<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number 000-24939
EAST WEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-470331
(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)
Registrant's telephone number, including area code: (626) 799-5700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
NONE NONE
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 April
30, 2000: 22,452,284 shares
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION .............................................. 3
Item 1. Interim Consolidated Financial Statements ...................... 4-7
Notes to Interim Consolidated Financial Statements ............. 8-11
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations .................. 11-33
Item 3. Quantitative and Qualitative Disclosures of Market Risks ....... 33
PART II - OTHER INFORMATION ................................................. 34
Item 1. Legal Proceedings .............................................. 34
Item 2. Changes in Securities and Use of Proceeds ...................... 34
Item 3. Defaults upon Senior Securities ................................ 34
Item 4. Submission of Matters to a Vote of Security Holders ............ 34
Item 5. Other Information .............................................. 34
Item 6. Exhibits and Reports on Form 8-K ............................... 34
SIGNATURE ................................................................... 35
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents ......................................................... $ 44,922 $ 43,497
Interest bearing deposits in banks ................................................ 100 --
Investment securities available for sale, at fair value (with amortized cost of
$504,396 in 2000 and $517,320 in 1999) ......................................... 480,547 496,426
Loans receivable, net of allowance for loan losses of $24,012 in 2000 and
$20,844 in 1999 ................................................................ 1,635,526 1,486,641
Investment in Federal Home Loan Bank stock, at cost ............................... 28,550 26,954
Other real estate owned ........................................................... 888 577
Investments in affordable housing partnerships .................................... 25,021 26,485
Premises and equipment, net ....................................................... 26,058 22,646
Premiums on deposits acquired, net ................................................ 9,382 3,812
Excess of purchase price over fair value of net assets acquired, net .............. 16,763 6,770
Accrued interest receivable and other assets ...................................... 36,042 30,503
Deferred tax asset ................................................................ 14,604 8,319
---------- ----------
TOTAL ................................................................... $2,318,403 $2,152,630
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Customer deposit accounts ......................................................... $1,763,400 $1,500,529
Short-term borrowings ............................................................. 36,000 600
Federal Home Loan Bank advances ................................................... 328,000 482,000
Notes payable ..................................................................... 782 1,532
Accrued expenses and other liabilities ............................................ 21,048 15,861
Junior subordinated debt securities (Note 5) ...................................... 10,750 --
---------- ----------
Total liabilities .............................................................. 2,159,980 2,000,522
---------- ----------
FAIR VALUE OF NET ASSETS ACQUIRED IN EXCESS OF PURCHASE
PRICE, NET ..................................................................... 1,924 2,028
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDER'S EQUITY (Notes 4 and 5)
Common stock (par value of $0.001 per share)
Authorized - 50,000,000 shares
Issued -- 23,911,549 shares and 23,908,731 shares in 2000 and 1999, respectively
Outstanding -- 22,421,710 shares and 22,422,868 shares in 2000 and 1999,
respectively ................................................................... 24 24
Additional paid in capital ........................................................ 111,355 111,306
Retained earnings ................................................................. 75,041 67,001
Deferred compensation ............................................................. (747) (863)
Treasury stock, at cost: 1,489,839 shares and 1,485,863 shares in 2000 and 1999,
respectively ................................................................... (14,721) (14,659)
Accumulated other comprehensive loss, net of tax .................................. (14,453) (12,729)
---------- ----------
Total stockholders' equity ..................................................... 156,499 150,080
---------- ----------
TOTAL ................................................................... $2,318,403 $2,152,630
========== ==========
</TABLE>
See accompanying notes to interim consolidated financial statements.
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<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees ............................................... $35,376 $23,259
Investment securities available for sale ....................................... 8,317 9,778
Short-term investments ......................................................... 164 1,205
Federal Home Loan Bank stock ................................................... 384 420
------- -------
Total interest and dividend income .......................................... 44,241 34,662
------- -------
INTEREST EXPENSE
Customer deposit accounts ...................................................... 15,109 11,495
Short-term borrowings .......................................................... 175 348
Federal Home Loan Bank advances ................................................ 6,943 6,588
Junior subordinated debt securities ............................................ 30 --
------- -------
Total interest expense ...................................................... 22,257 18,431
------- -------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES .............................. 21,984 16,231
PROVISION FOR LOAN LOSSES ......................................................... 1,400 1,200
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ............................... 20,584 15,031
------- -------
NONINTEREST INCOME
Loan ancillary fees ............................................................ 528 528
Branch fees .................................................................... 1,216 728
Letters of credit fees and commissions ......................................... 1,083 982
Net gain on sales of investment securities available for sale .................. 260 380
Net gain on trading securities ................................................ 62 18
Net gain on sales of investments in affordable housing partnerships ............ 905 402
Amortization of fair value of net assets acquired in excess of purchase price... 104 103
Other operating income ......................................................... 235 191
------- -------
Total noninterest income .................................................... 4,393 3,332
------- -------
NONINTEREST EXPENSE
Compensation and employee benefits ............................................. 4,593 4,674
Net occupancy .................................................................. 1,780 1,364
Data processing ................................................................ 442 332
Amortization of premiums on deposits acquired and excess of purchase price
over fair value of net assets acquired ........................................ 780 310
Amortization of investments in affordable housing partnerships ................. 965 410
Deposit insurance premiums and regulatory assessments .......................... 96 208
Other real estate owned operations, net ........................................ 30 (284)
Other operating expenses ....................................................... 3,048 1,803
------- -------
Total noninterest expense ................................................... 11,734 8,817
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES .......................................... 13,243 9,546
PROVISION FOR INCOME TAXES ........................................................ 4,530 3,534
------- -------
NET INCOME ........................................................................ $ 8,713 $ 6,012
======= =======
BASIC EARNINGS PER SHARE .......................................................... $ 0.39 $ 0.26
DILUTED EARNINGS PER SHARE ........................................................ $ 0.38 $ 0.26
AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC ...................................... 22,331 23,559
AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED .................................... 22,677 23,559
</TABLE>
See accompanying notes to interim consolidated financial statements.
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EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Deferred Treasury Comprehensive
Stock Capital Earnings Compensation Stock Loss, Net of Tax
----- ------- -------- ------------ ----- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999.................... $24 $109,976 $41,718 $ -- $ -- $ (888)
Comprehensive income:
Net income for the year.................. 28,027
Net unrealized loss on securities........ (11,841)
Comprehensive income........................
Stock compensation costs.................... 249
Issuance of 105,003 shares
under Restricted Stock Plan................ 1,112 (1,112)
Issuance of 28,728 shares
under Employee Stock Purchase Plan......... 218
Purchase of 1,485,863 shares
of treasury stock.......................... (14,659)
Dividends declared on common stock.......... (2,744)
---- -------- ------- ------- -------- --------
BALANCE, DECEMBER 31, 1999.................. $24 $111,306 $67,001 $ (863) $(14,659) $(12,729)
Comprehensive income:
Net income for the year.................. 8,713
Net unrealized loss on securities........ (1,724)
Comprehensive income........................
