<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-24939
------------------------
EAST WEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4703316
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
415 HUNTINGTON DRIVE, SAN MARINO, CALIFORNIA 91108
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (626) 799-5700
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
------------------- ----------
<S> <C>
NONE NONE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
(TITLE OF CLASS)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Number of shares of common stock of the registrant outstanding as of
July 31, 2000: 22,453,188 shares
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I--FINANCIAL INFORMATION............................... 3
Item 1. Interim Consolidated Financial Statements......... 3
Notes to Interim Consolidated Financial
Statements.............................................. 7
Item 2. Management's Discussion and Analysis of
Consolidated Financial Condition and Results of
Operations........................................ 13
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>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 52,348 $ 43,497
Interest bearing deposits in banks.......................... 100 --
Investment securities available for sale, at fair value
(with amortized cost of $515,577 in 2000 and $517,320 in
1999)..................................................... 490,407 496,426
Loans receivable, net of allowance for loan losses of
$24,580 in 2000 and $20,844 in 1999....................... 1,657,149 1,486,641
Investment in Federal Home Loan Bank stock, at cost......... 21,334 26,954
Other real estate owned..................................... 830 577
Investments in affordable housing partnerships.............. 24,030 26,485
Premises and equipment, net................................. 27,074 22,646
Premiums on deposits acquired, net.......................... 8,820 3,812
Excess of purchase price over fair value of net assets
acquired, net............................................. 16,703 6,770
Accrued interest receivable and other assets................ 42,917 30,503
Deferred tax asset.......................................... 16,689 8,319
---------- ----------
TOTAL..................................................... $2,358,401 $2,152,630
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposit accounts................................... $1,813,078 $1,500,529
Short-term borrowings....................................... 38,000 600
Federal Home Loan Bank advances............................. 310,500 482,000
Notes payable............................................... 283 1,532
Accrued expenses and other liabilities...................... 20,178 15,861
Junior subordinated debt securities (Note 5)................ 10,750 --
---------- ----------
Total liabilities......................................... 2,192,789 2,000,522
---------- ----------
FAIR VALUE OF NET ASSETS ACQUIRED IN EXCESS OF PURCHASE
PRICE, NET................................................ 1,820 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--23,945,132 shares and 23,908,731 shares in 2000
and 1999, respectively
Outstanding--22,452,152 shares and 22,422,868 shares in
2000 and 1999, respectively............................. 24 24
Additional paid in capital.................................. 111,646 111,306
Retained earnings........................................... 82,731 67,001
Deferred compensation....................................... (653) (863)
Treasury stock, at cost: 1,492,980 shares and 1,485,863
shares in 2000 and 1999, respectively..................... (14,734) (14,659)
Accumulated other comprehensive loss, net of tax............ (15,222) (12,729)
---------- ----------
Total stockholders' equity................................ 163,792 150,080
---------- ----------
TOTAL................................................... $2,358,401 $2,152,630
========== ==========
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees.......................... $ 37,667 $ 25,759 $ 73,043 $ 49,017
Investment securities available for sale.................. 7,824 9,266 16,141 19,044
Investment securities held for trading.................... -- 14 -- 14
Short-term investments.................................... 45 606 209 1,811
Federal Home Loan Bank stock.............................. 584 373 968 793
-------- -------- -------- --------
Total interest and dividend income...................... 46,120 36,018 90,361 70,679
-------- -------- -------- --------
INTEREST EXPENSE
Customer deposit accounts................................. 17,709 11,827 32,819 23,321
Short-term borrowings..................................... 595 194 770 542
Federal Home Loan Bank advances........................... 5,174 6,660 12,116 13,248
Junior subordinated debt securities....................... 291 -- 321 --
-------- -------- -------- --------
Total interest expense.................................. 23,769 18,681 46,026 37,111
-------- -------- -------- --------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES........ 22,351 17,337 44,335 33,568
PROVISION FOR LOAN LOSSES................................... 1,400 1,486 2,800 2,686
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 20,951 15,851 41,535 30,882
-------- -------- -------- --------
NONINTEREST INCOME
Loan fees................................................. 430 598 958 1,126
Branch fees............................................... 1,260 883 2,476 1,611
Letters of credit fees and commissions.................... 1,080 1,058 2,162 2,040
Net gain on sales of investment securities available for
sale.................................................... -- 304 261 684
Net gain (loss) on trading securities..................... (14) 407 48 425
Net gain on sales of investment in affordable housing
partnerships............................................ -- -- 905 402
Net gain on sale of branch................................ -- 676 -- 676
Amortization of fair value of net assets acquired in
excess of purchase price................................ 104 105 208 208
Other operating income.................................... 609 196 844 387
-------- -------- -------- --------
Total noninterest income................................ 3,469 4,227 7,862 7,559
-------- -------- -------- --------
NONINTEREST EXPENSE
Compensation and employee benefits........................ 5,078 4,463 9,671 9,137
Net occupancy............................................. 1,926 1,337 3,706 2,701
Data processing........................................... 479 358 921 690
Amortization of premiums on deposits acquired and excess
of purchase price over fair value of net assets
acquired................................................ 842 358 1,622 668
Amortization of investment in affordable housing
partnerships............................................ 991 777 1,956 1,187
Deposit insurance premiums and regulatory assessments..... 124 208 220 416
Other real estate owned operations, net................... (37) 23 (7) (261)
Other operating expenses.................................. 2,774 2,056 5,822 3,859
-------- -------- -------- --------
Total noninterest expense............................... 12,177 9,580 23,911 18,397
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 12,243 10,498 25,486 20,044
PROVISION FOR INCOME TAXES.................................. 3,879 3,398 8,409 6,932
-------- -------- -------- --------
NET INCOME.................................................. $ 8,364 $ 7,100 $ 17,077 $ 13,112
======== ======== ======== ========
BASIC EARNINGS PER SHARE (Note 4)........................... $ 0.37 $ 0.31 $ 0.76 $ 0.57
DILUTED EARNINGS PER SHARE (Note 4)......................... $ 0.37 $ 0.31 $ 0.75 $ 0.57
AVERAGE NUMBER OF SHARES OUTSTANDING--BASIC................. 22,363 22,764 22,347 23,159
AVERAGE NUMBER OF SHARES OUTSTANDING--DILUTED............... 22,822 22,764 22,752 23,159
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED DEFERRED TREASURY LOSS, NET OF
STOCK CAPITAL EARNINGS COMPENSATION STOCK 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 paid 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 period... 17,077
Net unrealized loss on
securities................ (2,493)
Comprehensive income..........
Stock compensation costs...... 228
Issuance of 3,727 shares under
Stock Incentive Plan........ 37
Issuance of 1,500 shares under
Restricted Stock Plan....... 18 (18)
Issuance of 31,174 shares
under Employee Stock
Purchase Plan............... 285
Purchase of 7,117 shares of
treasury stock.............. (75)
Dividends paid on common
stock....................... (1,347)
--- -------- ------- ------- -------- --------
BALANCE, JUNE 30, 2000........ $24 $111,646 $82,731 $ (653) $(14,734) $(15,222)
=== ======== ======= ======= ======== ========
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, DECEMBER 31,
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DISCLOSURE OF RECLASSIFICATION AMOUNTS:
Unrealized holding loss arising during period, net of tax benefit of $1,558 in 2000 and $7,620 in 1999....
Less: Reclassification adjustment for gain included in net income, net of tax expense of $104 in 2000 and
$274 in 1999............................................................................................
Net unrealized loss on securities, net of tax benefit of $1,662 in 2000 and $7,894 in 1999................
