<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark One
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
or
[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
Commission file number 000-24939
EAST WEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-4703316
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
415 Huntington Drive, San Marino, California 91108
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (626) 799-5700
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of each class Name of each exchange on which registered
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
As of February 29, 2000, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $276,047,244.
Number of shares of common stock of the registrant outstanding as of
February 29, 2000: 22,421,718 shares
The following documents are incorporated by reference herein:
<TABLE>
<CAPTION>
Part of Form 10-K
Into Which
Document Incorporated Incorporated
--------------------- -----------------
<S> <C>
1999 Annual Report........................................ Parts II and IV
Definitive Proxy Statement for the Annual Meeting of
Stockholders which will be filed within 120 days of the
fiscal year ended December 31, 1999...................... Part III
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
PART I..................................................................... 1
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 9
Item 3. Legal Proceedings.............................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............ 10
</TABLE>
<TABLE>
<S> <C> <C>
Item 4A. Executive Officers of the Registrant................................................... 11
PART II........................................................................................... 13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 13
Item 6. Selected Financial Data................................................................ 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 37
Item 8. Financial Statements and Supplementary Data............................................ 37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 37
PART III.......................................................................................... 37
Item 10. Directors and Executive Officers of the Registrant..................................... 37
Item 11. Executive Compensation................................................................. 37
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 37
Item 13. Certain Relationships and Related Transactions......................................... 37
PART IV........................................................................................... 38
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 38
SIGNATURES........................................................................................ 72
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
Organization
East West Bancorp, Inc. (the "Company") is a Delaware corporation
incorporated on August 26, 1998 pursuant to a Plan of Reorganization and
Agreement of Merger to be the holding company for East West Bank (the "Bank").
The Company became the holding company for the Bank as of December 30, 1998,
and is subject to the Bank Holding Company Act of 1956, as amended.
The principal office of the Company is located at 415 Huntington Drive, San
Marino, California 91108, and its telephone number is (626) 799-5700.
The Company has one wholly-owned subsidiary, the Bank. The Bank's deposits
are insured by the Savings Association Insurance Fund ("SAIF"), as
administered by the Federal Deposit Insurance Corporation ("FDIC"), up to
applicable limits. The Bank is not a member of the Federal Reserve System. The
Bank was the fourth largest commercial bank headquartered in Los Angeles,
California as of December 31, 1999, and one of the largest banks in the United
States that focuses on the Chinese-American community. Until June 12, 1998,
the Bank was privately owned. At that time, the former shareholders sold all
of their interest in the Bank to approximately 160 institutional and
accredited investors.
The Bank was chartered by the Federal Home Loan Bank Board in June 1972, as
the first federally-chartered savings institution focused primarily on the
Chinese-American community, and opened for business at its first office in the
Chinatown district of Los Angeles in January 1973. Until the early 1990's, the
Bank conducted a traditional savings and loan business by making predominately
long-term, single-family residential and commercial and multi-family real
estate loans with interest rates tied to the Eleventh District Cost of Funds
Index ("COFI"). These loans were made principally within the ethnic Chinese
market in Southern California and were funded primarily with retail savings
deposits and advances from the Federal Home Loan Bank ("FHLB") of San
Francisco. Currently, the Bank specializes in lending for commercial,
construction, and residential real estate projects and financing international
trade for California companies. The Bank has emphasized commercial lending
since its conversion to a state-chartered commercial bank on July 31, 1995.
As of December 31, 1999, the Bank had two wholly-owned subsidiaries. The
first subsidiary, E-W Services, Inc., is a California corporation organized by
the Bank in 1977. E-W Services, Inc. holds property used by the Bank in its
operations. At December 31, 1999, the Bank's total investment in E-W Services,
Inc. was $10.8 million. The second subsidiary, East-West Investments, Inc., is
a California corporation organized by the Bank in 1972. East-West Investments,
Inc. primarily acts as a trustee in connection with real estate secured loans.
At December 31, 1999, the Bank's total investment in East-West Investments,
Inc. was $72,000.
On May 28, 1999, the Bank completed its acquisition of First Central Bank,
N.A. for an aggregate cash price of $13.5 million. First Central Bank had
three branches in Southern California--one branch located in the Chinatown
sector of Los Angeles, one branch in Monterey Park and one branch in Cerritos.
The Bank acquired approximately $55.0 million in loans and assumed
approximately $92.6 million in deposits.
