fees for the second quarter of 1999 amounted to $883 thousand, an
increase of $214 thousand or 32% from the $669 thousand earned during the
second 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 six months ended June 30, 1999, branch fees increased
29% to $1.6 million, compared with $1.2 million for the same period in 1998.
Other contributions to noninterest income for the 1999 second quarter
include $304 thousand in gains on sales of investment securities available for
sale, compared with $271 thousand for the second quarter of 1998. For the six
months ended June 30, 1999, gains on sales of investment securities available
for sale increased to $684 thousand from $408 thousand for the same period in
1998. Net gains on investment securities held for
15
<PAGE>
trading for the second quarter and the first six months of 1999 totaled $407
thousand and $425 thousand, respectively. There were no gains on sales of
trading securities during the same periods in 1998.
Noninterest Expense
Components of Noninterest Expense
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
(In millions) (In millions)
<S> <C> <C> <C> <C>
Compensation and other employee
benefits......................... $ 4.46 $ 4.21 $ 9.14 $ 8.61
Net occupancy..................... 1.34 1.20 2.70 2.44
Data processing................... 0.36 0.33 0.69 0.64
Amortization of positive
intangibles...................... 0.36 0.31 0.67 0.62
Amortization of affordable housing
investments...................... 0.78 0.28 1.19 0.51
Deposit insurance premiums and
regulatory assessments........... 0.21 0.21 0.42 0.42
Other real estate owned
operations, net.................. 0.02 (0.11) (0.26) (0.20)
Other............................. 2.05 1.51 3.85 2.95
-------- --------- -------- --------
Total........................... $ 9.58 $ 7.94 $ 18.40 $ 15.99
======== ========= ======== ========
Efficiency ratio................ 43% 49% 43% 52%
======== ========= ======== ========
</TABLE>
Noninterest expense increased 21% to $9.6 million for the first three months
ended June 30, 1999, from $7.9 million for the three months ended June 30,
1998. Noninterest expense totaled $18.4 million for the six months ended June
30, 1999, compared with $16.0 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 6% to $4.5 million for the second quarter of 1999, compared with
$4.2 million for the second quarter of 1998. This primarily reflects the
Company's continuing growth which includes the opening of a new branch office
in Milpitas, California in August 1998 and the acquisition of First Central
Bank at the end of May 1999. For the six months ended June 30, 1999,
compensation and employee benefits increased to $9.1 million from $8.6 million
for the same period a year earlier. In addition to the Milpitas branch
opening, 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 to $1.3 million and $2.7 million, respectively,
for the second quarter and the first half of 1999. The 11% increase in
occupancy expenses for the second quarter and the first half of 1999 primarily
reflects the operations of the new Milpitas branch and one month of operations
for the branches and administrative offices of First Central Bank, overhead
factors which were not present during the corresponding periods in 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 $777 thousand for the second quarter of 1999, compared with $281 thousand
for the second quarter of 1998. For the six months ended June 30, 1999,
amortization of investments in affordable housing partnerships totaled $1.2
million, compared to $507 thousand for the same period in 1998. The increase
in amortization reflects the impact of additional investment purchases made
since the second quarter of 1998. Total investments in affordable housing
partnerships amounted to $23.2 million as of June 30, 1999, compared with
$14.4 million as of June 30, 1998.
Net expenses related to OREO operations increased $138 thousand or 120%
during the second quarter of 1999 when compared to the second quarter of 1998.
This is primarily attributed to a $257 thousand reduction in
16
<PAGE>
net rental income collected on OREO properties and a $36 thousand decline in
net gains on sales of OREO properties, partially offset by a $155 thousand
decrease in OREO writedowns. For the six months ended June 30, 1999, net
income generated from OREO operations totaled $261 thousand compared to $195
thousand for the same period in 1998. This increase in year-to-date net OREO
income is due primarily to higher net gains on sales of OREO properties and
lower writedowns on OREO properties, offset partially by lower net rental
income on such properties.
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
second quarter of 1999 increased $549 thousand or 36% to $2.1 million,
compared with $1.5 million for the second quarter of 1998. For the six months
ended June 30, 1999, other operating expenses increased $908 thousand or 31%
to $3.9 million, compared with $3.0 million for the six months ended June 30,
1998. The increase in expenses for the second quarter and year-to-date is
primarily due to the overall growth of the Company. 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) divided by the
aggregate of net interest income before provision for loan losses and
noninterest income (excluding the amortization of intangibles). For the second
quarter of 1999, the Company's efficiency ratio improved to 43%, as compared
to 49% for the second quarter of 1998. For the six months ended June 30, 1999,
the efficiency ratio improved to 43%, compared with 52% for the same period in
1998.