<CAPTION>
<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 paid on common
stock....................... (2,744)
--------
BALANCE, DECEMBER 31, 1999.... $150,080
Comprehensive income:
Net income for the period... $ 17,077 17,077
Net unrealized loss on
securities................ (2,493) (2,493)
--------
Comprehensive income.......... $ 14,584
========
Stock compensation costs...... 228
Issuance of 3,727 shares under
Stock Incentive Plan........ 37
Issuance of 1,500 shares under
Restricted Stock Plan....... --
Issuance of 31,174 shares
under Employee Stock
Purchase Plan............... 285
Purchase of 7,117 shares of
treasury stock.............. (75)
Dividends paid on common
stock....................... (1,347)
--------
BALANCE, JUNE 30, 2000........ $163,792
========
DISCLOSURE OF RECLASSIFICATION
Unrealized holding loss arisin
$(2,337) $(11,430)
Less: Reclassification adjustm
$274 in 1999................ (156) (411)
-------- --------
Net unrealized loss on securit $(2,493) $(11,841)
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------------
2000 1999
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 17,077 $ 13,112
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 4,263 1,887
Net loan fees deferred.................................. 350 1,246
Stock compensation costs................................ 228 --
Deferred tax benefit.................................... (1,710) (1,525)
Provision for loan losses............................... 2,800 2,686
Provision for other real estate owned losses............ -- 22
Net gain on sales of investment securities and other
assets................................................. (1,249) (2,673)
Gain on trading securities.............................. (48) (425)
Federal Home Loan Bank stock dividends.................. (962) (847)
Proceeds from sale of trading securities................ -- 21,090
Purchases of trading securities......................... -- (20,665)
Proceeds from sale of loans held for sale............... 6,157 37,462
Originations of loans held for sale..................... (6,078) (29,047)
Increase in accrued interest receivable and other
assets, net of effects from purchase of American
International Bank and First Central Bank.............. (7,552) (688)
Increase in accrued expenses and other liabilities, net
of effects from purchase of American International Bank
and First Central Bank................................. 990 904
------------ -----------
Total adjustments..................................... (2,811) 9,427
------------ -----------
Net cash provided by operating activities............. 14,266 22,539
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans....................................... (46,600) (78,166)
Purchases of:
Interest bearing deposits in banks...................... (100) --
Investment securities available for sale................ (94,957) (331,760)
Loans receivable........................................ (126,693) (156,768)
Federal Home Loan Bank stock............................ (1,326) (1,808)
Investment in affordable housing partnerships........... (5,544) (5,647)
Premises and equipment.................................. (6,262) (751)
Proceeds from sale of:
Investment securities available for sale................ 64,639 177,758
Other real estate owned................................. 47 2,295
Investment in affordable housing partnerships........... 6,948 3,267
Premises and equipment.................................. -- 2
Repayments, maturity and redemption of investment
securities available for sale........................... 35,249 248,720
Redemption of Federal Home Loan Bank stock................ 7,908 8,200
Repayments on foreclosed properties....................... 13 100
Payment for purchase of First Central Bank, net of cash
received................................................ (369) (5,413)
Payment for purchase of American International Bank, net
of cash received........................................ (25,218) --
------------ -----------
Net cash used in investing activities................. (192,265) (139,971)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits.................................... 312,550 140,945
Net increase (decrease) in short-term borrowings.......... 37,400 (33,000)
Proceeds from Federal Home Loan Bank advances............. 11,910,400 5,129,900
Repayment of Federal Home Loan Bank advances.............. (12,081,900) (5,194,900)
Proceeds from issuance of junior subordinated debt
securities.............................................. 10,750 --
Repayments of notes payable on affordable housing
investments............................................. (1,250) (1,350)
Proceeds from common stock options exercised.............. 322 --
Repurchases of common stock............................... (75) (12,869)
Dividends paid on common stock............................ (1,347) (1,397)
------------ -----------
Net cash provided by financing activities............. 186,850 27,329
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 8,851 (90,103)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 43,497 161,131
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 52,348 $ 71,028
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................. $ 46,198 $ 37,063
Income tax payments, net.................................. 10,729 10,400
Noncash investing and financing activities:
Other real estate acquired through foreclosure.......... 311 1,130
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.
6
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 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 June 30, 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. Commitments are included
in determining the appropriate level of the allowance for loan losses. As of
June 30, 2000, undisbursed loan commitments, commercial and standby letters of
credit, and commitments to fund mortgage loan applications in process amounted
to $271.7 million, $149.3 million, and $36.9 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.
7
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
4. STOCKHOLDERS' EQUITY
EARNINGS PER SHARE--The actual number of shares outstanding at June 30,
2000, was 22,452,152. 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, warrants and restricted stock.
The following tables set forth the Company's earnings per share calculations
for the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
NET NUMBER PER SHARE NET NUMBER PER SHARE
INCOME OF SHARES AMOUNTS INCOME OF SHARES AMOUNTS
-------- --------- --------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share............... $8,364 22,363 $0.37 $7,100 22,764 $0.31
Effect of dilutive securities:
Stock options........................ -- 338 -- -- -- --
Restricted stock..................... -- 28 -- -- -- --
Stock warrants....................... -- 93 -- -- -- --
------ ------ ----- ------ ------ -----
Dilutive earnings per share............ $8,364 22,822 $0.37 $7,100 22,764 $0.31
====== ====== ===== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
NET NUMBER PER SHARE NET NUMBER PER SHARE
INCOME OF SHARES AMOUNTS INCOME OF SHARES AMOUNTS
-------- --------- --------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share............. $17,077 22,347 $0.76 $13,112 23,159 $0.57
Effect of dilutive securities:
Stock options...................... -- 300 -- -- -- --
Restricted stock................... -- 23 -- -- -- --
Stock warrants..................... -- 82 -- -- -- --
------- ------ ----- ------- ------ -----
Dilutive earnings per share.......... $17,077 22,752 $0.75 $13,112 23,159 $0.57
======= ====== ===== ======= ====== =====
</TABLE>
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. On
April 20, 2000, the Company declared another quarterly common stock cash
dividend of $0.03 per share payable on or about May 17, 2000 to shareholders of
record on May 3, 2000. For the first half of 2000, cash dividends totaling
$1.3 million have been paid to the Company's shareholders.
8
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
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 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. On July 26,
2000, the Company issued another $10.0 million in junior subordinated deferrable
interest debentures. The scheduled maturity date of these securities is
July 19, 2030. These securities bear an interest rate of 10.945% per annum and
interest payments are due on January 19 and July 19 of each year. Interest
payments on these securities are deductible for tax purposes. These securities,
which are not registered with the SEC, 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.
On July 26, 2000, the Bank formed a closed-end, non-diversified regulated
company subsidiary, East West Securities Company, Inc. (the "Fund"), registered
under the Investment Company Act of 1940. The holdings of the Fund will consist
of cash, investments and loans. The formation of the Fund provides the Bank with
the flexibility to raise additional capital in a tax efficient manner for future
business opportunities if deemed necessary. There can be no assurance as to the
timing or ability of the Bank to raise capital through this subsidiary.
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 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
9
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
6. BUSINESS SEGMENTS (CONTINUED)
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 restated for comparability for
changes in management structure and reporting methodologies.