Stock compensation costs.................... 20 116
Issuance of 2,818 shares
under Stock Incentive Plan................. 29
Purchase of 3,976 shares of treasury stock.. (62)
Dividends declared on common stock.......... (673)
---- -------- ------- ------- -------- --------
BALANCE, MARCH 31, 2000..................... $24 $111,355 $75,041 $ (747) $(14,721) $(14,453)
==== ======== ======= ======= ======== ========
<CAPTION>
Total
Comprehensive Stockholders'
Income Equity
------ ------
(Dollars in thousands)
<S> <C> <C>
BALANCE, JANUARY 1, 1999....................... $150,830
Comprehensive income:
Net income for the year..................... $ 28,027 28,027
Net unrealized loss on securities........... (11,841) (11,841)
--------
Comprehensive income........................... $ 16,186
========
Stock compensation costs....................... 249
Issuance of 105,003 shares
under Restricted Stock Plan................... --
Issuance of 28,728 shares
under Employee Stock Purchase Plan............ 218
Purchase of 1,485,863 shares
of treasury stock............................. (14,659)
Dividends declared on common stock............. (2,744)
--------
BALANCE, DECEMBER 31, 1999..................... $150,080
Comprehensive income:
Net income for the year..................... $ 8,713 8,713
Net unrealized loss on securities........... (1,724) (1,724)
--------
Comprehensive income........................... $ 6,989
========
Stock compensation costs....................... 136
Issuance of 2,818 shares
under Stock Incentive Plan.................... 29
Purchase of 3,976 shares of treasury stock..... (62)
Dividends declared on common stock............. (673)
--------
BALANCE, MARCH 31, 2000........................ $156,499
========
<CAPTION>
Three Months Year
Ended Ended
March 31, December 31,
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Disclosure of reclassification amounts:
Unrealized holding loss arising during period, net of tax benefit of
$1,045 in 2000 and $7,620 in 1999......................................... $(1,568) $(11,430)
Less: Reclassification adjustment for gain included in net income,
net of tax expense of $104 in 2000 and $274 in 1999......................... (156) (411)
------- --------
Net unrealized loss on securities, net of tax benefit of
$1,149 in 2000 and $7,894 in 1999........................................... $(1,724) $(11,841)
======= ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
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<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
---- ----
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................................. $ 8,713 $ 6,012
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 1,976 734
Net loan fees deferred........................................................... 512 462
Stock compensation costs......................................................... 136 --
Deferred tax benefit............................................................. (313) (49)
Provision for loan losses........................................................ 1,400 1,200
Provision for other real estate owned losses..................................... -- 8
Net gains on sales of investment securities and other assets..................... (1,194) (1,387)
Gain on trading securities....................................................... (62) (18)
Federal Home Loan Bank stock dividends........................................... (379) (414)
Proceeds from sale of trading securities......................................... -- 186
Purchases of trading securities.................................................. -- (168)
Proceeds from sale of loans held for sale........................................ 2,841 21,624
Originations of loans held for sale.............................................. (2,527) (17,495)
(Increase) decrease in accrued interest receivable and other assets,
net of effects from purchase of American International Bank................... (599) 455
Increase in accrued expenses and other liabilities, net of effects from
purchase of American International Bank....................................... 1,861 3,029
----------- -----------
Total adjustments............................................................. 3,652 8,167
----------- -----------
Net cash provided by operating activities..................................... 12,365 14,179
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans.................................................................... (34,266) (31,289)
Purchases of:
Interest bearing deposits in banks............................................... (100) --
Investment securities available for sale......................................... (64,915) (259,631)
Loans receivable................................................................. (116,698) (40,223)
Federal Home Loan Bank stock..................................................... (1,326) --
Investment in affordable housing partnerships.................................... (5,544) (3,247)
Premises and equipment........................................................... (4,536) (204)
Proceeds from sale of:
Investment securities available for sale......................................... 64,639 88,246
Other real estate owned.......................................................... -- 890
Investment in affordable housing partnerships.................................... 6,947 3,267
Premises and equipment........................................................... -- 2
Repayments, maturity and redemption of investment securities available for sale........ 16,403 216,509
Redemption of Federal Home Loan Bank stock............................................. 110 --
Payment for purchase of American International Bank, net of cash received.............. (25,218) --
----------- -----------
Net cash used in investing activities......................................... (164,504) (25,680)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits................................................................. $ 262,870 $ 14,869
Net increase (decrease) in short-term borrowings....................................... 35,400 (11,922)
Proceeds from Federal Home Loan Bank advances.......................................... 7,588,000 2,695,300
Repayment of Federal Home Loan Bank advances........................................... (7,742,000) (2,758,300)
Proceeds from junior subordinated debt securities...................................... 10,750 --
Repayments of notes payable on affordable housing investments.......................... (750) (900)
Proceeds from common stock options exercised........................................... 29 --
Repurchases of common stock............................................................ (62) (7,009)
Dividends paid on common stock......................................................... (673) (714)
----------- -----------
Net cash provided by (used in) financing activities........................... 153,564 (68,676)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... 1,425 (80,177)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................................ 43,497 161,131
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................................. $ 44,922 $ 80,954
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.......................................................................... $ 22,484 $ 17,897
Income tax payments, net............................................................... 1 1,400
Noncash investing and financing activities:
Other real estate acquired through foreclosure...................................... 311 270
Loans made to facilitate sales of other real estate owned........................... -- 650
Investment in affordable housing partnerships acquired through notes payable........ -- 3,033
</TABLE>
See accompanying notes to interim consolidated financial statements.
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<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2000 and 1999
(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"). Intercompany transactions and accounts have
been eliminated.
The interim consolidated financial statements, presented in accordance with
principles generally accepted in the United States of America ("GAAP"), 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 March 31, 2000 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 annual
financial statements prepared in accordance with GAAP 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 on Form 10K for the year ended December
31, 1999.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
2. AMERICAN INTERNATIONAL BANK ACQUISITION
On January 18, 2000, the Company completed its $33.1 million acquisition of
American International Bank ("AIB") in an all-cash transaction. American
International Bank, with assets of $202 million, was a state-chartered bank with
eight branches in Southern California. AIB specialized in servicing small-to-
medium sized companies involved in international trade and other areas, as well
as offering a full range of personal banking products and services to a
predominantly Chinese-American customer base.
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
$10.2 million, which is being amortized using the straight-line method over 15
years.
3. COMMITMENTS AND CONTINGENCIES
Credit Extensions - In the normal course of business, there are various
outstanding commitments to extend credit which are not reflected in the
accompanying interim consolidated financial statements. While the Company does
not anticipate losses as a result of these transactions, commitments are
included in determining the appropriate level of the allowance for loan losses.
As of March 31, 2000, undisbursed loan
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commitments, commercial and standby letters of credit, and commitments to fund
mortgage loan applications in process amounted to $292.3 million, $154.1
million, and $38.6 million, respectively.
Litigation - The Company is a party to various legal proceedings arising in
the normal course of business. While it is difficult to predict the outcome of
such litigation, the Company does not expect that such litigation will have a
material adverse effect on its financial position and results of operations.
4. STOCKHOLDERS' EQUITY
Earnings Per Share - The actual number of shares outstanding at March 31,
2000, was 22,421,710. Basic earnings per share are calculated on the basis of
the weighted average 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.
Quarterly Dividends - On January 20, 2000, the Company's Board of Directors
declared a quarterly common stock cash dividend of $0.03 per share payable on or
about February 16, 2000 to shareholders of record on February 2, 2000. For the
first quarter of 2000, cash dividends totaling $673 thousand have been paid to
the Company's shareholders.
5. SIGNIFICANT TRANSACTIONS
During the first quarter of 2000, the Company filed a $50 million universal
shelf registration statement with the Securities and Exchange Commission ("SEC")
which became effective on February 22, 2000. Pursuant to the filing, the
Company may, from time to time, offer new common stock, trust preferred,
preferred stock and/or other debentures. The timing and amount of offerings
will depend on market and general business conditions. The Company will utilize
the net proceeds from the sale of securities for general business purposes,
including supporting the growth of its commercial banking activities and
possible future acquisitions.
Additionally, on March 23, 2000, the Company issued $10.8 million of Junior
Subordinated Deferrable Interest Debentures. These securities, which are not
registered with the SEC, have a scheduled maturity date of March 8, 2030 and
bear an interest rate of 10.875% per annum. Interest payments are due on March
8 and September 8 of each year and are deductible for tax purposes. The
securities are recorded in the liability section of the consolidated balance
sheet in accordance with GAAP. For regulatory reporting purposes, these
securities qualify for Tier 1 capital treatment.
6. BUSINESS SEGMENTS
Management utilizes an internal reporting system to measure the performance
of various operating segments within the Company and the Company overall. Four
principal operating segments have been identified by the Company 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
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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.
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.
Net interest income is based on the Company's internal funds transfer pricing
system which assigns a cost of funds or a credit for funds to assets or
liabilities based on their type, maturity or repricing characteristics.
Noninterest income and noninterest expense, including depreciation and
amortization, directly attributable to a segment are assigned to that business.
Indirect costs, including overhead expense, are allocated to the segments based
on several factors, including, but not limited to, full-time equivalent
employees, loan volume and deposit volume. The provision for credit losses is
allocated based on new loan originations for the period. The Company evaluates
overall performance based on profit or loss from operations before income taxes
not including nonrecurring gains and losses.
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 have been and will be restated for
comparability in the event of changes in management structure or reporting
methodologies.