Banking Services
Through its network of 29 retail branches, the Bank provides a wide range of
personal and commercial banking services to small and medium-sized businesses,
business executives, professionals, and other individuals. The Bank offers
multilingual services to all of its customers in English, Cantonese, Mandarin
and Spanish. The Bank offers a variety of deposit products which includes the
traditional range of personal and business checking and savings accounts, time
deposits and individual retirement accounts, travelers' checks, safe deposit
boxes, and Master Card and Visa merchant deposit services.
1
<PAGE>
The Bank's lending activities include residential and commercial real
estate, construction, commercial, trade finance, account receivables,
inventory and working capital loans. The Bank provides commercial loans to
small and medium-sized businesses with annual revenues that generally range
from several million to $200 million. In addition, the Bank provides short-
term trade finance facilities for terms of less than one year primarily to
U.S. importers and manufacturers doing business in the Asia Pacific region.
Management believes that these activities
have not been adversely affected to a significant degree by the economic
crisis in Asia of the last several years. The Bank's commercial borrowers are
engaged in a wide variety of manufacturing, wholesale trade, and service
businesses.
Market Area and Competition
The Bank concentrates on marketing its services in the Los Angeles
metropolitan area, Orange County, the San Francisco Bay area, and the Silicon
Valley area in Santa Clara County, with a particular focus on regions with a
high concentration of ethnic Chinese. The ethnic Chinese markets within the
Bank's primary market area have experienced rapid growth in recent periods.
Based on information provided by the California State Department of Finance,
there were an estimated 3.6 million Asian and Pacific Islanders residing in
California as of July 1997. As California continues to gain momentum as the
hub of the Pacific Rim, the Bank provides important competitive advantages to
its customers participating in the Asia Pacific marketplace. Management
believes the Bank's customers benefit from its understanding of Asian markets
and cultures, its corporate and organizational ties throughout Asia, as well
as its international banking products and services. Management believes that
this approach, combined with the extensive ties of its management and Board of
Directors to the growing Asian and ethnic Chinese communities, provides the
Bank with an advantage in competing for customers in its market area.
The banking and financial services industry in California generally, and in
the Bank's market areas specifically, are highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation,
changes in technology and product delivery systems, and the accelerating pace
of consolidation among financial services providers. In addition, recent
federal legislation may have the effect of further increasing the pace of
consolidation within the financial services industry. See "Economic
Conditions, Government Policies, Legislation and Regulation."
The Bank competes for loans, deposits, and customers with other commercial
banks, savings and loan associations, securities and brokerage companies,
mortgage companies, insurance companies, finance companies, money market
funds, credit unions, and other nonbank financial service providers. Some of
these competitors are larger in total assets and capitalization, have greater
access to capital markets and offer a broader range of financial services than
the Bank. The Bank has 30 offices located in the following counties: Los
Angeles, Orange, San Francisco and Santa Clara. Neither the deposits nor loans
of the offices of the Bank exceed 1% of the deposits or loans of all financial
services companies located in the counties in which the Bank operates.
Accounting Changes
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. In June 1999, SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133"
was issued and is effective upon issuance. The adoption of this standard
delays for one year the effective date of implementing SFAS No. 133 to all
fiscal quarters of all fiscal years beginning after June 15, 2000. Management
of the Company does not believe that the adoption of this standard will have a
material impact on the Company's results of operations or financial position
when adopted.
2
<PAGE>
In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for certain activities of mortgage banking
enterprises and other enterprises that conduct operations that are
substantially similar. SFAS No. 134 requires that after the securitization of
mortgage loans held for sale, the resulting mortgage-backed securities and
other retained interests should be classified in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," based on
the company's ability and intent to sell or hold those investments. SFAS No.
134 is effective for the first fiscal quarter beginning after December 15,
1998. The adoption of this standard did not have a material impact on the
Company's results of operations or financial position.
Economic Conditions, Government Policies, Legislation, and Regulation
The Bank's profitability, like most financial institutions, is primarily
dependent on interest rate differentials. In general, the difference between
the interest rates paid by the Bank on interest-bearing liabilities, such as
deposits and other borrowings, and the interest rates received by the Bank on
its interest-earning assets, such as loans extended to its clients and
securities held in its investment portfolio, comprise the major portion of the
Company's earnings. These rates are highly sensitive to many factors that are
beyond the control of the Company and the Bank, such as inflation, recession
and unemployment, and the impact which future changes in domestic and foreign
economic conditions might have on the Company and the Bank cannot be
predicted.