The following tables present the operating results and other key financial
measures for the individual operating segments for the three and six months
ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
----------------------------------------------------------------------
RETAIL COMMERCIAL RESIDENTIAL
BANKING LENDING TREASURY LENDING OTHER TOTAL
-------- ---------- -------- ----------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income................... $ 12,038 $ 15,484 $ 8,425 $ 9,643 $ 530 $ 46,120
Charges for funds used............ (8,163) (11,227) (7,970) (8,222) (106) (35,688)
-------- -------- -------- -------- -------- ----------
Interest spread on funds used... 3,875 4,257 455 1,421 424 10,432
-------- -------- -------- -------- -------- ----------
Interest expense.................. (12,733) (1,379) (9,657) -- -- (23,769)
Credit on funds provided.......... 22,027 2,590 11,071 -- -- 35,688
-------- -------- -------- -------- -------- ----------
Interest spread on funds
provided...................... 9,294 1,211 1,414 -- -- 11,919
-------- -------- -------- -------- -------- ----------
Net interest income........... $ 13,169 $ 5,468 $ 1,869 $ 1,421 $ 424 $ 22,351
======== ======== ======== ======== ======== ==========
Depreciation and amortization..... $ 950 $ 130 $ 76 $ 144 $ 969 $ 2,269
Segment pretax profit............. 6,022 3,565 1,349 1,090 217 12,243
Segment assets as of June 30,
2000............................ 487,764 692,389 516,849 513,733 147,666 2,358,401
</TABLE>
10
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
6. BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------------------
RETAIL COMMERCIAL RESIDENTIAL
BANKING LENDING TREASURY LENDING OTHER TOTAL
-------- ---------- -------- ----------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income....................... $ 6,716 $10,756 $10,135 $ 7,807 $ 604 $ 36,018
Charges for funds used................ (3,886) (6,249) (8,549) (5,299) (37) (24,020)
------- ------- ------- ------- ------- ---------
Interest spread on funds used....... 2,830 4,507 1,586 2,508 567 11,998
------- ------- ------- ------- ------- ---------
Interest expense...................... (9,793) (691) (8,197) -- -- (18,681)
Credit on funds provided.............. 13,714 1,226 9,080 -- -- 24,020
------- ------- ------- ------- ------- ---------
Interest spread on funds provided... 3,921 535 883 -- -- 5,339
------- ------- ------- ------- ------- ---------
Net interest income............... $ 6,751 $ 5,042 $ 2,469 $ 2,508 $ 567 $ 17,337
======= ======= ======= ======= ======= =========
Depreciation and amortization......... $ 615 $ 69 $ 121 $ -- $ 347 $ 1,152
Segment pretax profit................. 1,642 4,171 2,599 1,958 128 10,498
Segment assets as of June 30, 1999.... 351,122 448,701 649,315 564,456 83,689 2,097,283
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
---------------------------------------------------------------------
RETAIL COMMERCIAL RESIDENTIAL
BANKING LENDING TREASURY LENDING OTHER TOTAL
-------- ---------- -------- ----------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income..................... $ 22,568 $ 30,655 $ 17,204 $ 18,594 $ 1,340 $ 90,361
Charges for funds used.............. (15,168) (21,685) (16,447) (15,542) (116) (68,958)
-------- -------- -------- -------- ------- ---------
Interest spread on funds used..... 7,400 8,970 757 3,052 1,224 21,403
-------- -------- -------- -------- ------- ---------
Interest expense.................... (24,139) (2,546) (19,341) -- -- (46,026)
Credit on funds provided............ 41,715 4,926 22,317 -- -- 68,958
-------- -------- -------- -------- ------- ---------
Interest spread on funds
provided........................ 17,576 2,380 2,976 -- -- 22,932
-------- -------- -------- -------- ------- ---------
Net interest income............. $ 24,976 $ 11,350 $ 3,733 $ 3,052 $ 1,224 $ 44,335
======== ======== ======== ======== ======= =========
Depreciation and amortization....... $ 2,034 $ 188 $ 235 $ 362 $ 1,444 $ 4,263
Segment pretax profit............... 11,505 7,832 3,148 2,447 554 25,486
Segment assets as of June 30,
2000.............................. 487,764 692,389 516,849 513,733 147,666 2,358,401
</TABLE>
11
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
6. BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
----------------------------------------------------------------------
RETAIL COMMERCIAL RESIDENTIAL
BANKING LENDING TREASURY LENDING OTHER TOTAL
-------- ---------- -------- ----------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income.................... $ 12,050 $ 19,917 $ 21,496 $ 15,787 $ 1,429 $ 70,679
Charges for funds used............. (7,013) (11,520) (18,274) (10,623) (128) (47,558)
-------- -------- -------- -------- ------- ----------
Interest spread on funds used.... 5,037 8,397 3,222 5,164 1,301 23,121
-------- -------- -------- -------- ------- ----------
Interest expense................... (19,364) (1,363) (16,384) -- -- (37,111)
Credit on funds provided........... 27,037 2,335 18,186 -- -- 47,558
-------- -------- -------- -------- ------- ----------
Interest spread on funds
provided....................... 7,673 972 1,802 -- -- 10,447
-------- -------- -------- -------- ------- ----------
Net interest income............ $ 12,710 $ 9,369 $ 5,024 $ 5,164 $ 1,301 $ 33,568
======== ======== ======== ======== ======= ==========
Depreciation and amortization...... $ 1,180 $ 130 $ 395 $ -- $ 182 $ 1,887
Segment pretax profit.............. 2,582 8,275 5,169 3,975 43 20,044
Segment assets as of June 30,
1999............................. 351,122 448,701 649,315 564,456 83,689 2,097,283
</TABLE>
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivative as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
Gains or losses resulting from changes in the values of those derivatives would
be accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. Implementation of SFAS No. 133 has been postponed to fiscal
periods beginning after June 15, 2000, and will be effective for the Company on
January 1, 2001. Early implementation is permitted under this statement.
Management of the Company has not yet determined whether the adoption of this
standard will have a material impact on the Company's results of operations or
financial position when adopted.
On December 3, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, which summarizes the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. Under the
provisions of SAB No. 101, if a transaction is within the scope of existing
specific authoritative literature that provides revenue recognition guidance,
such literature should be applied. SAB No. 101 is intended to provide additional
or more consistent guidance only in the absence of authoritative literature
addressing a specific arrangement or a specific industry as it relates to
revenue recognition. It is the view of the SEC that revenue is generally
realized or realizable and earned when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists, (2) delivery has occurred or
services have been rendered, (3) the seller's price to the buyer is fixed or
determinable, and (4) collectibility is reasonably assured. Management does not
believe that the bulletin has a material impact on the Company's results of
operations or financial position.
12
<PAGE>
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.
RESULTS OF OPERATIONS
The Company reported second quarter 2000 net income of $8.4 million, or
$0.37 per basic and diluted share, compared with $7.1 million, or $0.31 per
basic and diluted share, reported during the second quarter of 1999. The 18%
increase in second quarter net earnings is primarily attributable to continued
growth in the loan portfolio and a higher net interest margin, offset by lower
noninterest-related revenues and higher operating expenses. The Company's
annualized return on average total assets increased to 1.43% for the quarter
ended June 30, 2000, from 1.38% for the same period in 1999. The annualized
return on average stockholders' equity increased to 21.18% for the second
quarter of 2000, compared with 19.26% for the second quarter of 1999.
Net income for the six months ended June 30, 2000 increased to
$17.1 million, or $0.76 per basic share and $0.75 per diluted share, from
$13.1 million, or $0.57 per basic and diluted share, for the first six months of
1999. The annualized return on average total assets increased to 1.47% for the
first half of 2000, compared with 1.29% for the first half of 1999. The
annualized return on average stockholders' equity increased to 22.11% for the
first half of 2000, compared with 17.61% for the same period in 1999.
13
<PAGE>
COMPONENTS OF NET INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Net interest income..................... $ 22.4 $ 17.3 $ 44.3 $ 33.6
Provision for loan losses............... (1.4) (1.5) (2.8) (2.7)
Noninterest income...................... 3.5 4.2 7.9 7.5
Noninterest expense..................... (12.2) (9.6) (23.9) (18.4)
Provision for income taxes.............. (3.9) (3.3) (8.4) (6.9)
------ ------ ------ ------
Net income............................ $ 8.4 $ 7.1 $ 17.1 $ 13.1
====== ====== ====== ======
Return on average total assets.......... 1.43% 1.38% 1.47% 1.29%
====== ====== ====== ======
</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 second quarter of 2000
totaled $22.4 million, a 29% increase over net interest income of $17.3 million
for the same period in 1999.
Total interest and dividend income during the quarter ended June 30, 2000
increased 28% to $46.1 million compared with $36.0 million during the same
period in 1999. Similarly, year-to-date interest and dividend income increased
28% to $90.4 million, from $70.7 million during the first half of 1999. The
increase in interest and dividend income during both the second quarter and the
first six months of 2000 is derived primarily from a 13% growth in average
earning assets and higher yields on all categories of earning assets. Growth in
the Bank's average loan portfolio, partially offset by decreases in all other
categories of earning assets, triggered the increase 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.