The following tables present the operating results and other key financial
measures for the individual operating segments for the three months ended March
31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
------- ------- -------- ------- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income........................ $ 10,530 $ 15,171 $ 8,779 $ 8,951 $ 810 $ 44,241
Charges for funds used................. (7,005) (10,458) (8,477) (7,320) (10) (33,270)
-------- -------- -------- -------- -------- ----------
Interest spread on funds used....... 3,525 4,713 302 1,631 800 10,971
-------- -------- -------- -------- -------- ----------
Interest expense....................... (11,406) (1,167) (9,684) -- -- (22,257)
Credit on funds provided............... 19,688 2,336 11,246 -- -- 33,270
-------- -------- -------- -------- -------- ----------
Interest spread on funds provided... 8,282 1,169 1,562 -- -- 11,013
-------- -------- -------- -------- -------- ----------
Net interest income.............. $ 11,807 $ 5,882 $ 1,864 $ 1,631 $ 800 $ 21,984
======== ======== ======== ======== ======== ==========
Depreciation and amortization.......... $ 1,084 $ 58 $ 159 $ 218 $ 457 $ 1,976
Segment pretax profit.................. 5,483 4,267 1,799 1,357 337 13,243
Segment assets as of March 31, 2000.... 447,537 725,157 480,658 506,735 158,316 2,318,403
</TABLE>
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<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
--------- ----------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest income......................... $ 5,334 $ 9,161 $ 11,363 $ 7,980 $ 824 $ 34,662
Charges for funds used.................. (3,127) (5,271) ( 9,725) (5,324) (91) (23,538)
-------- -------- -------- -------- -------- ----------
Interest spread on funds used........ 2,207 3,890 1,638 2,656 733 11,124
-------- -------- -------- -------- -------- ----------
Interest expense........................ (9,570) (672) (8,189) -- -- (18,431)
Credit on funds provided................ 13,322 1,110 9,106 -- -- 23,538
-------- -------- -------- -------- -------- ----------
Interest spread on funds provided.... 3,752 438 917 -- -- 5,107
-------- -------- -------- -------- -------- ----------
Net interest income............... $ 5,959 $ 4,328 $ 2,555 $ 2,656 $ 733 $ 16,231
======== ======== ======== ======== ======== ==========
Depreciation and amortization........... $ 565 $ 61 $ 274 $ -- $ (166) $ 734
Segment pretax profit................... 940 4,104 2,570 2,017 (85) 9,546
Segment assets as of March 31, 1999..... 262,141 433,808 691,079 508,370 105,660 2,001,058
</TABLE>
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 1999 annual report on Form 10-K for the year ended December 31,
1999, and the accompanying interim unaudited consolidated financial statements
and notes thereto.
In addition to historical information, this discussion includes certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 which involve inherent risks and uncertainties. A
number of important factors could cause the Company's actual results and
performance in future periods to differ materially from those discussed in such
forward-looking statements. These factors include, but are not limited to, the
effect of interest rate and currency exchange fluctuations; competition in the
financial services market for both deposits and loans; the Company's ability to
efficiently incorporate acquisitions into its operations; the ability of the
Company to increase its customer base; and regional and general economic
conditions. Given these uncertainties, the reader is cautioned not to place
undue reliance on such forward-looking statements. The Company expressly
disclaims any obligation to update or revise any forward-looking statements
contained herein to reflect any changes in the Company's expectations of results
or any change in events.
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<PAGE>
Results of Operations
The Company reported net income of $8.7 million, or $0.39 per basic share
and $0.38 per diluted share for the first quarter of 2000, compared with $6.0
million, or $0.26 per basic and diluted share, reported during the first quarter
of 1999. The 45% increase in net earnings is primarily attributable to the
growth in the loan portfolio and higher yields on all categories of earning
assets. Sustained growth in noninterest-related revenues and continuing efforts
to manage operational expenses, despite the Company's growth, have further
contributed to the increase in net income. The Company's annualized return on
average total assets increased to 1.50% for the quarter ended March 31, 2000,
from 1.19% for the same period in 1999. The annualized return on average
stockholders' equity increased to 23.08% for the first quarter of 2000, compared
with 15.98% for the first quarter of 1999.
Components of Net Income
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
---- ----
(In millions)
<S> <C> <C>
Net interest income................ $ 22.0 $16.2
Provision for loan losses.......... (1.4) (1.2)
Noninterest income................. 4.3 3.3
Noninterest expense................ (11.7) (8.8)
Provision for income taxes......... (4.5) (3.5)
------ -----
Net income...................... $ 8.7 $ 6.0
====== =====
Return on average total assets..... 1.50% 1.19%
====== =====
</TABLE>
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 first quarter of 2000
totaled $22.0 million, a 35% increase over net interest income of $16.2 million
for the same period in 1999.
Total interest and dividend income during the quarter ended March 31, 2000
increased 28% to $44.2 million compared with $34.7 million during the same
period in 1999. The increase in interest and dividend income is due primarily
to a 13% growth in average earning assets. Growth in the Bank's average loan
portfolio of 43%, partially offset by decreases in short-term investments and
investment securities, triggered the growth in average earning assets. The net
growth in average earning assets was funded largely by increases in time
deposits, money market and checking accounts, and noninterest-bearing demand
deposits.
-12-
<PAGE>
Total interest expense during the first quarter of 2000 increased 21% to
$22.3 million compared with $18.4 million for the same period a year ago. The
increase in interest expense is primarily attributable to increases in average
money market account, checking accounts and time deposits, partially offset by
decreases in average short-term borrowings and FHLB advances.
Net interest margin, defined as taxable equivalent net interest income
divided by average earning assets, increased 66 basis points to 4.01% for the
first quarter of 2000, compared with 3.35% for the first quarter of 1999. The
overall yield on average earning assets increased 93 basis points, to 8.08%,
primarily due to marked increases in the average volume of multifamily,
commercial real estate and construction loans. Additionally, a 100 basis point
increase in the average prime rate during the first quarter of 2000, compared to
the same period in 1999, further contributed to the increase in the overall
yield on average earning assets. Similarly, the Company's overall cost of funds
increased 32 basis points, to 4.52%, due primarily to increases in the average
volume of time deposits and money market accounts, amplified by higher rates
paid on new time deposits and on all other categories of interest-bearing
liabilities.
-13-
<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 March 31,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------------------
2000 1999
---- ----
Average Average
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Interest-earning assets:
Short-term investments............................ $ 8,857 $ 164 7.36% $ 85,691 $ 1,205 5.62%
Taxable investment securities (2)(3).............. 541,080 8,317 6.15 688,515 9,778 5.68
Loans receivable (2)(4)........................... 1,613,432 35,376 8.77 1,131,692 23,259 8.22
FHLB stock........................................ 28,005 384 5.48 33,177 420 5.06
---------- ------- ---------- -------
Total interest-earning assets................... 2,191,374 44,241 8.08 1,939,075 34,662 7.15
------- ----- ------- ----
Noninterest-earning assets:
Cash and due from banks........................... 50,979 28,304
Allowance for loan losses......................... (23,046) (16,815)
Other assets...................................... 97,933 66,999
---------- ----------
Total assets.................................... $2,317,240 $2,017,563
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
- -----------------------------------
Interest-bearing liabilities:
Checking accounts................................. $ 104,002 $ 328 1.26 $ 79,684 $ 225 1.13
Money market accounts............................. 92,177 625 2.71 38,070 274 2.88
Savings deposits.................................. 221,492 1,170 2.11 221,342 1,020 1.84
Time deposits..................................... 1,065,939 12,986 4.87 857,831 9,976 4.65
Short-term borrowings............................. 11,003 175 6.36 26,713 348 5.21
FHLB advances..................................... 475,835 6,943 5.84 530,226 6,588 4.97
Junior subordinated debt securities............... 1,103 30 10.88 -- -- --
---------- ------- ---------- -------
Total interest-bearing liabilities.............. 1,971,551 22,257 4.52 1,753,866 18,431 4.20
------- ----- ------- ----
Noninterest-bearing liabilities:
Demand deposits................................... 176,613 98,837
Other liabilities................................. 18,041 14,388
Stockholders' equity.............................. 151,035 150,472
---------- ----------
Total liabilities and stockholders' equity...... $2,317,240 $2,017,563
========== ==========
Interest rate spread................................ 3.56% 2.95%
===== ====
Net interest income and net interest margin......... $21,984 4.01% $16,231 3.35%
======= ===== ======= ====
</TABLE>
_________
(1) Annualized
(2) Includes amortization of premiums and accretion of discounts on investment
securities and loans receivable. 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.
-14-
<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 March 31,
2000 vs 1999
----------------------------------
Total Changes Due to
Change Volume (1) Rates (1)
--------- ---------- ---------
<S> <C> <C> <C>
(In thousands)
INTEREST-EARNING ASSETS:
Short-term investments................. $(1,041) $(1,588) $ 547
Taxable investment securities.......... (1,461) (2,376) 915
Loans receivable, net.................. 12,117 10,473 1,644
FHLB stock............................. (36) (77) 41
------- ------- ------
Total interest income.............. $ 9,579 $ 6,432 $3,147
------- ------- ------
INTEREST-BEARING LIABILITIES:
Checking accounts...................... $ 103 $ 74 $ 29
Money market accounts.................. 351 366 (15)
Savings deposits....................... 150 1 149
Time deposits.......................... 3,010 2,516 494
Short-term borrowings.................. (173) (277) 104
FHLB advances.......................... 355 (506) 861
Junior subordinated debt securities.... 30 30 --
------- ------- ------
Total interest expense............. $ 3,826 $ 2,204 $1,622
------- ------- ------
CHANGE IN NET INTEREST INCOME.......... $ 5,753 $ 4,228 $1,525
======= ======= ======
</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 amounted to $1.4 million for the first
quarter of 2000 compared to $1.2 million for the same period in 1999.