Provision for Income Taxes
The provision for income taxes increased 50% to $3.4 million during the
second quarter of 1999, compared with $2.3 million for the second quarter of
1998 primarily due to higher pretax income partially offset by tax credits
from qualified affordable housing investments. Tax credits utilized in the
second quarter of 1999 totaled $945 thousand, compared to $397 thousand for
the second quarter of 1998. The second quarter 1999 provision reflects an
effective tax rate of 32.4%, compared with an effective tax rate of 37.1% for
the second quarter 1998.
For the six months ended June 30, 1999, the provision for income taxes
totaled $6.9 million, an 84% increase from the $3.8 million income tax expense
recorded for the same period a year ago. The effective tax rate of 34.6% for
the first half of 1999 reflects tax credits of $1.5 million, compared with an
effective tax rate of 35.5% for the first half of 1998 reflecting tax credits
of $837 thousand.
Balance Sheet Analysis
The Company's total assets at June 30, 1999 were $2.10 billion, an increase
of $39.1 million or 2% when compared to December 31, 1998. The increase in
total assets was comprised primarily of a $223.9 million growth in loans
receivable, partially offset by decreases in short-term investments of $90.1
million and investment securities available for sale of $100.0 million. The
increase in total assets was funded by an increase of $140.9 million in
deposits, partially offset by decreases of $33.0 million in short-term
borrowings and $65.0 million in FHLB advances.
Investment Securities Available for Sale
Investment securities available for sale of $582.5 million as of June 30,
1999 represents a decrease of $100.0 million, or 15%, compared to the December
31, 1998 balance of $682.4 million. Total repayments on mortgage-backed
securities, including calls and redemptions, totaled $325.7 million for the
first half of 1999. Proceeds from such repayments were utilized to purchase
additional mortgage-backed securities and to fund loan originations and
purchases. During the first six months of 1999, the Bank sold mortgage-backed
securities with a
17
<PAGE>
total carrying value of $177.1 million. The Bank recorded net gains on sale of
$684 thousand from these transactions. Proceeds from the sale of these
securities were used to repay $65.0 million of FHLB advances and $33.0 million
of short-term borrowings. The remaining proceeds were used to fund a portion
of the loan originations and loan purchases made during the first half of
1999.
The following table sets forth the amortized cost and the estimated fair
values of investment securities available for sale as of June 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 June 30, 1999:
U.S. Treasury securities............. $ 1,975 $ -- $ (18) $ 1,957
U.S. Government agency securities.... 75,599 -- (775) 74,824
Mortgage-backed securities........... 512,151 120 (6,771) 505,500
Obligations of states and political
subdivisions........................ 200 4 -- 204
-------- ----- ------- --------
Total investment securities
available for sale................ $589,925 $ 124 $(7,564) $582,485
======== ===== ======= ========
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>
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. During
the first six months of 1999, the Company sold investment securities held for
trading with a total carrying amount of $20.7 million. Net gains realized on
these transactions amounted to $425 thousand for the six months ended June 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 June 30, 1999.
Loans
The Company continued to experience strong loan demand during the second
quarter of 1999. Net loans receivable at June 30, 1999 totaled $1.32 billion,
representing a $223.9 million or 20% 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 half of 1999. Excluding the $55.0 million
in loans acquired from First Central Bank, gross loans receivable increased
$171.3 million, or 15%, from December 31, 1998. This growth is comprised of
increases in multifamily loans of $82.3 million or 49%, commercial real estate
loans of $76.5 million or 21%, construction loans of $14.9 million or 19%, and
commercial loans, including trade finance products, of $8.8 million or 4%.
Management anticipates continued strong loan demand in these categories
throughout the remainder of 1999.
Partially offsetting the increases in the multifamily and commercial loan
categories is a decline of $15.4 million, or 6%, 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.