Total interest expense during the second quarter of 2000 increased 27% to
$23.8 million compared with $18.7 million for the same period a year ago. For
the first half of 2000, total interest expense increased 24% to $46.0 million,
from $37.1 million for the first half of 1999. The increase in second quarter
and year-to-date 2000 interest expense is primarily attributable to higher rates
paid on interest-bearing liabilities and growth in average money market accounts
and time deposits, partially offset by a decrease in average FHLB advances.
Net interest margin, defined as taxable equivalent net interest income
divided by average earning assets, increased 51 basis points to 4.03% for the
second quarter of 2000, compared with 3.52% for the second quarter of 1999. For
the first six months of 2000, the Company's net interest margin increased 59
basis points to 4.02%, from 3.43% for the same period a year ago. The increase
in net interest margin for both periods is due to higher overall yields on
earning assets primarily resulting from average loan growth of 35% during the
second quarter of 2000 and 38% for the first half of 2000, most notably in the
multifamily residential, commercial real estate, construction and commercial
business segments of the portfolio. Additionally, marked increases in the
average prime rate of 150 basis points and 121 basis points during the second
quarter and first six months of 2000, respectively, also contributed to higher
yields on earning assets.
The Company's overall cost of funds increased 61 basis points and 46 basis
points, respectively, to 4.81% for the second quarter of 2000 and 4.66% for the
first six months of 2000. The increase in the Company's overall cost of funds is
primarily due to higher rates paid on new time deposits and on all other
14
<PAGE>
categories of interest-bearing liabilities resulting from the increase in
overall interest rates. Growth in the average volume of time deposits and money
markets accounts, partially offset by a decrease in average FHLB advances,
further contributed to the increase in the Company's cost of funds.
The following table presents the net interest spread, net interest margin,
average balances, interest income and expense, and the average yields and rates
by asset and liability component for the three months ended June 30, 2000 and
1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
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........... $ 1,968 $ 45 8.94% $ 39,665 $ 607 6.12%
Taxable investment securities
(2)(3)......................... 500,491 7,824 6.25 643,255 9,280 5.77
Loans receivable (2)(4).......... 1,695,101 37,667 8.89 1,259,692 25,758 8.18
FHLB stock....................... 23,473 584 9.95 28,912 373 5.16
---------- ------- ---------- -------
Total interest-earning
assets....................... 2,221,033 46,120 8.31 1,971,524 36,018 7.31
------- ----- ------- ----
Noninterest-earning assets:
Cash and due from banks.......... 48,693 29,766
Allowance for loan losses........ (24,345) (18,461)
Other assets..................... 95,943 79,388
---------- ----------
Total assets................... $2,341,324 $2,062,217
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Checking accounts................ $ 109,379 $ 330 1.21 $ 84,034 $ 245 1.17
Money market accounts............ 110,838 1,109 4.00 46,023 351 3.05
Savings deposits................. 218,299 912 1.67 220,772 1,059 1.92
Time deposits.................... 1,163,452 15,358 5.28 886,165 10,172 4.59
Short-term borrowings............ 37,071 595 6.42 15,035 194 5.16
FHLB advances.................... 329,314 5,174 6.28 528,530 6,660 5.04
Junior subordinated debt
securities..................... 10,750 291 10.88 -- -- --
---------- ------- ---------- -------
Total interest-bearing
liabilities.................. 1,979,103 23,769 4.81 1,780,559 18,681 4.20
------- ----- ------- ----
Noninterest-bearing liabilities:
Demand deposits.................. 179,128 110,453
Other liabilities................ 25,123 23,784
Stockholders' equity............. 157,970 147,421
---------- ----------
Total liabilities and
stockholders' equity........... $2,341,324 $2,062,217
========== ==========
Interest rate spread............... 3.50% 3.11%
===== ====
Net interest income and net
interest margin................... $22,351 4.03% $17,337 3.52%
======= ===== ======= ====
</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.
15
<PAGE>
The following table presents the net interest spread, net interest margin,
average balances, interest income and expense, and the average yields and rates
by asset and liability component for the six months ended June 30, 2000 and
1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
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........... $ 5,413 $ 209 7.65% $ 62,551 $ 1,811 5.79%
Taxable investment securities
(2)(3)......................... 521,893 16,141 6.19 665,911 19,058 5.72
Loans receivable (2)(4).......... 1,654,270 73,043 8.83 1,196,045 49,017 8.20
FHLB stock....................... 25,739 968 7.52 31,033 793 5.11
---------- ------- ---------- -------
Total interest-earning
assets....................... 2,207,315 90,361 8.19 1,955,540 70,679 7.23
------- ----- ------- -----
Noninterest-earning assets:
Cash and due from banks.......... 49,836 29,039
Allowance for loan losses........ (23,695) (17,642)
Other assets..................... 96,932 73,076
---------- ----------
Total assets................... $2,330,388 $2,040,013
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Checking accounts................ $ 106,690 $ 658 1.23 $ 81,883 $ 470 1.15
Money market accounts............ 101,508 1,734 3.42 42,057 625 2.97
Savings deposits................. 219,326 2,082 1.90 221,056 2,079 1.88
Time deposits.................... 1,115,265 28,345 5.08 872,077 20,147 4.62
Short-term borrowings............ 24,037 770 6.41 20,842 542 5.20
FHLB advances.................... 402,583 12,116 6.02 529,373 13,248 5.01
Junior subordinated debt
securities..................... 5,917 321 10.88 -- -- --
---------- ------- ---------- -------
Total interest-bearing
liabilities.................. 1,975,326 46,026 4.66 1,767,288 37,111 4.20
------- ----- ------- -----
Noninterest-bearing liabilities:
Demand deposits.................. 177,872 104,676
Other liabilities................ 22,688 19,111
Stockholders' equity............... 154,502 148,938
---------- ----------
Total liabilities and
stockholders' equity........... $2,330,388 $2,040,013
========== ==========
Interest rate spread............... 3.53% 3.03%
===== =====
Net interest income and net
interest margin................... $44,335 4.02% $33,568 3.43%
======= ===== ======= =====
</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.
16
<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 SIX MONTHS ENDED
JUNE 30, 2000 VS 1999 JUNE 30, 2000 VS 1999
--------------------------------- ---------------------------------
CHANGES DUE TO CHANGES DUE TO
TOTAL ---------------------- TOTAL ----------------------
CHANGE VOLUME (1) RATES (1) CHANGE VOLUME (1) RATES (1)
-------- ---------- --------- -------- ---------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Short-term investments.............. $ (563) $(1,093) $ 530 $(1,604) $ (2,472) $ 868
Taxable investment securities....... (1,454) (2,336) 882 (2,914) (4,653) 1,739
Loans receivable, net............... 11,908 9,520 2,388 24,025 19,988 4,037
FHLB stock.......................... 211 (54) 265 175 (99) 274
------- ------- ------ ------- -------- -------
Total interest and dividend
income.......................... $10,102 $ 6,037 $4,065 $19,682 $ 12,764 $ 6,918
------- ------- ------ ------- -------- -------
INTEREST-BEARING LIABILITIES
Checking accounts................... $ 85 $ 76 $ 9 $ 188 $ 151 $ 37
Money market accounts............... 758 621 137 1,109 1,003 106
Savings deposits.................... (147) (12) (135) 3 (15) 18
Time deposits....................... 5,185 3,505 1,680 8,197 6,032 2,165
Short-term borrowings............... 401 344 57 228 91 137
FHLB advances....................... (1,486) (4,306) 2,820 (1,132) (7,342) 6,210
Junior subordinated debt
securities........................ 292 292 -- 322 322 --
------- ------- ------ ------- -------- -------
Total interest expense............ $ 5,088 $ 520 $4,568 $ 8,915 $ 242 $ 8,673
======= ======= ====== ======= ======== =======
CHANGE IN NET INTEREST INCOME....... $ 5,014 $ 5,517 $ (503) $10,767 $ 12,522 $(1,755)
======= ======= ====== ======= ======== =======
</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 second
quarter of 2000 compared to $1.5 million for the same period in 1999. For the
first six months of 2000, the provision for loan losses totaled $2.8 million,
compared to $2.7 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.