Provisions for loan losses are charged to income to bring the allowance for
credit losses to a level deemed appropriate by management based on the factors
discussed under the "Allowance for Loan Losses" section of this report.
-15-
<PAGE>
Noninterest Income
Components of Noninterest Income
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
----- -----
(In millions)
<S> <C> <C>
Loan ancillary fees.................................... $0.53 $0.53
Branch fees............................................ 1.22 0.73
Letters of credit fees and commissions................. 1.08 0.98
Net gain on sales of securities available for sale..... 0.26 0.38
Net gain on trading securities......................... 0.06 0.02
Net gain on sale of affordable housing investments..... 0.91 0.40
Amortization of negative intangibles................... 0.10 0.10
Other.................................................. 0.23 0.19
----- -----
Total............................................. $4.39 $3.33
===== =====
</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 gain on sales
of investment securities available for sale and affordable housing investments.
Noninterest income increased 32% to $4.4 million during the three months
ended March 31, 2000. Branch fees, which represent revenues derived from branch
operations, amounted to $1.2 million for the first quarter of 2000, a 67%
increase from the $728 thousand earned during the same period in 1999. The rise
in branch fees is primarily due to higher service-related fee income on
transaction accounts resulting from the acquisition of American International
Bank in mid-January 2000. In addition, sustained growth in revenues from
analysis charges on commercial deposit accounts and sales of nonproprietary
mutual funds also contributed to the increase in branch fee income.
Letters of credit fees and commissions increased 10% to $1.1 million for
the first three months of 2000. This increase is attributed primarily to
continued growth in trade finance activities, reflecting a 40% growth in the
number of transactions processed during the first quarter of 2000 compared to
the same period in 1999.
Other notable contributions to noninterest income for the first quarter of
2000 include a $905 thousand gain on sale of affordable housing investments and
$260 thousand net gain on sales of available for sale securities, compared with
$402 thousand and $380 thousand, respectively, for the corresponding period in
1999.
-16-
<PAGE>
Noninterest Expense
Components of Noninterest Expense
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
------- ------
(In millions)
<S> <C> <C>
Compensation and other employee benefits.................. $ 4.59 $ 4.68
Net occupancy............................................. 1.78 1.36
Data processing........................................... 0.44 0.33
Amortization of positive intangibles...................... 0.78 0.31
Amortization of affordable housing investments............ 0.96 0.41
Deposit insurance premiums and regulatory assessments..... 0.10 0.21
Other real estate owned operations, net................... 0.03 (0.28)
Other..................................................... 3.05 1.80
------ ------
Total............................................... $11.73 $ 8.82
====== ======
Efficiency Ratio.................................... 38% 42%
====== ======
</TABLE>
Noninterest expense, which is comprised primarily of compensation and
employee benefits, occupancy and other operating expenses increased 33% to
$11.7 million during the three months ended March 31, 2000. Despite the
Company's continued growth, compensation and employee benefits remained
relatively flat during the first quarter of 2000 when compared to the same
period last year. This is due primarily to ongoing company-wide efforts to
streamline operations and consolidate related functions.
Occupancy expenses increased 30% to $1.8 million during the first quarter
of 2000. This reflects two and a half months of operations for the eight branch
offices of American International Bank, an overhead factor which was not present
during the first quarter of 1999. Additionally, the impact of normal rent
adjustments in existing leases, and increased expenses related to the
enhancement and maintenance of the Company's computer network system further
contributed to the rise in occupancy expenses.
The amortization of investments in affordable housing partnerships
increased 135% to $965 thousand during the 2000 first quarter, compared with
$410 thousand for the same period in 1999. The increase in amortization
reflects the impact of $13.0 million in additional affordable housing investment
purchases made since the first quarter of 1999.
The amortization of positive intangibles, which include premiums on
deposits acquired and excess of purchase price over fair value of net assets
acquired ("goodwill"), increased 152% to $780 thousand during the first quarter
of 2000 as a result of the First Central Bank and American International Bank
acquisitions. Combined goodwill of $14.0 million and deposit premiums of $8.6
million were recorded by the Company for both transactions which are being
amortized straight line over 15 and 7 years, respectively.
-17-
<PAGE>
Deposit insurance premiums and regulatory assessments decreased 54% to $96
thousand for the three months ended March 31, 2000, compared with $208 thousand
for the same period in 1999. This is primarily due to a significant decrease in
the Savings Association Insurance Fund ("SAIF") Financing Corporation ("FICO")
assessment rate effective in 2000. The annualized FICO rate decreased to 2.12
basis points for the first quarter of 2000 compared with 6.10 basis points for
the first quarter of 1999.
Net expenses related to OREO operations totaled $30 thousand for the first
quarter of 2000, compared with net income of $284 thousand for the prior year
period. Gains on sales of OREO and net rental income collected from OREO
properties totaled $266 thousand and $29 thousand for the 1999 first quarter.
There were no sales of OREO properties during the first quarter of 2000.
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
increased 69% to $3.0 million during the three months ended March 31, 2000,
compared with $1.8 million for the same period in 1999. The increase in other
operating expenses is due primarily to the Company's continued expansion, which
includes the recent acquisitions of First Central Bank and American
International Bank, as well as internal growth.
Despite the Company's growth trend over the past several years, ongoing
efforts to closely manage operational expenses continue to favorably impact the
Company's efficiency ratio, which represents noninterest expense (excluding the
amortization of intangibles and investments in affordable housing partnerships)
divided by the aggregate of net interest income before provision for loan losses
and noninterest income (excluding the amortization of intangibles). The
Company's efficiency ratio improved to 38% for the quarter ended March 31, 2000,
compared to 42% for the corresponding period in 1999.
Provision for Income Taxes
The provision for income taxes increased 28% to $4.5 million for the first
three months of 2000, compared with $3.5 million for the same period in 1999.
This is primarily due to higher pretax income partially offset by tax credits
from qualified affordable housing investments. Tax credits utilized during the
first quarter of 2000 totaled $1.0 million, compared to $550 thousand for the
first quarter of 1999. The first quarter 2000 provision reflects an effective
tax rate of 34.2%, compared with 37.0% for the first quarter of 1999.
Balance Sheet Analysis
The Company's total assets increased $165.8 million, or 8%, to $2.32
billion, as of March 31, 2000. The increase in total assets was due primarily to
a $148.9 million growth in loans receivable, partially offset by a decrease in
investment securities available for sale of $15.9 million. The increase in
total assets was funded by increases of $262.9 million in deposits, $35.4
million in short-term borrowings and $10.8 million in junior subordinated debt
securities, partially offset by decreases in FHLB advances of $154.0 million.
-18-
<PAGE>
Investment Securities Available for Sale
Total investment securities available for sale decreased 3% to $480.5
million as of March 31, 2000. Investment securities with a net carrying value of
$64.9 million were acquired from American International Bank during the first
quarter of 2000, substantially all of which were sold during the same period.
Total repayments and proceeds from sales of available for sale securities
amounted to $16.4 million and $64.6 million, respectively, during the quarter
ended March 31, 2000. Proceeds from repayments and sales were applied towards
the repayment of FHLB advances as well as funding a portion of the loan
originations made during the quarter. The Bank recorded net gains totaling $260
thousand on sales of available for sale securities during the three months ended
March 31, 2000.
The following table sets forth the amortized cost and the estimated fair
values of investment securities available for sale as of March 31, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
As of March 31, 2000:
U.S. Treasury securities............................. $ 998 $-- $ (23) $ 975
U.S. Government agency securities.................... 75,615 -- (8,851) 66,764
Obligations of states and political subdivisions..... 200 1 -- 201
Mortgage-backed securities........................... 425,083 69 (14,889) 410,263
Trust preferred securities........................... 2,500 -- (156) 2,344
-------- --- -------- --------
Total investment securities available for sale.... $504,396 $70 $(23,919) $480,547
======== === ======== ========
As of December 31, 1999:
U.S. Treasury securities............................. $ 985 $-- $ (10) $ 975
U.S. Government agency securities.................... 75,610 -- (6,739) 68,871
Obligations of states and political subdivisions..... 200 2 -- 202
Mortgage-backed securities........................... 440,525 51 (14,198) 426,378
-------- --- -------- --------
Total investment securities available for sale.... $517,320 $53 $(20,947) $496,426
======== === ======== ========
</TABLE>
Loans
Net loans receivable increased $148.9 million, or 10% to $1.6 billion at
March 31, 2000. Excluding the $105.2 million of net loans acquired from
American International Bank, organic loan growth during the first quarter of
2000 amounted to $44.1 million, or 3%, compared to year-end 1999 levels. The
increase in loans was funded primarily through deposit growth and through
repayments and sales of investment securities available for sale.