18
<PAGE>
The following table sets forth the composition of the loan portfolio as of the
dates indicated:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998 June 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............ $ 259,772 19.3% $ 270,444 24.2% $301,820 30.6%
Residential,
multifamily........... 258,902 19.3 167,545 15.0 150,108 15.2
Commercial and
industrial
real estate........... 469,218 34.9 358,850 32.0 330,660 33.6
Construction........... 96,089 7.1 78,922 7.0 38,502 3.9
---------- ----- ---------- ----- -------- -----
Total real estate
loans................ 1,083,981 80.6 875,761 78.2 821,090 83.3
---------- ----- ---------- ----- -------- -----
Other loans:
Business, commercial... 235,956 17.5 223,318 20.0 150,108 15.2
Automobile............. 4,981 0.4 4,972 0.4 5,089 0.5
Other consumer......... 20,107 1.5 15,156 1.4 9,768 1.0
---------- ----- ---------- ----- -------- -----
Total other loans..... 261,044 19.4 243,446 21.8 164,965 16.7
---------- ----- ---------- ----- -------- -----
Total gross loans.... 1,345,025 100.0% 1,119,207 100.0% 986,055 100.0%
========== ===== ========== ===== ======== =====
Unearned fees, premiums
and discounts, net..... (502) (2,122) (2,448)
Allowance for loan
losses................. (20,019) (16,506) (14,213)
---------- ---------- --------
Loans receivable,
net.................. $1,324,504 $1,100,579 $969,394
========== ========== ========
</TABLE>
Nonperforming Assets
Nonaccrual loans, which include loans 90 days or more past due, totaled $5.5
million at June 30, 1999, compared with $9.8 million at December 31,1998, and
$4.4 million at June 30, 1998. Nonaccrual loans as a percentage of total loans
outstanding were 0.41% at June 30, 1999, 0.88% at December 31, 1998, and 0.44%
at June 30, 1998. Loans totaling $4.3 million were placed on nonaccrual status
during the three months ended June 30, 1999. The increase in nonaccrual loans
was partially offset by $1.2 million in payoffs, $1.4 million in loans brought
current and one loan for $116 thousand that was transferred to other real
estate owned. The increase in nonaccrual loans during the second quarter of
1999 is comprised of $2.2 million in residential single family loans, $372
thousand in residential multifamily loans, $921 thousand in commercial real
estate loans, and $895 thousand in commercial loans. For the six months ended
June 30, 1999, nonaccrual loans decreased by $4.3 million due to payoffs
totaling $5.4 million, loans brought current totaling $2.7 million, gross
chargeoffs totaling $158 thousand and loans transferred to other real estate
owned totaling $270 thousand. These were offset by $4.2 million of loans
placed on nonaccrual status during the six months ended June 30, 1999.
Restructured loans or loans that have had their original terms modified
totaled $7.2 million at June 30, 1999, representing an increase of $1.3
million from the $5.9 million reported at December 31, 1998. The increase in
restructured loans is primarily due to the addition of two commercial loans.
Other real estate owned ("OREO") includes properties acquired through
foreclosure or through full or partial satisfaction of loans. Other real
estate owned totaled $3.0 million, $4.6 million and $5.4 million at June 30,
1999, December 31, 1998 and June 30, 1998, respectively. For the six months
ended June 30, 1999, three properties with combined book value of $480
thousand were added to OREO and eleven properties with a total book value of
$1.9 million were sold. Net gains amounting to $371 thousand were recognized
on OREO sales during the first half of 1999.
19
<PAGE>
The following table sets forth information regarding nonaccrual loans,
restructured loans and other real estate owned as of the dates indicated:
<TABLE>
<CAPTION>
June June
30, March 31, December 31, September 30, 30,
1999 1999 1998 1998 1998
------- --------- ------------ ------------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans........ $ 5,508 $ 3,983 $ 9,762 $ 9,415 $ 4,378
Loans past due 90 days
or more but not on
nonaccrual............. -- -- 129 -- --
------- ------- ------- ------- -------
Total nonperforming
loans................ 5,508 3,983 9,891 9,415 4,378
------- ------- ------- ------- -------
Restructured loans...... 7,249 6,154 5,936 6,430 6,279
Other real estate owned,
net.................... 3,034 3,585 4,600 5,088 5,386
------- ------- ------- ------- -------
Total nonperforming
assets............... $15,791 $13,722 $20,427 $20,933 $16,043
======= ======= ======= ======= =======
Total nonperforming
assets to total
assets................. 0.75% 0.69% 0.99% 1.12% 0.89%
Allowance for loan
losses to nonperforming
loans.................. 363.45 440.87 166.88 167.92 324.65
Nonperforming loans to
total gross loans...... 0.41 0.34 0.88 0.90 0.44
</TABLE>
Loans classified as impaired totaled $12.7 million at June 30, 1999,
compared with $10.0 million at December 31, 1998. Specific reserves on
impaired loans were $230 thousand and $350 thousand as of June 30, 1999 and
December 31, 1998, respectively. Total chargeoffs associated with impaired
loans as of June 30, 1999 amounted to $1.0 million. A significant portion of
the impaired loans, 57% at June 30, 1999 and 67% at December 31, 1998, were
secured by real estate. The Bank's average recorded investment in impaired
loans for the six months ended June 30, 1999 was $13.2 million. During the six
months ended June 30, 1999, gross interest income that would have been
recorded on impaired loans, had they performed in accordance with their
original terms, totaled $630 thousand. Of this amount, actual interest
recognized on impaired loans, on a cash basis, was $468 thousand.