17
<PAGE>
NONINTEREST INCOME
COMPONENTS OF NONINTEREST INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Loan ancillary fees.................................... $ 0.43 $ 0.60 $ 0.96 $ 1.13
Branch fees............................................ 1.26 0.88 2.48 1.61
Letters of credit fees and commissions................. 1.08 1.06 2.16 2.04
Net gain on sales of securities available for sale..... -- 0.30 0.26 0.68
Net gain on trading securities......................... (0.01) 0.41 0.05 0.43
Net gain on sale of affordable housing investments..... -- -- 0.90 0.40
Net gain on sale of branch............................. -- 0.68 -- 0.68
Amortization of negative intangibles................... 0.10 0.10 0.21 0.21
Other.................................................. 0.61 0.20 0.84 0.38
------ ------ ------ ------
Total................................................ $ 3.47 $ 4.23 $ 7.86 $ 7.56
====== ====== ====== ======
</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 decreased 18% to $3.5 million during the three months
ended June 30, 2000, compared to $4.2 million for the same period in 1999
primarily due to lower gain on sales of selected assets. Included in noninterest
income for the second quarter of 1999, are a one-time gain on sale of the
Company's Irvine branch amounting to $676 thousand, gain on sales of securities
available for sale amounting to $305 thousand and gain on trading securities of
$407 thousand. There were no such noninterest-related revenues during the second
quarter of 2000. Noninterest income for the first half of 2000 increased 4% to
$7.9 million, from $7.6 million for the first half of 1999, primarily due to
higher branch fees and gain on sale of affordable housing investments, partially
offset by lower gains from trading securities and the sale of investment
securities available for sale.
Ancillary fees on loans include fees and service charges related to
appraisal services, loan documentation, processing and underwriting, and
secondary market-related activities. Ancillary loan fees decreased 28% to $430
thousand for the second quarter of 2000, compared to $598 thousand for the same
period in 1999. For the first half of 2000, ancillary loan fee income decreased
15% to $958 thousand, from $1.1 million for the first half of 1999. The decrease
in ancillary loan fees is primarily due to the Company's deliberate efforts to
reduce its secondary marketing activities.
Branch fees, which represent revenues derived from branch operations,
amounted to $1.3 million for the second quarter of 2000, a 43% increase from the
$883 thousand earned during the same period in 1999. For the six months ended
June 30, 2000, branch fees increased 54% to $2.5 million, compared with
$1.6 million for 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. Further,
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 2% to $1.1 million for the
second quarter of 2000. For the six months ended June 30, 2000, letters of
credit fees and commissions increased 6% to $2.2 million, compared with
$2.0 million for the same period in 1999. This increase is attributed primarily
to continued growth in trade finance activities, partially offset by a decrease
in issuance and maintenance fees related to standby letters of credit.
18
<PAGE>
NONINTEREST EXPENSE
COMPONENTS OF NONINTEREST EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Compensation and other employee benefits.............. $ 5.08 $4.46 $ 9.67 $ 9.14
Net occupancy......................................... 1.93 1.34 3.71 2.70
Amortization of affordable housing investments........ 0.99 0.78 1.96 1.19
Amortization of positive intangibles.................. 0.84 0.36 1.62 0.67
Data processing....................................... 0.48 0.36 0.92 0.69
Deposit insurance premiums and regulatory
assessments......................................... 0.12 0.21 0.22 0.42
Other real estate owned operations, net............... (0.03) 0.02 (0.01) (0.26)
Other................................................. 2.77 2.05 5.82 3.85
------ ----- ------ ------
Total............................................... $12.18 $9.58 $23.91 $18.40
====== ===== ====== ======
Efficiency Ratio (1)................................ 40% 39% 39% 40%
====== ===== ====== ======
</TABLE>
------------------------
(1) Excludes the amortization of intangibles and investments in affordable
housing partnerships.
Noninterest expense, which is comprised primarily of compensation and
employee benefits, occupancy and other operating expenses increased 27% to
$12.2 million during the second quarter of 2000, from $9.6 million for the same
period in 1999. Noninterest expense for the six months ended June 30, 2000
increased 30% to $23.9 million, from $18.4 million for the first half of 1999.
The increase in noninterest expense is primarily due to higher expenses related
to compensation and other employee benefits, occupancy, and amortization of
intangibles.
Compensation and employee benefits increased 14% to $5.1 million during the
second quarter of 2000, compared to $4.5 million for the same period last year.
For the first half of 2000, compensation and employee benefits increased 6% to
$9.7 million, compared to $9.1 million for the same period in 1999. The rise in
compensation and employee benefits is primarily related to the acquisition of
American International Bank and also to the addition of several new loan
officers with specialized lending experience.
Occupancy expenses increased 44% to $1.9 million during the second quarter
of 2000, compared to $1.3 million for the same period in 1999. For the first
six months of 2000, occupancy expenses increased 37% to $3.7 million, from
$2.7 million for the same period in 1999. The increase in occupancy expenses
reflects the operations for the eight branch offices of American International
Bank, an overhead factor which was not present during 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
28% to $991 thousand during the 2000 second quarter, compared with $777 thousand
for the same period in 1999. For the six months ended June 30, 2000, the
amortization of investments in affordable housing partnerships increased 65% to
$2.0 million, from $1.2 million for the first half of 1999. The increase in
amortization reflects the impact of $10.6 million in additional affordable
housing investment purchases made since the second quarter of 1999, partially
offset by sales totaling $6.7 million.
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 135% to $842 thousand during the second quarter of 2000,
compared to $358 thousand for the second quarter of 1999. For the six months
ended June 30, 2000, the amortization of positive intangibles increased 143% to
$1.6 million, from $668 thousand for the same period a year ago. The increase in
the amortization of positive intangibles is due to
19
<PAGE>
the acquisitions of First Central Bank and American International Bank. 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.
Data processing expenses increased 34% to $479 thousand for the second
quarter of 2000, compared to $358 thousand for the second quarter of 1999. For
the six months ended June 30, 2000, data processing expenses increased 33% to
$921 thousand, from $690 thousand for the same period in 1999. The increase in
data processing expenses for both periods is primarily related to the
acquisition of American International Bank.
Deposit insurance premiums and regulatory assessments decreased 40% to $124
thousand for the quarter ended June 30, 2000, compared with $208 thousand for
the same period in 1999. For the first half of 2000, deposit insurance premiums
decreased 47% to $220 thousand, from $416 thousand for the first half of 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 and 2.08 basis
points for the first and second quarters of 2000, respectively, compared with
6.10 basis points and 5.88 basis points for the first and second quarters of
1999, respectively.
Net income related to OREO operations, which include net rental income
collected from OREO properties and net gains or losses on subsequent sales,
totaled $37 thousand for the second quarter of 2000, compared with net expenses
of $23 thousand for the prior year period. For the six months ended June 30,
2000, net income related to OREO operations decreased 97% to $7 thousand, from
$261 thousand for the same period in 1999.
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
35% to $2.8 million during the quarter ended June 30, 2000, compared with
$2.1 million for the same period in 1999. For the first six months of 2000,
other operating expenses increased 51% to $5.8 million, from $3.9 million for
the first half of 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 increased marginally to 40% for the quarter ended
June 30, 2000, compared to 39% for the corresponding quarter in 1999. For the
first six months of 2000, the Company's efficiency ratio improved to 39%,
compared to 40% for the same period a year ago.
PROVISION FOR INCOME TAXES
The provision for income taxes increased 14% to $3.9 million for the second
quarter of 2000, compared with $3.4 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 second
quarter of 2000 totaled $1.0 million, compared to $945 thousand for the second
quarter of 1999. The second quarter 2000 provision reflects an effective tax
rate of 31.7%, compared with 32.4% for the second quarter of 1999.
For the six months ended June 30, 2000, the provision for income taxes
totaled $8.4 million, a 21% increase from the $6.9 million income tax expense
recorded for the same period a year ago. The effective tax rate of 33.0% for the
first half of 2000 reflects tax credits of $2.0 million, compared with an
effective tax rate of 34.6% for the first half of 1999 reflecting tax credits of
$1.5 million.