-19-
<PAGE>
The growth in loans, excluding loans acquired from American International
Bank, is comprised primarily of increases in single family loans of $18.5
million or 7%, commercial real estate loans of $14.8 million or 3%, construction
loans of $5.6 million or 5%, commercial business loans, including trade finance
products, of $8.7 million or 4%, and consumer loans, including home equity lines
of credit, of $2.5 million or 10%.
The following table sets forth the composition of the loan portfolio as of the
dates indicated:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999 March 31, 1999
-------------- ----------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential, one to four
units.................... $ 296,963 17.9% $ 278,161 18.4% $ 251,728 21.2%
Residential, multifamily.. 305,418 18.4 311,193 20.6 199,256 16.8
Commercial and industrial
real estate.............. 613,186 36.9 518,074 34.4 381,220 32.1
Construction.............. 135,311 8.2 122,363 8.1 87,873 7.4
---------- ----- ---------- ----- ---------- -----
Total real estate
loans................ 1,350,878 81.4 1,229,791 81.5 920,077 77.5
---------- ----- ---------- ----- ---------- -----
Other loans:
Business, commercial...... 276,676 16.7 248,865 16.5 246,582 20.8
Automobile................ 5,645 0.3 5,284 0.4 4,652 0.4
Other consumer............ 26,690 1.6 23,834 1.6 15,594 1.3
---------- ----- ---------- ----- ---------- -----
Total other loans...... 309,011 18.6 277,983 18.5 266,828 22.5
---------- ----- ---------- ----- ---------- -----
Total gross
loans.......... 1,659,889 100.0% 1,507,774 100.0% 1,186,905 100.0%
---------- ===== ---------- ===== ---------- =====
Unearned fees, premiums and
discounts, net.............. (351) (289) (1,624)
Allowance for loan losses.... (24,012) (20,844) (17,560)
---------- ---------- ----------
Loans receivable, net.. $1,635,526 $1,486,641 $1,167,721
========== ========== ==========
</TABLE>
Nonperforming Assets
Nonaccrual loans, which include loans 90 days or more past due, totaled
$10.4 million at March 31, 2000, compared with $10.9 million at year-end 1999.
Nonaccrual loans as a percentage of total loans outstanding were 0.63% and 0.73%
at March 31, 2000 and December 31,1999, respectively. Loans totaling $1.8
million were placed on nonaccrual status during the first quarter of 2000. These
additions to nonaccrual loans were offset by $363 thousand in payoffs, $736
thousand in chargeoffs, $1.1 million in loans brought current and one loan
amounting to $52 thousand that was transferred to other real estate owned.
Additions to nonaccrual loans during the first quarter of 2000 were comprised of
$363 thousand in residential single family loans, $1.2 million in commercial
business loans, $143 thousand in trade finance loans, and $54 thousand in
consumer home equity lines.
Restructured loans or loans that have had their original terms modified
totaled $4.1 million at March
-20-
<PAGE>
31, 2000, compared with $4.7 million year-end 1999. The decrease in
restructured loans is primarily due to payments received during the first
quarter of 2000.
Other real estate owned ("OREO") includes properties acquired through
foreclosure or through full or partial satisfaction of loans. Other real estate
owned totaled $888 thousand and $577 thousand at March 31, 2000 and December 31,
1999, respectively. First quarter 2000 additions to OREO totaling $311 thousand
were comprised of a parcel of commercial land acquired from American
International Bank and two single family residential properties. There were no
sales of OREO properties during the three months ended March 31, 2000.
The following table sets forth information regarding nonaccrual loans,
restructured loans and other real estate owned as of the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31, September 30, June 30, March 31,
2000 1999 1999 1999 1999
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans .................................. $10,426 $10,933 $ 5,843 $ 5,508 $ 3,983
Accruing loans past due 90 days or more ........... -- -- -- -- --
------- ------- ------- ------- -------
Total nonperforming loans .................... 10,426 10,933 5,843 5,508 3,983
------- ------- ------- ------- -------
Restructured loans ................................ 4,113 4,700 6,060 7,249 6,154
Other real estate owned, net ...................... 888 577 2,823 3,034 3,585
------- ------- ------- ------- -------
Total nonperforming assets ................... $15,427 $16,210 $14,726 $15,791 $13,722
======= ======= ======= ======= =======
Total nonperforming assets to total assets ........ 0.66% 0.75% 0.71% 0.75% 0.69%
Allowance for loan losses to nonperforming loans... 230.31 190.65 351.41 363.45 440.87
Nonperforming loans to total gross loans .......... 0.63 0.73 0.42 0.41 0.34
</TABLE>
At March 31, 2000, the Bank had classified $18.9 million of its loans as
impaired, compared with $20.9 million at December 31, 1999. Specific reserves
on impaired loans totaled $1.2 million at March 31, 2000 and $1.3 million at
December 31, 1999. Total chargeoffs associated with impaired loans as of March
31, 2000 amounted to $1.1 million, compared with $1.1 million for impaired loans
as of December 31, 1999. The Bank's average recorded investment in impaired
loans for the three months ended March 31, 2000 and 1999 were $19.5 million and
$11.1 million, respectively. During the three months ended March 31, 2000 and
1999, gross interest income that would have been recorded on impaired loans, had
they performed in accordance with their original terms, totaled $495 thousand
and $263 thousand, respectively. Of this amount, actual interest recognized on
impaired loans, on a cash basis, was $263 thousand and $210 thousand,
respectively.
-21-
<PAGE>
Allowance for Loan Losses
Management of the Bank is committed to maintaining the allowance for loan
losses at a level that is considered to be commensurate with estimated and
known, as well as inherent, risks in the portfolio. Although the adequacy of
the allowance is reviewed quarterly, management performs an ongoing assessment
of the risks inherent in the portfolio. While management believes that the
allowance for loan losses is adequate at March 31, 2000, future additions to the
allowance will be subject to continuing evaluation of estimated and known, as
well as inherent, risks 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. At March 31, 2000, the
allowance for loan losses amounted to $24.0 million, or 1.45% of total loans,
compared with $20.8 million, or 1.38% of total loans, at December 31, 1999, and
$17.6 million, or 1.48% of total loans, at March 31, 1999. The $3.2 million
increase in the allowance for loan losses at March 31, 2000, from year-end 1999,
is primarily due to $2.3 million in allowance for losses acquired from American
International Bank. The remaining $900 thousand increase in the allowance
during the first quarter of 2000 is comprised of $1.4 million in additional loss
provisions less $488 thousand in net chargeoffs recorded during the period.
The provision for loan losses of $1.4 million for the first quarter of 2000
represents a 17% increase from the $1.2 million in loss provisions recorded
during the first quarter of 1999. First quarter 2000 net chargeoffs amounting
to $488 thousand represent 0.03% of average loans outstanding for the three
months ended March 31, 2000. This compares to net chargeoffs of $146 thousand,
or 0.01% of average loans outstanding for the same period in 1999. The Bank
continues to record loss provisions to compensate for both the growth and the
changing composition of the overall loan portfolio, which continues to shift
away from residential mortgage loans to commercial real estate and business
loans.