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 June 30, 1999, future additions to the
allowance will be subject to continuing evaluation of inherent risks in the
loan portfolio.
20
<PAGE>
At June 30, 1999, the allowance for loan losses amounted to $20.0 million,
or 1.49% of total loans, compared with $16.5 million, or 1.47% of total loans,
at December 31, 1998, and $14.2 million, or 1.44% of total loans, at June 30,
1998. The following table summarizes activity in the allowance for loan losses
for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
---------- -------- ---------- --------
(Dollars in
thousands)
<S> <C> <C> <C> <C>
Allowance balance at beginning of
period........................... $ 17,560 $ 12,947 $ 16,506 $ 12,273
Allowance from acquisition........ 1,150 -- 1,150 --
Provision for loan losses......... 1,486 1,583 2,686 3,325
Actual chargeoffs:
1-4 family residential real
estate......................... 18 29 21 97
Multifamily real estate......... 39 78 39 111
Commercial and industrial real
estate......................... -- -- -- 60
Business, commercial............ 274 414 601 1,775
Automobile...................... -- 73 -- 116
Other........................... 1 -- 1 3
---------- -------- ---------- --------
Total chargeoffs.............. 332 594 662 2,162
---------- -------- ---------- --------
Recoveries:
1-4 family residential real
estate......................... -- 30 -- 101
Multifamily real estate......... -- -- 70 --
Commercial and industrial real
estate......................... (43) 201 27 476
Business, commercial............ 198 30 228 173
Automobile...................... -- 16 14 27
Other........................... -- -- -- --
---------- -------- ---------- --------
Total recoveries.............. 155 277 339 777
---------- -------- ---------- --------
Net chargeoffs.............. 177 317 323 1,385
---------- -------- ---------- --------
Allowance balance at end of
period........................... $ 20,019 $ 14,213 $ 20,019 $ 14,213
========== ======== ========== ========
Average net loans outstanding..... $1,259,692 $980,378 $1,196,045 $977,753
========== ======== ========== ========
Total gross loans outstanding at
end of period.................... $1,345,025 $986,055 $1,345,025 $986,055
========== ======== ========== ========
Net chargeoffs to average loans... 0.01% 0.03% 0.03% 0.14%
Allowance for loan losses to total
gross loans at end of period..... 1.49 1.44 1.49 1.44
</TABLE>
The provision for loan losses totaled $2.7 million for the six months ended
June 30, 1999, compared with $3.3 million for the same period in 1998. The
decline reflects an improvement in the Company's chargeoff experience. Net
chargeoffs totaled $177 thousand for the second quarter of 1999, a 44%
decrease from second quarter 1998 net chargeoffs of $317 thousand. As a
percentage of average loans outstanding, net chargeoffs were 0.01% and 0.03%,
respectively, for the three months ended June 30, 1999 and 1998. For the six
months ended June 30, 1999, net chargeoffs of $323 thousand represent a 77%
decrease from net chargeoffs of $1.4 million for the same period in 1998. As a
percentage of average loans outstanding, net chargeoffs were 0.03% and 0.14%,
respectively, for the six months ended June 30, 1999 and 1998. The improvement
in 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.