The business of the Bank is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Federal Reserve Board. The Federal Reserve Board implements
national monetary policies (with objectives such as curbing inflation and
combating recession) through its open-market operations in U.S. Government
securities by adjusting the required level of reserves for depository
institutions subject to its reserve requirements and by varying the target
federal funds and discount rates applicable to borrowings by depository
institutions. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates earned on interest-earning assets and paid on interest-bearing
liabilities. The nature and impact on the Company and the Bank of any future
changes in monetary and fiscal policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies, other financial institutions, and financial services providers are
frequently made in the U.S. Congress, in the state legislatures and before
various regulatory agencies.
General
Bank holding companies and banks are extensively regulated under both
federal and state law. This regulation is intended primarily for the
protection of depositors and the deposit insurance fund and not for the
benefit of stockholders of the Company or the Bank. Set forth below is a
summary description of the material laws and regulations which relate to the
operations of the Company and the Bank. The description is qualified in its
entirety by reference to the applicable laws and regulations.
In recent years, significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by Congress.
Such proposals include legislation to revise the Glass-Steagall Act and the
BHC Act and to expand permissible activities for banks. In November 1999, the
Gramm-Leach-Bliley Act was passed permitting the affiliation of banks,
insurance underwriters and investment banking firms. It also provided for
possible future additional expansions of permissible activities for banks.
Regulations to implement this new law are still being prepared, and
consequently, it is not possible to determine what effect, if any, it may have
on the Company and the Bank.
3
<PAGE>
The Company
General. The Company, as a registered bank holding company, is subject to
regulation under the BHC Act. The Company is required to file with the Federal
Reserve Board quarterly, semi-annual, and annual reports and such additional
information as the Federal Reserve Board may require pursuant to the BHC Act.
The Federal Reserve Board may conduct examinations of the Company and its
subsidiaries.
The Federal Reserve Board may require that the Company terminate an activity
or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company
must file written notice and obtain approval from the Federal Reserve Board
prior to purchasing or redeeming its equity securities.
Under the BHC Act and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "- The Bank--Capital Standards."
The Company is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5% of the outstanding shares of any
class of voting securities or substantially all of the assets of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank
holding company.
The Company is prohibited by the BHC Act, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control
of more than 5% of the outstanding voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, the Company may engage in
any, or acquire shares of companies engaged in, activities that are deemed by
the Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve Board to be an
unsafe and unsound banking practice or a violation of the Federal Reserve
Board's regulations or both.
The Company is a bank holding company within the meaning of Section 3700 of
the California Financial Code. As such, the Company and its subsidiaries will
be subject to examination by, and may be required to file reports with, the
California Department of Financial Institutions ("DFI").
The Company's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As such, the Company is subject to the information, proxy
solicitation, insider trading, and other requirements and restrictions of the
Exchange Act.
4
<PAGE>
The Bank
General. The Bank, as a California chartered bank, is subject to primary
supervision, periodic examination, and regulation by the DFI and the FDIC. To
a lesser extent, the Bank is also subject to certain regulations promulgated
by the Federal Reserve Board. If, as a result of an examination of the Bank,
the FDIC should determine that the financial condition, capital resources,
asset quality, earnings prospects, management, liquidity, or other aspects of
the Bank's operations are unsatisfactory or that the Bank or its management is
violating or has violated any law or regulation, various remedies are
available to the FDIC. Such remedies include the power to enjoin "unsafe or
unsound" practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order
that can be judicially enforced, to direct an increase in capital, to restrict
the growth of the Bank, to assess civil monetary penalties, to remove officers
and directors and ultimately to terminate the Bank's deposit insurance, which
for a California chartered bank would result in a revocation of the Bank's
charter. The DFI has many of the same remedial powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit
accounts, interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain certain levels of
capital. See "- Capital Standards."
Dividends and Other Transfers of Funds. Dividends from the Bank constitute
the principal source of income to the Company. The Company is a legal entity
separate and distinct from the Bank. The Bank is subject to various statutory
and regulatory restrictions on its ability to pay dividends to the Company.
Under such restrictions, the amount available for payment of dividends to the
Company by the Bank totaled $39.5 million at December 31, 1999. In addition,
the DFI and the Federal Reserve Board have the authority to prohibit the Bank
from paying dividends, depending upon the Bank's financial condition, if such
payment is deemed to constitute an unsafe or unsound practice.
The FDIC and the Commissioner also have authority to prohibit the Bank from
engaging in activities that, in the FDIC's or the Commissioner's opinion,
constitute unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that the FDIC or the Commissioner could assert that the payment
of dividends or other payments might, under some circumstances, be an unsafe
or unsound practice. Further, the FDIC and the Federal Reserve Board have
established guidelines with respect to the maintenance of appropriate levels
of capital by banks or bank holding companies under their jurisdiction.