The following table summarizes activity in the allowance for loan losses
for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Allowance balance, beginning of period ....... $ 20,844 $ 16,506
Allowance from acquisition ................... 2,256 --
Provision for loan losses .................... 1,400 1,200
Charge-offs:
1-4 family residential real estate .......... -- 3
Multifamily real estate ..................... -- --
Commercial and industrial real estate ....... 3 --
Business, commercial ........................ 752 327
</TABLE>
-22-
<PAGE>
<TABLE>
<S> <C> <C>
Automobile .................................. -- --
Other ....................................... -- --
---------- ----------
Total charge-offs ....................... 755 330
---------- ----------
Recoveries:
1-4 family residential real estate ......... 201 --
Multifamily real estate ..................... 7 70
Commercial and industrial real estate ....... -- 70
Business, commercial ........................ 54 30
Automobile .................................. 2 14
Other ....................................... 3 --
---------- ----------
Total recoveries ........................ 267 184
---------- ----------
Net charge-offs ....................... 488 146
---------- ----------
Allowance balance, end of period ............. $ 24,012 $ 17,560
Average loans outstanding .................... $1,613,432 $1,131,692
Total gross loans outstanding, end of
period .................................... $1,659,889 $1,186,905
Net charge-offs to average loans ............. 0.03% 0.01%
Allowance for loan losses to total gross
loans ..................................... 1.45 1.48
</TABLE>
The Bank's total allowance for loan losses is comprised of two components-
allocated and unallocated. The Bank utilizes several methodologies to determine
the allocated portion of the allowance and to test overall adequacy. The two
primary methodologies, the classification migration model and the individual
loan review analysis methodology, provide the basis for determining allocations
between the various loan categories as well as 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 classification migration model utilizes net losses incurred by the Bank
during the preceding five years in conjunction with current internal asset
classifications. The model calculates loss factors for every classification
category (i.e. pass, special mention, substandard and doubtful) for each loan
type, except consumer loans which are analyzed as a homogeneous pool. These
calculated loss factors are applied to outstanding loan balances, unused
commitments and off-balance sheet exposures, such as letters of credit. While
the amount of losses actually observed can vary significantly from estimated
amounts derived from the model, the loss migration model is designed to be self-
correcting by taking into account the Bank's recent loss experience. In
addition, minimum loss rates are also utilized by management as a self-
correcting mechanism to compensate for the lack of historical loss information
on certain loan types and to reduce differences between estimated and actual
observed losses. Specific allowances are established for loans where management
believes that the probability of loss is in excess of the amount determined by
the application of the migration model. These specific allowances for
individual loans are incorporated into the migration model to determine the
overall allowance requirement.
-23-
<PAGE>
The individual loan review analysis method provides a more contemporaneous
assessment of the portfolio by incorporating individual asset evaluations
prepared by both the Bank's credit administration department and an independent
external credit review group. Specific monitoring policies and procedures are
applied in analyzing the existing loan portfolios which vary according to
relative risk profile. Residential single family and consumer loans are
relatively homogeneous and no single loan is individually significant in terms
of size or potential risk of loss. Therefore, residential and consumer
portfolios are analyzed as a pool of loans, and individual loans are criticized
or classified based solely on performance. In contrast, the monitoring process
for multifamily, commercial real estate, construction, and commercial business
loans include a periodic review of individual loans. Loans are reviewed at
least annually and more frequently, if warranted by circumstances. For
instance, loans that are performing but have shown some signs of weakness are
subjected to more stringent reporting and oversight. Real estate loans and
commercial business loans which are subject to individual loan review, and out-
of-cycle individually reviewed loans, are monitored based on problem loan
indicators such as loan payment, delinquencies, loan covenant or reporting
violations, 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 results from the classification migration model and the individual loan
review analysis are then compared to various analyses, including historical
losses, peer group comparisons and the federal regulatory interagency policy for
loan and lease losses, to determine an overall allowance requirement amount.
Factors that are considered in determining the final allowance requirement
amount are scope and volume of completed individual loan reviews during the
period, trends and applicability of historical loss migration analysis compared
to current loan portfolio concentrations, and comparison of allowance levels to
actual historical losses.
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>
- ----------------------------------------------------------------------------------------------------------
March 31, 2000 December 31, 1999 March 31, 1999
- ----------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
------- - ------ - ------ -
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1-4 family residential real estate ..... $ 326 17.9% $ 345 18.4% $ 391 21.2%
Multifamily real estate ................ 2,586 18.4 2,735 20.6 2,686 16.8
Commercial and industrial real estate .. 3,763 36.9 3,110 34.4 2,772 32.1
Construction ........................... 2,517 8.2 2,597 8.1 1,277 7.4
Business, commercial ................... 10,986 16.7 9,244 16.5 7,071 20.8
Automobile ............................. 28 0.3 30 0.4 25 0.4
Consumer and other ..................... 24 1.6 9 1.6 15 1.3
Year 2000 exposure ..................... -- -- 500
Unallocated ............................ 3,782 2,774 2,823
------- ----- ------- ----- ------- -----
Total ................................. $24,012 100.0% $20,844 100.0% $17,560 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
-24-
<PAGE>
Allocated reserves on multifamily loans decreased $149 thousand to $2.6
million as of March 31, 2000 primarily due to the decrease in the volume of
loans in this loan category from year-end 1999 levels. On the other hand,
allocated loss reserves on commercial real estate loans increased $653 thousand
to $3.8 million primarily due to an 18% increase in the volume of loans in this
category since December 31, 1999. Allocated reserves on commercial business
loans increased $1.7 million to $11.0 million as of March 31, 2000 for two
reasons: an 11% increase in loan volume since year-end 1999 and higher levels
of classified assets within this loan category compared to December 31, 1999
classifications.
The allowance for loan losses of $24.0 million at March 31, 2000 exceeded
the Bank's allocated allowance by $3.8 million, or 16% of the total allowance.
This compares to an unallocated allowance of $2.8 million, or 13%, as of
December 31, 1999. The $3.8 million unallocated allowance at March 31, 2000 is
essentially comprised of two elements. First, the Bank has set aside
approximately $2.0 million, or 10% of the allocated allowance amount of $20.2
million at March 31, 2000, to compensate for the estimation risk associated with
the classification migration and individual loan review analysis methodologies.
The second element, which accounts for approximately $1.4 million of the
unallocated allowance, has been established for the foreign transaction risk
associated with credit lines extended to financial institutions in foreign
countries totaling $83.0 million. Loss factors, ranging from 0.50% to 2.50% of
the total credit facility, have been assigned to absorb the loss exposure on
this type of credit offering. These loss factors are internally determined
based on the sovereign risk ratings of the various countries which range from
BBB to AA.
Deposits
Deposits increased $262.9 million, or 18%, to $1.76 billion at March 31,
2000. The increase in deposits reflects $170.8 million in deposits acquired
from American International Bank in January 2000. Excluding this transaction,
internal deposit growth amounted to $92.1 million, or 6%, over December 31,
1999. This internal growth is primarily due to a 6% increase in time deposits of
$56.9 million, resulting from the growth in brokered deposits and various
promotions associated with the Chinese New Year holiday.
Included in time deposits at March 31, 2000 are $121.4 million of brokered
deposits , compared with $82.7 million as of December 31, 1999. The increase of
$38.7 million essentially reflects the continued replacement of Federal Home
Loan Bank advances with brokered deposits as an alternate source of funding. The
transition to brokered deposits as an alternate source of funding enabled the
Bank to release some investment securities which were previously pledged as
collateral against FHLB advances.
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. Excluding the deposits acquired
from American International Bank, the average balance of non-time deposit
accounts, which include non-interest bearing demand accounts, interest-bearing
checking accounts, savings deposits and money market accounts, increased $54.0
million, or 12%, for the first quarter of 2000 compared to the same period in
1999. This increase was comprised primarily of $27.6 million, or 28%, in
noninterest-bearing demand accounts and $24.9 million, or 65%, in money market
accounts. Increases in both types of deposits were almost entirely from
commercial account relationships.
-25-
<PAGE>
Borrowings
The Bank regularly uses short-term borrowings and FHLB advances to manage
its liquidity position. Short-term borrowings, which consist of federal funds
purchased and securities sold under agreements to repurchase increased to $36.0
million at March 31, 2000, compared to $600 thousand at December 31, 1999. The
increase in short-term borrowings during the three months ended March 31, 2000
was primarily due to partial repayments of FHLB advances. FHLB advances
decreased 32% to $328.0 million as of March 31, 2000, a decrease of $154.0
million from December 31, 1999. The decrease in FHLB advances resulted
primarily from the growth in brokered deposits and short-term borrowings as
alternate sources of funding. Cash acquired from American International Bank
and runoffs on short-term investments and investment securities available for
sale also contributed to the decrease in FHLB advances during the quarter.
Capital Resources
The primary source of capital for the Company is the retention of net after
tax earnings. At March 31, 2000, stockholders' equity totaled $156.5 million, a
4% increase from $150.1 million as of December 31, 1999. The increase is due
primarily to: (i) net income of $8.7 million during the first quarter of 2000;
(ii) net issuance of common stock totaling $29 thousand from the exercise of
stock options; and (iii) stock compensation costs amounting to $136 thousand
related to the Company's Restricted Stock Award Program. These transactions were
offset by (i) payment of first quarter 2000 cash dividends totaling $673
thousand; (ii) forfeitures of restricted stock awards totaling $62 thousand; and
(iii) a net increase of $1.7 million in unrealized losses on available-for-sale
securities.