21
<PAGE>
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 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>
December 31,
June 30, 1999 1998
--------------- ---------------
Amount Percent Amount Percent
------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1-4 family residential real estate.............. $ 497 19.3% $ 500 24.2%
Multifamily real estate......................... 3,316 19.3 2,435 15.0
Commercial and industrial real estate........... 3,659 34.9 1,373 32.0
Construction.................................... 1,489 7.1 2,339 7.0
Business, commercial............................ 7,498 17.5 7,679 20.0
Automobile...................................... 26 0.4 45 0.4
Consumer and other.............................. 29 1.5 22 1.4
Year 2000 exposure.............................. 650 600
Unallocated..................................... 2,855 1,513
------- ----- ------- -----
Total....................................... $20,019 100.0% $16,506 100.0%
======= ===== ======= =====
</TABLE>
The allowance for loan losses of $20.0 million at June 30, 1999 exceeded the
Company's estimated allowance requirement by $3.5 million. The estimated
allowance requirement as of June 30, 1999 was $16.5 million as compared to
$14.4 million as of December 31, 1998. Notwithstanding the unallocated
allowance of $2.9 million at June 30, 1999, the Company continues to record
loan loss provisions on a monthly basis to compensate for growth in the
various loan portfolios. Moreover, it is management's opinion that the
commercial loan portfolio has not fully seasoned, and therefore, current
positive chargeoff experience may not necessarily be reflective of potential
future losses, which is even more relevant in light of current favorable
economic conditions.
As of June 30, 1999, the Company has earmarked $650 thousand of the
unallocated allowance to absorb any potential exposure to "Year 2000" issues.
The remaining unallocated allowance at June 30, 1999 is $2.9 million compared
to the $1.5 million unallocated allowance at December 31, 1998. These amounts
represent 14% and 9% of the total allowance for loan losses at June 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 relatively untested loan
portfolios, but also to compensate for the attendant estimation risk
associated with the classification migration and individual loan review
analysis methodologies.
22
<PAGE>
Deposits
Deposits of $1.43 billion at June 30, 1999, represented an increase of
$140.9 million or 11% over December 31, 1998. The increase in deposits
reflects $92.6 million in deposits acquired through First Central 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 June 30, 1999 grew
$65.4 million or 5% over December 31, 1998. This growth in deposits is
comprised primarily of increases in time deposits of $47.2 million or 6% and
noninterest-bearing demand deposits of $13.9 million or 14%. The increase in
time deposits during the first six 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 $70.2 million or 18% during the six months ended June 30,
1999, compared with the same period in 1998. This increase was comprised of a
$34.7 million or 49% increase in noninterest-bearing demand accounts, an $18.7
million or 80% increase in money market accounts, a $12.1 million or 6%
increase in savings deposits, and a $4.7 million or 6% increase in interest-
bearing checking accounts.
Borrowings
The Company had no short-term borrowings at June 30, 1999. In comparison,
short-term borrowings, which consist primarily of federal funds purchased and
securities sold under agreements to repurchase, totaled $33.0 million as of
December 31, 1998. FHLB advances totaled $498.0 million as of June 30, 1999,
representing a $65.0 million or 12% decrease from the December 31, 1998
balance of $563.0 million. The decreases in short-term borrowings and 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 June 30, 1999, stockholders' equity totaled $145.9 million, a
decrease of $4.9 million or 3% from $150.8 million as of December 31, 1998.
The decrease is due primarily to: (i) repurchases of $12.9 million or
1,307,000 shares of common stock in connection with the first and second stock
repurchase programs approved by the Board of Directors during the first
quarter of 1999; (ii) payment of first and second quarter 1999 cash dividends
totaling $1.4 million; and (iii) a net increase of $3.8 million in unrealized
losses on available-for-sale securities. These transactions were offset, in
part, by net income of $13.1 million for the six months ended June 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 June 30, 1999, the Company's Tier 1 and total capital
ratios were 9.23% and 10.48%, respectively, compared to 10.28% and 11.42%,
respectively, at December 31, 1998, and 11.85% and 13.08%, respectively, at
June 30, 1998.
23
<PAGE>
The following table compares the Company's and the Bank's actual capital
ratios at June 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)............ 10.48% 10.46% 8.0% 10.0%
Tier 1 Capital (to Risk-
Weighted Assets)............ 9.23 9.21 4.0 6.0
Tier 1 Capital (to Average
Assets)..................... 6.87 6.85 4.0 5.0
</TABLE>
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 six months ended June 30, 1999, the Company experienced a net cash
outflow of $140.0 million from its investing activities primarily due to the
growth in the Company's loan portfolio. Partially offsetting the net cash
outflow from investing activities is $22.5 million in net cash provided by
operating activities and $27.3 million in net cash provided by financing
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, while the growth in the Company's deposit
base can be attributed for the net cash inflow from financing activities.