20
<PAGE>
BALANCE SHEET ANALYSIS
The Company's total assets increased $205.8 million, or 10%, to
$2.36 billion as of June 30, 2000, primarily due to loan growth. The increase in
total assets was funded by increases of $312.5 million in deposits, $37.4
million in short-term borrowings and $10.8 million in junior subordinated debt
securities, partially offset by decreases in FHLB advances of $171.5 million.
INVESTMENT SECURITIES AVAILABLE FOR SALE
Total investment securities available for sale decreased 1% to
$490.4 million as of June 30, 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 $35.2 million and $64.6 million, respectively, during the
six months ended June 30, 2000. Proceeds from repayments and sales were applied
towards additional investment securities purchases, repayment of FHLB advances,
and funding a portion of the loan originations made during the first half of the
2000. The Bank recorded net gains totaling $261 thousand on sales of available
for sale securities during the six months ended June 30, 2000.
The following table sets forth the amortized cost and the estimated fair
values of investment securities available for sale as of June 30, 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 JUNE 30, 2000
U.S. Treasury securities............................ $ 8,015 $-- $ -- $ 8,015
U.S. Government agency securities................... 75,620 -- (9,643) 65,977
Obligations of states and political subdivisions.... 200 1 -- 201
Mortgage-backed securities.......................... 407,212 60 (15,233) 392,039
Trust preferred securities.......................... 24,530 -- (355) 24,175
-------- --- -------- --------
Total investment securities available for sale.... $515,577 $61 $(25,231) $490,407
======== === ======== ========
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 $170.5 million, or 12% to $1.7 billion at
June 30, 2000. Excluding the $105.2 million of net loans acquired from American
International Bank, loan growth during the first six months of 2000 amounted to
$66.9 million, or 4%, 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.
The growth in loans, excluding loans acquired from American International
Bank, is comprised primarily of increases in single family loans of
$33.7 million or 12%, construction loans of $13.0 million or 11%, commercial
business loans, including trade finance products, of $29.5 million or 12%, and
consumer loans, including home equity lines of credit, of $9.4 million or 39%.
Partially offsetting the growth in these loan categories was a reduction in
multifamily loans of $9.5 million or 3% and commercial real estate loans
21
<PAGE>
of $9.7 million or 2%, primarily as a result of the Company's increased loan
participation activity during 2000.
The following table sets forth the composition of the loan portfolio as of
the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999 JUNE 30, 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... $ 312,114 18.6% $ 278,161 18.4% $ 259,772 19.3%
Residential, multifamily......... 301,707 17.9 311,193 20.6 258,902 19.3
Commercial and industrial real
estate......................... 588,701 35.0 518,074 34.4 469,218 34.9
Construction..................... 142,697 8.5 122,363 8.1 96,089 7.1
---------- ----- ---------- ----- ---------- -----
Total real estate loans........ 1,345,219 80.0 1,229,791 81.5 1,083,981 80.6
---------- ----- ---------- ----- ---------- -----
Other loans:
Business, commercial............. 297,426 17.7 248,865 16.5 235,956 17.5
Automobile....................... 5,850 0.3 5,284 0.4 4,981 0.4
Other consumer................... 33,624 2.0 23,834 1.6 20,107 1.5
---------- ----- ---------- ----- ---------- -----
Total other loans.............. 336,900 20.0 277,983 18.5 261,044 19.4
---------- ----- ---------- ----- ---------- -----
Total gross loans.......... 1,682,119 100.0% 1,507,774 100.0% 1,345,025 100.0%
---------- ===== ---------- ===== ---------- =====
Unearned fees, premiums and
discounts, net................... (390) (289) (502)
Allowance for loan losses.......... (24,580) (20,844) (20,019)
---------- ---------- ----------
Loans receivable, net.......... $1,657,149 $1,486,641 $1,324,504
========== ========== ==========
</TABLE>
NONPERFORMING ASSETS
Nonaccrual loans, which include loans 90 days or more past due, totaled
$7.7 million at June 30, 2000, compared with $10.9 million at year-end 1999.
Nonaccrual loans as a percentage of total loans outstanding were 0.46% and 0.73%
at June 30, 2000 and December 31,1999, respectively. Loans totaling
$2.7 million were placed on nonaccrual status during the second quarter of 2000.
These additions to nonaccrual loans were offset by $2.5 million in payoffs,
$1.3 million in chargeoffs, and $1.6 million in loans brought current. Additions
to nonaccrual loans during the second quarter of 2000 were comprised of
$1.2 million in residential single family loans, $264 thousand in commercial
business loans, and $1.2 million in trade finance loans. For the six months
ended June 30, 2000, nonaccrual loans decreased by $5.6 million due to payoffs
totaling $2.9 million, gross chargeoffs totaling $2.0 million, loans brought
current totaling $650 thousand, and one loan transferred to other real estate
owned totaling $52 thousand. These were offset by $2.4 million of loans placed
on nonaccrual status during the six months ended June 30, 2000.
Restructured loans or loans that have had their original terms modified
totaled $4.1 million at June 30, 2000, compared with $4.7 million at year-end
1999. The decrease in restructured loans is primarily due to payments received
during the first six months 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 $830 thousand and $577 thousand at June 30, 2000 and December 31,
1999, respectively. During the first six months of 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.
One property with a carrying value of $44
22
<PAGE>
thousand was sold during the six months ended June 30, 2000. The net gain
recognized on this sale was $3 thousand.
The following table sets forth information regarding nonaccrual loans,
restructured loans and other real estate owned as of the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
2000 2000 1999 1999 1999
--------- ---------- ------------- -------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans........................ $ 7,664 $10,426 $10,933 $ 5,843 $ 5,508
Accruing loans past due 90 days or
more.................................. -- -- -- -- --
------- ------- ------- ------- -------
Total nonperforming loans............. 7,664 10,426 10,933 5,843 5,508
------- ------- ------- ------- -------
Restructured loans...................... 4,142 4,113 4,700 6,060 7,249
Other real estate owned, net............ 830 888 577 2,823 3,034
------- ------- ------- ------- -------
Total nonperforming assets............ $12,636 $15,427 $16,210 $14,726 $15,791
======= ======= ======= ======= =======
Total nonperforming assets to total
assets................................ 0.54% 0.66% 0.75% 0.71% 0.75%
Allowance for loan losses to
nonperforming loans................... 320.72 230.31 190.65 351.41 363.45
Nonperforming loans to total gross
loans................................. 0.46 0.63 0.73 0.42 0.41
</TABLE>
At June 30, 2000, the Bank had classified $17.6 million of its loans as
impaired, compared with $20.9 million at December 31, 1999. Specific reserves on
impaired loans totaled $1.4 million at June 30, 2000 and $1.3 million at
December 31, 1999. Total chargeoffs on impaired loans totaled $3 thousand and
$184 thousand for the six months ended June 30, 2000 and 1999, respectively. The
Bank's average recorded investment in impaired loans for the six months ended
June 30, 2000 and 1999 were $17.8 million and $13.2 million, respectively.
During the six months ended June 30, 2000 and 1999, gross interest income that
would have been recorded on impaired loans, had they performed in accordance
with their original terms, totaled $957 thousand and $630 thousand,
respectively. Of this amount, actual interest recognized on impaired loans, on a
cash basis, was $759 thousand and $468 thousand, respectively.
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 June 30, 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 June 30, 2000, the allowance
for loan losses amounted to $24.6 million, or 1.46% of total loans, compared
with $20.8 million, or 1.38% of total loans, at December 31, 1999, and
$20.0 million, or 1.49% of total loans, at June 30, 1999. The $3.7 million
increase in the allowance for loan losses at June 30, 2000, from year-end 1999,
is primarily due to $2.3 million in allowance for losses acquired from American
International Bank. The remaining $1.5 million increase in the allowance during
the first six months of 2000 is comprised of $2.8 million in additional loss
provisions less $1.3 million in net chargeoffs recorded during the period.