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 March 31, 2000, the Bank's Tier 1 and total capital
ratios were 8.8% and 10.0%, respectively, compared to 9.3% and 10.6%,
respectively, at December 31, 1999.
During the first quarter of 2000, the Company filed a $50 million universal
shelf registration statement with the Securities and Exchange Commission.
Pursuant to this filing, the Company may offer new common stock, trust
preferred, preferred stock and/or other debentures to augment its capital
resources. The timing and amount of offerings will depend on market and general
business conditions. The Company intends to utilize the net proceeds from the
sale of securities for general business purposes, which include supporting the
growth of its commercial banking activities and possible future acquisitions.
Additionally, the Company issued $10.8 million of Junior Subordinated
Deferrable Interest Debentures during the first quarter of 2000. These
securities qualify as Tier 1 capital for regulatory reporting purposes.
-26-
<PAGE>
The following table compares the Company's and the Bank's actual capital
ratios at March 31, 2000, 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) .... 10.1% 10.0 8.0% 10.0%
Tier 1 Capital (to Risk-Weighted Assets) ... 8.8 8.8 4.0 6.0
Tier 1 Capital (to Average Assets) ......... 6.9 6.8 4.0 5.0
</TABLE>
ASSET LIABILITY AND MARKET RISK MANAGEMENT
Liquidity
Liquidity management involves the Bank's ability to meet cash flow
requirements arising from fluctuations in deposit levels and demands of daily
operations, which include funding of securities purchases, providing for
customers' credit needs and ongoing repayment of borrowings. The Bank's
liquidity is actively managed on a daily basis and reviewed periodically by the
Asset/Liability Committee and the Board of Directors. This process is intended
to ensure the maintenance of sufficient funds to meet the needs of the Bank,
including adequate cash flow for off-balance sheet instruments.
The Bank's primary sources of liquidity are derived from financing
activities which include the acceptance of customer and broker 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.
During the three months ended March 31, 2000 and 1999, the Company
experienced net cash inflows of $12.4 million and $14.2 million, respectively,
from operating activities. The increase in net cash inflows from operating
activities for both periods was due primarily to the growth in interest income
on loans and investment securities, and to a lesser degree, from net proceeds
from sales of loans held for sale. Net cash outflows from investing activities
totaled $164.5 million and $25.7 million, respectively, for the three months
ended March 31, 2000 and 1999 primarily due to the growth in the Bank's loan
portfolio. Financing activities provided a net cash inflow of $153.6 million
for the first quarter of 2000, compared with a net cash outflow of $68.7 million
for the same period in 1999. Growth in deposits and short-term borrowings
largely accounted for the increase in net cash inflow from financing activities
during the first quarter of 2000, while partial repayments of FHLB advances and
short-term borrowings can be attributed for the net cash outflow from financing
activities for the first quarter of 1999.
-27-
<PAGE>
As a means of augmenting its liquidity, the Bank has established federal
funds lines with four correspondent banks and several master repurchase
agreements with major brokerage companies. At March 31, 2000, the Bank's
available borrowing capacity includes approximately $6.7 million in repurchase
arrangements, $47.0 million in federal funds line facilities, and $237.6 million
in unused FHLB advances. Management believes its liquidity sources to be stable
and adequate. At March 31, 2000, management was not aware of any information
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.
During the three months ended March 31, 2000, total dividends paid by the Bank
to East West Bancorp, Inc. totaled $881 thousand, compared with $8.1 million for
the same period in 1999. As of March 31, 2000, approximately $38.6 million of
undivided profits of the Bank were available for dividends to the Company.
Interest Rate Sensitivity Management
The Bank's success is largely dependent upon its ability to manage interest
rate risk, which is the impact of adverse fluctuations in interest rates on the
Bank's net interest income and net portfolio value. Although in the normal
course of business the Bank manages other risks, such as credit and liquidity
risk, management considers interest rate risk to be its most significant market
risk and could potentially have the largest material effect on the Bank's
financial condition and results of operations.
The fundamental objective of the asset liability management process is to
manage the Bank's exposure to interest rate fluctuations while maintaining
adequate levels of liquidity and capital. The Bank's strategy is formulated by
the Asset/Liability Committee, which coordinates with the Board of Directors to
monitor the Bank's overall asset and liability composition. The Committee meets
regularly to evaluate, among other things, the sensitivity of the Bank's assets
and liabilities to interest rate changes, the book and market values of assets
and liabilities, unrealized gains and losses on its available-for-sale portfolio
(including those attributable to hedging transactions), purchase and
securitization activity, and maturities of investments and borrowings.
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 March 31, 2000 and December 31, 1999, assuming a
parallel shift of 100 to 200 basis points in both directions:
-28-
<PAGE>
<TABLE>
<CAPTION>
Change in Interest Rates Net Interest Income Net Portfolio Value
(Basis Points) Volatility (1) Volatility (2)
------------------------------ ----------------------------------
March 31, December 31, March 31, December 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
+200 5.1% 2.6% (10.0)% (13.0)%
+100 3.6% 2.1% (3.6)% (5.3)%
-100 (3.7)% (2.7)% 6.6% 8.5%
-200 (7.6)% (5.9)% 6.5% 8.5%
</TABLE>
(1) The percentage change represents net interest income for twelve months in a
stable interest rate environment versus net interest income in the various
rate scenarios.
(2) The percentage change represents net portfolio value of the Bank in a stable
rate environment versus net portfolio value in the various rate scenarios.
All interest-earning assets, interest-bearing liabilities and related
derivative contracts are included in the interest rate sensitivity analysis at
March 31, 2000 and December 31, 1999. At March 31, 2000 and December 31, 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.
The following tables provide the outstanding principal balances and the
weighted average interest rates of the Bank's non-derivative financial
instruments as of March 31, 2000 and December 31, 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.
-29-
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity or Repricing Date by Year
-----------------------------------------------------------------
After Fair value at
2000 2001 2002 2003 2004 2004 Total Mar. 31. 2000
---- ---- ---- ---- ---- ---- ----- -------------
At March 31, 2000: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Investment securities available-
for-sale (fixed rate)......... $ 49,270 $41,221 $35,301 $29,503 $22,718 $111,197 $ 289,210 $ 270,038
Weighted average rate......... 6.12% 6.13% 6.13% 6.13% 6.16% 6.19% 6.15%
Investment securities available-
for-sale (variable rate)...... $ 215,186 $ -- $ -- $ -- $ -- $ -- $ 215,186 $ 210,509
Weighted average rate......... 6.33% --% --% --% --% --% 6.33%
Total gross loans................ $1,409,262 $79,622 $51,148 $29,261 $37,999 $ 52,597 $1,659,889 $1,656,035
Weighted average rate......... 8.76% 8.20% 7.99% 8.14% 8.20% 8.15% 8.67%
Liabilities:
Checking accounts................ $ 113,635 $ -- $ -- $ -- $ -- $ -- $ 113,635 $ 113,635
Weighted average rate......... 1.25% --% --% --% --% --% 1.25%
Money market accounts............ $ 100,842 $ -- $ -- $ -- $ -- $ -- $ 100,842 $ 100,842
Weighted average rate......... 3.54% --% --% --% --% --% 3.54%
Savings deposits................. $ 226,515 $ -- $ -- $ -- $ -- $ -- $ 226,515 $ 226,515
Weighted average rate......... 1.97% --% --% --% --% --% 1.97%
Time deposits.................... $1,061,214 $45,735 $ 1,545 $ 1,452 $ 2,347 $ 29,938 $1,142,231 $1,140,216
Weighted average rate......... 4.99% 5.33% 5.25% 5.64% 5.32% 7.00% 5.06%
Short-term borrowings............ $ 36,000 $ -- $ -- $ -- $ -- $ -- $ 36,000 $ 36,000
Weighted average rate......... 6.03% --% --% --% --% --% 6.03%
FHLB advances.................... $ 314,000 $ -- $ -- $14,000 $ -- $ -- $ 328,000 $ 328,017
Weighted average rate......... 6.01% --% --% 5.94% --% --% 6.01%
Junior subordinated debt
securities................... $ -- $ -- $ -- $ -- $ -- $ 10,750 $ 10,750 $ 11,889
Weighted average rate......... --% --% --% --% --% 10.88% 10.88%
</TABLE>
<TABLE>
<CAPTION>
Expected Maturity or Repricing Date by Year
-----------------------------------------------------------------
After Fair value at
1999 2000 2001 2002 2003 2003 Total Dec. 31. 1999
---- ---- ---- ---- ---- ---- ----- -------------
At December 31, 1999: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Short-term investments............ $ 10,000 $ -- $ -- $ -- $ -- $ -- $ 10,000 $ 10,000
Weighted average rate.......... 4.00% --% --% --% --% --% 4.00%
Investment securities available-
for-sale (fixed rate)............ $ 49,783 $41,527 $35,429 $30,313 $24,322 $110,906 $ 292,280 $ 275,783
Weighted average rate.......... 6.13% 6.14% 6.14% 6.14% 6.15% 6.16% 6.15%
Investment securities available-
for-sale (variable rate)....... $ 225,040 $ -- $ -- $ -- -- $ -- $ 225,040 $ 220,643
Weighted average rate.......... 6.43% --% --% --% --% --% 6.43%
Total gross loans................. $1,299,273 $78,110 $44,223 $32,686 $27,286 $ 26,196 $1,507,774 $1,511,241
Weighted average rate.......... 8.42% 8.10% 8.02% 8.16% 8.21% 7.65% 8.37%
Liabilities:
Checking accounts................. $ 89,545 $ -- $ -- $ -- $ -- $ -- $ 89,545 $ 89,545
Weighted average rate.......... 1.22% --% --% --% --% --% 1.22%
Money market accounts............. $ 69,434 $ -- $ -- $ -- $ -- $ -- $ 69,434 $ 69,434
Weighted average rate.......... 3.38% --% --% --% --% --% 3.38%
Savings deposits.................. $ 211,818 $ -- $ -- $ -- $ -- $ -- $ 211,818 $ 211,818
Weighted average rate.......... 1.85% --% --% --% --% --% 1.85%
Time deposits..................... $ 930,167 $36,894 $ 1,250 $ 667 $ 2,202 $ 30,000 $1,001,180 $1,002,176
Weighted average rate.......... 4.70% 5.03% 5.06% 5.09% 5.50% 7.00% 4.79%
Short-term borrowings............. $ 600 $ -- $ -- $ -- $ -- $ -- $ 600 $ 600
Weighted average rate.......... 5.75% --% --% --% --% --% 5.75%
FHLB advances..................... $ 468,000 $ -- $ -- $14,000 $ -- $ -- $ 482,000 $ 482,507
Weighted average rate.......... 5.86% --% --% 5.94% --% --% 5.87%
</TABLE>
-30-
<PAGE>
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 fair value of junior
-31-
<PAGE>
subordinated debt securities is estimated by discounting the cash flows through
maturity based on current rates offered on the 30-year Treasury bond.