As a means of augmenting its liquidity, the Bank has established federal
funds lines with two correspondent banks and several master repurchase
agreements with major brokerage companies. At June 30, 1999, the Bank's
available borrowing capacity includes approximately $11.5 million in
repurchase arrangements, $40.0 million in federal funds line facilities, and
$38.5 million in unused FHLB advances. Management believes its liquidity
sources to be stable and adequate. At June 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 second quarter of 1999, East West Bank paid dividends
amounting to $6.8 million to East West Bancorp, Inc. For the six months ended
June 30, 1999, total dividends paid by the Bank to East West Bancorp, Inc.
totaled $14.7 million. As of June 30, 1999, approximately $17.4 million of
undivided profits of the Bank was available for dividends to the Company.
24
<PAGE>
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.
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 June 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 3.2% (9.8)%
+100 2.9% (2.7)%
-100 (4.3)% (3.0)%
-200 (8.9)% (9.5)%
</TABLE>
- --------
(1) The percentage change represents net interest income for twelve months in
a stable interest rate environment versus the net interest income in the
various rate scenarios.
(2) The percentage change represents net portfolio value of the Bank in a
stable rate environment versus the net portfolio value in the various rate
scenarios.
All interest-earning assets, interest-bearing liabilities and derivative
contracts are included in the interest rate sensitivity analysis at June 30,
1999. At June 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 June 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
--------------------------------------------------------
After Fair value at
1999 2000 2001 2002 2003 2003 Total June 30, 1999
---------- ------- ------- -------- ------- ------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Short-term investments.. $ 39,500 $ -- $ -- $ -- $ -- $ -- $ 39,500 $ 39,500
Weighted average rate.. 5.83% -- % -- % -- % -- % -- % 5.83%
Investment securities
available- for-sale
(fixed rate)........... $ 94,673 $65,596 $46,265 $ 32,927 $22,043 $46,148 $ 307,652 $ 302,509
Weighted average rate.. 6.15% 6.18% 6.17% 6.16% 6.17% 6.18% 6.17%
Investment securities
available- for-sale
(variable rate)........ $ 282,273 $ -- $ -- $ -- $ -- $ -- $ 282,273 $ 279,976
Weighted average rate.. 5.62% -- % -- % -- % -- % -- % 5.62%
Total gross loans....... $1,189,611 $55,685 $39,481 $ 28,304 $23,347 $ 8,597 $1,345,025 $1,353,280
Weighted average rate.. 7.98% 7.91% 8.08% 8.29% 8.20% 7.57% 7.98%
Liabilities:
Checking accounts....... $ 89,940 $ -- $ -- $ -- $ -- $ -- $ 89,940 $ 89,940
Weighted average rate.. 1.30% -- % -- % -- % -- % -- % 1.30%
Money market accounts... $ 56,245 $ -- $ -- $ -- $ -- $ -- $ 56,245 $ 56,245
Weighted average rate.. 3.14% -- % -- % -- % -- % -- % 3.14%
Savings deposits........ $ 217,277 $ -- $ -- $ -- $ -- $ -- $ 217,277 $ 217,277
Weighted average rate.. 1.91% -- % -- % -- % -- % -- % 1.91%
Time deposits........... $ 905,435 $20,348 $ 1,127 $ 785 $ 2,286 $15,000 $ 944,981 $ 944,116
Weighted average rate.. 4.57% 4.69% 5.24% 5.43% 5.37% 7.00% 4.63%
FHLB advances........... $ 288,000 $ 5,000 $ -- $195,000 $10,000 $ -- $ 498,000 $ 498,911
Weighted average rate.. 5.13% 5.16% -- % 5.11% 5.78% -- % 5.13%
</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.
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
26
<PAGE>
Bank's asset/liability management strategy. Therefore, the Bank does not
believe it is meaningful to separately analyze the derivatives components of
its risk management activities in isolation from their related positions. The
Bank uses derivative instruments, primarily interest rate swap and cap
agreements, as part of its management of asset and liability positions in
connection with its overall goal of minimizing the impact of interest rate
fluctuations on the Bank's net interest margin or its stockholders' equity.
These contracts are entered into for purposes of reducing the Bank's interest
rate risk and not for trading purposes.