23
<PAGE>
The provision for loan losses of $1.4 million for the second quarter of 2000
represents a 6% decrease from the $1.5 million in loss provisions recorded
during the second quarter of 1999. Second quarter 2000 net chargeoffs totaling
$832 thousand represent 0.05% of average loans outstanding for the three months
ended June 30, 2000. This compares to net chargeoffs of $177 thousand, or 0.01%
of average loans outstanding for the same period in 1999. For the six months
ended June 30, 2000, the provision for loan losses totaled $2.8 million, a 4%
increase over the $2.7 million provision recorded during the same period in
1999. Net chargeoffs for the first half of 2000 totaling $1.3 million represent
0.08% of average loans outstanding for the six months ended June 30, 2000. This
compares to net chargeoffs of $323 thousand for the first half of 1999, or 0.03%
of average loans outstanding. The Bank continues to record loss provisions to
compensate for both the growth and the changing composition of the overall loan
portfolio, reflecting a shift towards commercial real estate, construction and
commercial business loans.
The following table summarizes activity in the allowance for loan losses for
the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance balance, beginning of period........ $ 24,012 $ 17,560 $ 20,844 $ 16,506
Allowance from acquisition.................... -- 1,150 2,256 1,150
Provision for loan losses..................... 1,400 1,486 2,800 2,686
Charge-offs:
1-4 family residential real estate.......... -- 18 -- 21
Multifamily real estate..................... -- 39 -- 39
Commercial and industrial real estate....... -- -- 3 --
Business, commercial........................ 1,277 274 2,029 601
Automobile.................................. 7 -- 7 --
Other....................................... -- 1 -- 1
---------- ---------- ---------- ----------
Total charge-offs......................... 1,284 332 2,039 662
---------- ---------- ---------- ----------
Recoveries:
1-4 family residential real estate.......... 27 -- 227 --
Multifamily real estate..................... -- -- 9 70
Commercial and industrial real estate....... 7 (43) 7 27
Business, commercial........................ 388 198 442 228
Automobile.................................. 30 -- 33 14
Other....................................... -- -- 1 --
---------- ---------- ---------- ----------
Total recoveries.......................... 452 155 719 339
---------- ---------- ---------- ----------
Net charge-offs......................... 832 177 1,320 323
---------- ---------- ---------- ----------
Allowance balance, end of period.............. $ 24,580 $ 20,019 $ 24,580 $ 20,019
Average loans outstanding..................... $1,695,101 $1,259,692 $1,654,270 $1,196,045
Total gross loans outstanding, end of
period...................................... $1,682,119 $1,345,025 $1,682,119 $1,345,025
Net charge-offs to average loans.............. 0.05% 0.01% 0.08% 0.03%
Allowance for loan losses to total gross
loans....................................... 1.46 1.49 1.46 1.49
</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
24
<PAGE>
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.
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.
25
<PAGE>
The following table reflects management's allocation of the allowance for
loan losses by loan category and the ratio of each loan category to total loans
as of the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999 JUNE 30, 1999
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1-4 family residential real estate.......... $ 272 18.6% $ 345 18.4% $ 497 19.3%
Multifamily real estate..................... 1,396 17.9 2,735 20.6 3,316 19.3
Commercial and industrial real estate....... 3,722 35.0 3,110 34.4 3,659 34.9
Construction................................ 3,038 8.5 2,597 8.1 1,489 7.1
Business, commercial........................ 12,375 17.7 9,244 16.5 7,498 17.5
Automobile.................................. 20 0.3 30 0.4 26 0.4
Consumer and other.......................... 26 2.0 9 1.6 29 1.5
Year 2000 exposure.......................... -- -- 650
Unallocated................................. 3,731 2,774 2,855
------- ----- ------- ----- ------- -----
Total..................................... $24,580 100.0% $20,844 100.0% $20,019 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
Despite a 12% increase in the volume of single family loans at June 30, 2000
from year-end 1999 levels, allocated reserves on single family loans decreased
$73 thousand, or 21%, to $272 thousand. primarily due to a decrease in the loss
factor for single family loans that are not classified (i.e. rated "pass.") Over
98% of the loans within this category are rated "pass."
Allocated reserves on multifamily loans decreased $1.3 million, or 49%, to
$1.4 million as of June 30, 2000 primarily due to a significantly lower level of
criticized (i.e. rated "special mention") assets within this loan category when
compared to year-end 1999 levels. Further, a 3% decrease in the volume of loans
in this loan category at June 30, 2000 in comparison to December 31, 1999 also
contributed to the decrease in allocated reserves on this pool of loans.
Allocated reserves on commercial real estate loans increased $612 thousand,
or 20%, to $3.7 million primarily due to a 14% increase in the volume of loans
in this category since December 31, 1999. In addition, the loss factor on
commercial real estate loans rated "pass" decreased at June 30, 2000 when
compared to the loss factor at December 31, 1999. Almost 99% of all commercial
real estate loans have a "pass" rating.
The $441 thousand, or 17%, increase in allocated reserves on construction
loans to $3.0 million is primarily due to the increase in the volume of loans in
this category, which rose 17% at June 30, 2000 relative to year-end 1999 levels.
Allocated reserves on commercial business loans increased $3.1 million, or
34%, to $12.4 million as of June 30, 2000 for two reasons: a 20% 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 $24.6 million at June 30, 2000 exceeded the
Bank's allocated allowance by $3.7 million, or 15% of the total allowance. This
compares to an unallocated allowance of $2.8 million, or 13%, as of
December 31, 1999. The $3.7 million unallocated allowance at June 30, 2000 is
essentially comprised of two elements. First, the Bank has set aside
approximately $2.1 million, or 10% of the allocated allowance amount of
$20.9 million at June 30, 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.
26
<PAGE>
DEPOSITS
Deposits increased $312.5 million, or 21%, to $1.81 billion at June 30,
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 $141.8 million, or 9%, over December 31,
1999. This internal growth was primarily due to a 9% increase in time deposits
of $93.6 million, resulting from the growth in brokered deposits and various
promotions associated with the Chinese New Year holiday. 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 deposits acquired from American International Bank,
noninterest-bearing demand deposits increased $15.8 million, or 12%, and money
market accounts increased $22.2 million, or 32%, primarily due to new and
existing commercial account relationships.
Included in time deposits at June 30, 2000 are $124.6 million of brokered
deposits, compared with $82.7 million as of December 31, 1999. The increase of
$41.9 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.
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
$38.0 million at June 30, 2000, compared to $600 thousand at December 31, 1999.
The increase in short-term borrowings during the first half of 2000 was
primarily due to partial repayments of FHLB advances. FHLB advances decreased
36% to $310.5 million as of June 30, 2000, a decrease of $171.5 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
investment securities available for sale also contributed to the decrease in
FHLB advances during the first six months of 2000.
CAPITAL RESOURCES
The primary source of capital for the Company is the retention of net after
tax earnings. At June 30, 2000, stockholders' equity totaled $163.8 million, a
9% increase from $150.1 million as of December 31, 1999. The increase is due
primarily to: (i) net income of $17.1 million during the first six months of
2000; (ii) net issuance of common stock totaling $45 thousand from the exercise
of stock options; and (iii) stock compensation costs amounting to $228 thousand
related to the Company's Restricted Stock Award Program. These transactions were
offset by (i) payment of first and second quarter 2000 cash dividends totaling
$1.3 million; (ii) forfeitures of restricted stock awards totaling $75 thousand;
and (iii) a net increase of $2.5 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 June 30, 2000, the Bank's Tier 1 and total capital ratios
were 9.1% and 10.4%, respectively, compared to 9.3% and 10.6%, respectively, at
December 31, 1999.
During the first half 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
27
<PAGE>
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 has issued a total of
$20.8 million of junior subordinated deferrable interest debentures in two
separate transactions. These securities qualify as Tier 1 capital for regulatory
reporting purposes.