The Asset/Liability Committee is authorized to utilize a wide variety of
off-balance sheet financial techniques to assist in the management of interest
rate risk. Derivative positions are integral components of the Bank's
asset/liability management strategy. Therefore, the Bank does not believe it is
meaningful to separately analyze the derivatives components of its risk
management activities in isolation from their related positions. The Bank uses
derivative instruments, primarily interest rate swap and cap agreements, as part
of its management of asset and liability positions in connection with its
overall goal of minimizing the impact of interest rate fluctuations on the
Bank's net interest margin or its stockholders' equity. These contracts are
entered into for purposes of reducing the Bank's interest rate risk and not for
trading purposes.
The Bank enters into interest rate swap agreements for the purposes of
converting fixed rate loans and deposits to floating rate assets and
liabilities. The total gross notional amount of interest rate swaps was $58.5
million as of March 31, 2000 and December 31, 1999. At March 31, 2000, the net
unrealized loss on the entire swap agreement portfolio was $1.0 million compared
to a net unrealized loss of $1.4 million at December 31, 1999.
The Bank has also entered into interest rate cap agreements which are
primarily linked to the three-month LIBOR. Prior to October 1, 1999, the Bank
used interest rate caps for purposes of hedging against market fluctuations in
the Bank's available-for-sale securities portfolio. Due to the volatility of
the correlation between the Treasury yield curve and fixed rate mortgage-backed
securities, the Bank ceased using interest rate caps to hedge against
fluctuations in the investment securities available for sale portfolio,
effective October 1, 1999. The Bank continues to record interest rate caps at
their estimated fair values, with resulting gains or losses recorded in current
earnings. The unrealized gains and losses reflected in accumulated other
comprehensive income (loss) in stockholders' equity as of September 30, 1999 are
amortized into interest income or expense over the expected remaining lives of
the interest rate cap agreements.
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 March 31, 2000 and December 31, 1999. The fair
values reflected in the table are based on quoted market prices from broker
dealers making a market for these derivatives.
-32-
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity
------------------------------------------------
Average
After Unrealized Expected
2000 2001 2002 2003 2003 Total Gain (Loss) Maturity
---- ---- ---- ---- ---- ----- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At March 31, 2000:
- -----------------
Interest rate swap agreements:
Notional amount................... $ -- $10,000 $18,500 $ -- $30,000 $58,500 $(1,022) 5.9 Years
Weighted average receive rate..... --% 6.18% 6.13% --% 7.00% 6.58%
Weighted average pay rate......... --% 6.46% 6.45% --% 6.00% 6.22%
Interest rate cap agreements:
Notional amount................... $ -- $18,000 $18,000 $ -- $ -- $36,000 $ -- 1.8 Years
LIBOR cap rate.................... --% 6.50% 7.00% --% --% 6.75%
</TABLE>
<TABLE>
<CAPTION>
Expected Maturity
------------------------------------------------
Average
After Unrealized Expected
1999 2000 2001 2002 2002 Total Gain (Loss) Maturity
---- ---- ---- ---- ---- ----- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1999:
- --------------------
Interest rate swap agreements:
Notional amount.................... $ -- $ -- $10,000 $18,500 $30,000 $58,500 $(1,408) 6.1 Years
Weighted average receive rate...... --% --% 5.24% 5.29% 7.00% 6.16%
Weighted average pay rate.......... --% --% 6.46% 6.45% 6.10% 6.27%
Interest rate cap agreements:
Notional amount.................... $ -- $ -- $18,000 $18,000 $ -- $36,000 $ -- 2.1 Years
LIBOR cap rate..................... --% --% 6.50% 7.00% --% 6.75%
</TABLE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISKS
For quantitative and qualitative disclosures regarding market risks in the
Bank's portfolio, see, "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations --Asset Liability and Market Risk
Management."
-33-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Bank nor the Company is involved in any material legal
proceedings. The Bank, from time to time is party to litigation which arises in
the ordinary course of business, such as claims to enforce liens, claims
involving the origination and servicing of loans, and other issues related to
the business of the Bank. In the opinion of management, based upon the advice
of legal counsel, the resolution of any such issues would not have a material
adverse impact on the financial position, results of operations, or liquidity of
the Bank or the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No events have transpired which would make response to this item
appropriate.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No events have transpired which would make response to this item
appropriate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No events have transpired which would make response to this item
appropriate.
ITEM 5. OTHER INFORMATION
No events have transpired which would make response to this item
appropriate.
ITEM 6. ITEM EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Index
Exhibit Number Exhibit Description
-------------- -------------------
27 Financial Data Schedule
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 first quarter of 2000.
-34-
<PAGE>
SIGNATURE
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: May 12, 2000
EAST WEST BANCORP, INC.
(Registrant)
By /s/ Julia Gouw
---------------------------------------
JULIA GOUW
Executive Vice President and
Chief Financial Officer
-35-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANK'S
BALANCE SHEET AS OF MARCH 31, 2000, AND STATEMENT OF EARNINGS FOR THE THREE
MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 44,922
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 480,547
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,635,526
<ALLOWANCE> 24,012
<TOTAL-ASSETS> 2,318,403
<DEPOSITS> 1,763,400
<SHORT-TERM> 36,000
<LIABILITIES-OTHER> 23,754
<LONG-TERM> 338,750
0
0
<COMMON> 24
<OTHER-SE> 156,475
<TOTAL-LIABILITIES-AND-EQUITY> 2,318,403
<INTEREST-LOAN> 35,376
<INTEREST-INVEST> 8,317
<INTEREST-OTHER> 548
<INTEREST-TOTAL> 44,241
<INTEREST-DEPOSIT> 15,109
<INTEREST-EXPENSE> 22,257
<INTEREST-INCOME-NET> 21,984
<LOAN-LOSSES> 1,400
<SECURITIES-GAINS> 260
<EXPENSE-OTHER> 11,734
<INCOME-PRETAX> 13,243
<INCOME-PRE-EXTRAORDINARY> 8,713
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,713
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.38
<YIELD-ACTUAL> 4.01
<LOANS-NON> 10,426
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,113
<LOANS-PROBLEM> 4,935
<ALLOWANCE-OPEN> 20,844
<CHARGE-OFFS> 755
<RECOVERIES> 267
<ALLOWANCE-CLOSE> 24,012
<ALLOWANCE-DOMESTIC> 20,230
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,782
</TABLE>