Interest rate swaps were designated for purposes of converting fixed rate
loans to floating rate assets while interest rate cap agreements were
designated as hedges against certain securities in the available-for-sale
portfolio. The total gross notional amount of the interest rate swaps on June
30, 1999 was $43.5 million. The net unrealized loss on the swap agreement
portfolio was $884 thousand compared to a net unrealized loss of $1.5 million
at December 31, 1998.
Interest rate caps are used as hedges against market fluctuations in the
Bank's available-for-sale securities portfolio. The total gross notional
amount of interest rate cap agreements on June 30, 1999 was $36.0 million. The
net unrealized loss on the cap agreement portfolio was $354 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 June 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 2003 2003 Total Gain (Loss) Maturity
---- ---- ------- ------- ---- ------- ------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate swap
agreements:
Notional amount......... $ -- $ -- $10,000 $18,500 $ -- $15,000 $43,500 $(884) 5.4 Years
Weighted average receive
rate................... --% --% 5.23% 5.23% --% 5.29% 5.25%
Weighted average pay
rate................... --% --% 6.46% 6.45% --% 7.00% 6.64%
Interest rate cap
agreements:
Notional amount......... $ -- $ -- $18,000 $18,000 $ -- $ -- $36,000 $(354) 2.6 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.
As of June 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
27
<PAGE>
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 75% complete. The hardware and network infrastructure replacement cost of
$750 thousand represents the largest portion of the "Year 2000" plan total
budget of $1.0 million. The Bank has incurred $885 thousand in "Year 2000"
expenses to date, $587 thousand of which was incurred during 1999.
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 will be tested during 1999, as is the case with wire
transfer operations which were successfully tested at the Bank's offsite
contingency location during January 1999. The Bank's contingency plan will be
independently validated by September 30, 1999 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 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.
28
<PAGE>
The following tables present the operating results and other key financial
measures for the individual operating segments for the three months and the
six months ended June 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 June 30, 1999
(unaudited)
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
-------- ---------- -------- ----------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income......... $ 6,770 $ 9,032 $ 10,133 $ 9,533 $ 550 $ 36,018
Charges for funds used.. (3,923) (5,152) (8,549) (6,396) -- (24,020)
-------- -------- -------- -------- ------- ----------
Interest spread on
funds used............ 2,847 3,880 1,584 3,137 550 11,998
-------- -------- -------- -------- ------- ----------
Interest expense........ (9,794) (691) (8,195) -- (1) (18,681)
Credit on funds
provided............... 13,715 1,225 9,080 -- -- 24,020
-------- -------- -------- -------- ------- ----------
Interest spread on
funds provided........ 3,921 534 885 -- (1) 5,339
-------- -------- -------- -------- ------- ----------
Net interest income... $ 6,768 $ 4,414 $ 2,469 $ 3,137 $ 549 $ 17,337
======== ======== ======== ======== ======= ==========
Depreciation and
amortization........... $ 346 $ 68 $ 1 $ -- $ 136 $ 551
Segment pretax profit... 1,639 3,556 2,599 2,704 -- 10,498
Segment assets as of
June 30, 1999.......... 351,241 448,654 649,326 563,464 84,598 2,097,283
<CAPTION>
Three Months Ended June 30, 1998
(unaudited)
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
-------- ---------- -------- ----------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income......... $ 4,054 $ 6,783 $ 9,532 $ 9,559 $ 487 $ 30,415
Charges for funds used.. (2,534) (4,047) (8,901) (8,031) -- (23,513)
-------- -------- -------- -------- ------- ----------
Interest spread on
funds used............ 1,520 2,736 631 1,528 487 6,902
-------- -------- -------- -------- ------- ----------
Interest expense........ (10,583) (666) (5,913) -- -- (17,162)
Credit on funds
provided............... 14,903 984 7,626 -- -- 23,513
-------- -------- -------- -------- ------- ----------