The following table compares the Company's and the Bank's actual capital
ratios at June 30, 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).......... 10.4% 10.4% 8.0% 10.0%
Tier 1 Capital (to Risk-Weighted Assets)......... 9.1 9.1 4.0 6.0
Tier 1 Capital (to Average Assets)............... 7.2 7.1 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 six months ended June 30, 2000 and 1999, the Company experienced
net cash inflows of $14.3 million and $22.5 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. For the six months ended June 30, 1999, net proceeds from
sales of loans held for sale also contributed to operating cash inflows for the
period. Net cash outflows from investing activities totaled $192.3 million and
$140.0 million, respectively, for the six months ended June 30, 2000 and 1999,
primarily due to the growth of the Bank's loan portfolio. Financing activities
provided net cash inflows of $186.9 million and $27.3 million, respectively, for
the six months ended June 30, 2000 and 1999. Deposit growth largely accounted
for the increase in net cash inflows from financing activities for both periods.
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 June 30, 2000, the Bank's
available borrowing capacity includes approximately $30.3 million in repurchase
arrangements, $47.0 million in federal funds line facilities, and
$245.7 million in unused FHLB advances. Management believes its liquidity
sources to be stable and adequate. At June 30, 2000, management was not aware of
any information that was reasonably likely to have a material effect on the
Bank's liquidity position.
28
<PAGE>
The liquidity of the parent company, East West Bancorp, Inc. is primarily
dependent on the payment of cash dividends by its subsidiary, East West Bank,
subject to limitations imposed by the Financial Code of the State of California.
For the second quarter of 2000, total dividends paid by the Bank to East West
Bancorp, Inc. totaled $331 thousand, compared with $6.8 million for the second
quarter of 1999. For the six months ended June 30, 2000, total dividends paid by
the Bank to East West Bancorp, Inc. totaled $1.2 million compared to
$14.7 million for the same period in 1999. As of June 30, 2000, approximately
$38.3 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 June 30, 2000 and December 31, 1999, assuming a
parallel shift of 100 to 200 basis points in both directions:
<TABLE>
<CAPTION>
NET INTEREST INCOME NET PORTFOLIO VALUE
VOLATILITY (1) VOLATILITY (2)
------------------------- -------------------------
CHANGE IN INTEREST RATES JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
(BASIS POINTS) 2000 1999 2000 1999
-------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
+200 4.4% 2.6% (13.9)% (13.0)%
+100 3.6% 2.1% (4.3)% (5.3)%
-100 (3.6)% (2.7)% 8.0% 8.5%
-200 (7.3)% (5.9)% 9.2% 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
June 30, 2000 and December 31, 1999. At June 30, 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.
29
<PAGE>
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 June 30, 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.
<TABLE>
<CAPTION>
EXPECTED MATURITY OR REPRICING DATE BY YEAR
-----------------------------------------------------------------
AFTER FAIR VALUE AT
2000 2001 2002 2003 2004 2004 TOTAL JUNE 30, 2000
---------- -------- -------- -------- -------- -------- ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT JUNE 30, 2000
ASSETS:
Short-term investments......... $ 5,000 $ -- $ -- $ -- $ -- $ -- $ 5,000 $ 5,000
Weighted average rate........ 6.00% --% --% --% --% --% 6.00%
Investment securities
available-
for-sale (fixed rate)........ $ 47,780 $48,916 $35,161 $28,552 $22,584 $137,622 $ 320,615 $ 301,659
Weighted average rate........ 6.14% 6.20% 6.14% 6.15% 6.17% 6.35% 6.24%
Investment securities
available-
for-sale (variable rate)..... $ 194,962 $ -- $ -- $ -- $ -- $ -- $ 194,962 $ 188,748
Weighted average rate........ 6.87% --% --% --% --% --% 6.87%
Total gross loans.............. $1,370,283 $95,412 $74,178 $51,747 $37,554 $ 52,946 $1,682,120 $1,682,199
Weighted average rate........ 9.20% 8.12% 7.95% 8.00% 8.08% 8.13% 8.95%
LIABILITIES:
Checking accounts.............. $ 107,783 $ -- $ -- $ -- $ -- $ -- $ 107,783 $ 107,783
Weighted average rate........ 1.26% --% --% --% --% --% 1.26%
Money market accounts.......... $ 116,361 $ -- $ -- $ -- $ -- $ -- $ 116,361 $ 116,361
Weighted average rate........ 3.77% --% --% --% --% --% 3.77%
Savings deposits............... $ 223,199 $ -- $ -- $ -- $ -- $ -- $ 223,199 $ 223,199
Weighted average rate........ 1.92% --% --% --% --% --% 1.92%
Time deposits.................. $1,109,919 $28,305 $ 7,143 $ 1,850 $ 1,791 $ 29,905 $1,178,913 $1,176,333
Weighted average rate........ 5.34% 5.29% 5.87% 5.23% 5.69% 7.00% 5.39%
Short-term borrowings.......... $ 38,000 $ -- $ -- $ -- $ -- $ -- $ 38,000 $ 38,000
Weighted average rate........ 6.59% --% --% --% --% --% 6.59%
FHLB advances.................. $ 286,500 $ 5,000 $ 9,000 $10,000 $ -- $ -- $ 310,500 $ 311,380
Weighted average rate........ 6.60% 6.55% 6.21% 5.78% --% --% 6.56%
Junior subordinated debt
securities................... $ -- $ -- $ -- $ -- $ -- $ 10,750 $ 10,750 $ 11,632
Weighted average rate........ --% --% --% --% --% 10.88% 10.88%
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXPECTED MATURITY OR REPRICING DATE BY YEAR
-----------------------------------------------------------------
AFTER FAIR VALUE AT
1999 2000 2001 2002 2003 2003 TOTAL DEC. 31, 1999
---------- -------- -------- -------- -------- -------- ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1999
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>
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 subordinated debt securities is estimated
by discounting the cash flows through maturity based on current rates offered on
the 30-year Treasury bond.
31
<PAGE>
The Asset/Liability Committee is authorized to utilize a wide variety of
off-balance sheet financial techniques to assist in the management of interest
rate risk. Derivative positions are integral components of the Bank's
asset/liability management strategy. Therefore, the Bank does not believe it is
meaningful to separately analyze the derivatives components of its risk
management activities in isolation from their related positions. The Bank uses
derivative instruments, primarily interest rate swap and cap agreements, as part
of its management of asset and liability positions in connection with its
overall goal of minimizing the impact of interest rate fluctuations on the
Bank's net interest margin or its stockholders' equity. These contracts are
entered into for purposes of reducing the Bank's interest rate risk and not for
trading purposes.
The Bank enters into interest rate swap agreements for the purposes of
converting fixed rate loans and deposits to floating rate assets and
liabilities. The total gross notional amount of interest rate swaps was
$58.5 million as of June 30, 2000 and December 31, 1999. At June 30, 2000, the
net unrealized loss on the entire swap agreement portfolio was $1.2 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 June 30, 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.
<TABLE>
<CAPTION>
EXPECTED MATURITY
---------------------------------------------------- UNREALIZED AVERAGE
AFTER GAIN EXPECTED
2000 2001 2002 2003 2003 TOTAL (LOSS) MATURITY
-------- -------- -------- -------- -------- -------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT JUNE 30, 2000
Interest rate swap
agreements:
Notional amount............ $-- $10,000 $18,500 $ -- $30,000 $58,500 $(1,194) 5.6 Years
Weighted average receive
rate..................... --% 6.14% 6.13% --% 7.00% 6.58%
Weighted average pay
rate..................... --% 6.46% 6.45% --% 6.17% 6.31%
Interest rate cap
agreements:
Notional amount............ $-- $18,000 $18,000 $ -- $ -- $36,000 $ -- 1.6 Years
LIBOR cap rate............. --% 6.50% 7.00% --% --% 6.75%
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXPECTED MATURITY
---------------------------------------------------- UNREALIZED AVERAGE
AFTER GAIN EXPECTED
1999 2000 2001 2002 2002 TOTAL (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
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
-------------- -------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
All other material referenced in this report which is required to be filed
as an exhibit hereto has previously been submitted.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the second quarter of 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.
<TABLE>
<S> <C> <C>
Dated: August 11, 2000 EAST WEST BANCORP, INC.
(Registrant)
By: /s/ JULIA GOUW
-----------------------------------------
JULIA GOUW
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
35