Interest spread on
funds provided........ 4,320 318 1,713 -- -- 6,351
-------- -------- -------- -------- ------- ----------
Net interest income... $ 5,840 $ 3,054 $ 2,344 $ 1,528 $ 487 $ 13,253
======== ======== ======== ======== ======= ==========
Depreciation and
amortization........... $ 348 $ 82 $ 1 $ -- $ 116 $ 547
Segment pretax profit... 751 2,491 1,854 995 -- 6,091
Segment assets as of
June 30, 1998.......... 180,756 326,631 749,899 504,360 47,067 1,808,713
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
(unaudited)
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
-------- ---------- -------- ----------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income......... $ 12,237 $ 17,342 $ 21,496 $ 18,363 $ 1,241 $ 70,679
Charges for funds used.. (7,141) (9,924) (18,274) (12,219) -- (47,558)
-------- -------- -------- -------- ------- ----------
Interest spread on
funds used............ 5,096 7,418 3,222 6,144 1,241 23,121
-------- -------- -------- -------- ------- ----------
Interest expense........ (19,364) (1,363) (16,384) -- -- (37,111)
Credit on funds
provided............... 27,037 2,335 18,186 -- -- 47,558
-------- -------- -------- -------- ------- ----------
Interest spread on
funds provided........ 7,673 972 1,802 -- -- 10,447
-------- -------- -------- -------- ------- ----------
Net interest income... $ 12,769 $ 8,390 $ 5,024 $ 6,144 $ 1,241 $ 33,568
======== ======== ======== ======== ======= ==========
Depreciation and
amortization........... $ 713 $ 129 $ 2 $ -- $ 244 $ 1,088
Segment pretax profit... 2,494 7,309 5,169 5,072 -- 20,044
Segment assets as of
June 30, 1999.......... 351,241 448,654 649,326 563,464 84,598 2,097,283
<CAPTION>
Six Months Ended June 30, 1998
(unaudited)
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
-------- ---------- -------- ----------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income......... $ 7,537 $ 13,157 $ 17,856 $ 19,553 $ 894 $ 58,997
Charges for funds used.. (4,749) (7,819) (15,903) (16,408) -- (44,879)
-------- -------- -------- -------- ------- ----------
Interest spread on
funds used............ 2,788 5,338 1,953 3,145 894 14,118
-------- -------- -------- -------- ------- ----------
Interest expense........ (21,428) (1,302) (10,616) -- -- (33,346)
Credit on funds
provided............... 29,825 1,912 13,142 -- -- 44,879
-------- -------- -------- -------- ------- ----------
Interest spread on
funds provided........ 8,397 610 2,526 -- -- 11,533
-------- -------- -------- -------- ------- ----------
Net interest income... $ 11,185 $ 5,948 $ 4,479 $ 3,145 $ 894 $ 25,651
======== ======== ======== ======== ======= ==========
Depreciation and
amortization........... $ 741 $ 115 $ 2 $ -- $ 228 $ 1,086
Segment pretax profit... 918 4,916 3,296 1,479 -- 10,609
Segment assets as of
June 30, 1998.......... 180,756 326,631 749,899 504,360 47,067 1,808,713
</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. 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 second 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: August 9, 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 JUNE 3J0, 1999, AND STATEMENT OF EARNINGS FO THE SIX MONTH
ENDED JUNE 30, 1999 AN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 31,528
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 39,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 582,485
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,324,504
<ALLOWANCE> 20,018
<TOTAL-ASSETS> 2,097,283
<DEPOSITS> 1,433,882
<SHORT-TERM> 0
<LIABILITIES-OTHER> 19,513
<LONG-TERM> 498,000
0
0
<COMMON> 22
<OTHER-SE> 145,666
<TOTAL-LIABILITIES-AND-EQUITY> 2,097,283
<INTEREST-LOAN> 49,017
<INTEREST-INVEST> 19,044
<INTEREST-OTHER> 2,604
<INTEREST-TOTAL> 70,679
<INTEREST-DEPOSIT> 23,321
<INTEREST-EXPENSE> 37,111
<INTEREST-INCOME-NET> 33,588
<LOAN-LOSSES> 2,688
<SECURITIES-GAINS> 684
<EXPENSE-OTHER> 18,397
<INCOME-PRETAX> 20,044
<INCOME-PRE-EXTRAORDINARY> 13,112
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,112
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
<YIELD-ACTUAL> 3.43
<LOANS-NON> 5,508
<LOANS-PAST> 0
<LOANS-TROUBLED> 7,249
<LOANS-PROBLEM> 3,579
<ALLOWANCE-OPEN> 16,506
<CHARGE-OFFS> 682
<RECOVERIES> 339
<ALLOWANCE-CLOSE> 20,019
<ALLOWANCE-DOMESTIC> 20,019
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,866
</TABLE>