Compliance with the standards set forth in such guidelines and the
restrictions that are or may be imposed under the prompt corrective action
provisions of federal law could limit the amount of dividends which the Bank
or the Company may pay. An insured depository institution is prohibited from
paying management fees to any controlling persons or, with certain limited
exceptions, making capital distributions if after such transaction the
institution would be undercapitalized. The Commissioner may impose similar
limitations on the conduct of California-chartered banks. See "- Prompt
Corrective Regulatory Action and Other Enforcement Mechanisms" and "- Capital
Standards" for a discussion of these additional restrictions on capital
distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of, or investments
in, stock or other securities thereof, the taking of such securities as
collateral for loans, and the purchase of assets of the Company or other
affiliates. Such restrictions prevent the Company and such other affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank to or in the Company or to or in any other affiliate are limited,
individually, to 10.0% of the Bank's capital and surplus (as defined by
federal regulations), and such secured loans and investments are limited, in
the aggregate, to 20.0% of the Bank's capital and surplus (as defined by
federal regulations). California law also imposes certain restrictions with
respect to transactions involving the Company and other controlling persons of
the Bank. Additional restrictions on transactions with affiliates may be
imposed on the Bank under the prompt corrective action provisions of federal
law. See also "--Prompt Corrective Action and Other Enforcement Mechanisms."
5
<PAGE>
Capital Standards. The Federal Reserve Board and the FDIC have adopted risk-
based minimum capital guidelines intended to provide a measure of capital that
reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as commercial loans.
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risked-based guidelines,
federal banking regulators require banking organizations to maintain a minimum
amount of Tier 1 capital to total assets, referred to as the leverage ratio.
For a banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Capital" for information regarding the Company's
regulatory capital ratios at December 31, 1999.
Prompt Corrective Action and Other Enforcement Mechanisms. Federal banking
agencies possess broad powers to take corrective and other supervisory action
to resolve the problems of insured depository institutions, including but not
limited to those institutions that fall below one or more prescribed minimum
capital ratios. Each federal banking agency has promulgated regulations
defining the following five categories in which an insured depository
institution will be placed, based on its capital ratios: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. At December 31, 1999, the Bank exceeded the
required ratios for classification as "well capitalized."
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation, or
any condition imposed in writing by the agency or any written agreement with
the agency.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines designed to assist the federal banking agencies in identifying and
addressing potential safety and soundness concerns before capital becomes
impaired. The guidelines set forth operational and managerial standards
relating to: (i) internal controls, information systems and internal audit
systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset
growth, (v) earnings, and (vi) compensation, fees and benefits. In addition,
the federal banking agencies have also adopted safety and soundness guidelines
with respect to asset quality and earnings standards. These guidelines provide
six standards for establishing and maintaining a system to identify problem
assets and prevent those assets from deteriorating. Under these standards, an
insured depository institution should: (i) conduct periodic asset quality
reviews to identify problem assets, (ii) estimate the inherent losses in
problem assets and establish reserves that are sufficient to absorb estimated
losses, (iii) compare problem asset totals to capital, (iv) take appropriate
corrective action to resolve problem assets, (v) consider the size and
potential risks of material asset concentrations, and (vi) provide periodic
asset quality reports with adequate information for
6
<PAGE>
management and the board of directors to assess the level of asset risk. These
guidelines also set forth standards for evaluating and monitoring earnings and
for ensuring that earnings are sufficient for the maintenance of adequate
capital and reserves.
Premiums for Deposit Insurance. Although the Bank is a commercial bank, the
Bank's deposit accounts are insured by the SAIF, as administered by the FDIC,
up to the maximum amount permitted by law. Insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits based on
the risk a particular institution poses to its deposit insurance fund. Under
this system as of December 31, 1999, SAIF members paid within a range of 0 to
27 basis points per $100 of insured deposits, depending upon the institution's
risk classification. This risk classification is based on an institution's
capital group and supervisory subgroup assignment. Pursuant to the Economic
Growth and Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"),
the Bank is currently paying, in addition to its normal deposit insurance
premium as a member of the SAIF, an amount equal to approximately 2.12 basis
points toward the retirement of the Financing Corporation bonds ("Fico Bonds")
issued in the 1980's to assist in the recovery of the savings and loan
industry. Effective January 1, 1999, members of both the SAIF and the Bank
Insurance Fund ("BIF") will pay the same rate to retire the Fico Bonds. Under
the Paperwork Reduction Act, the FDIC also is not permitted to establish SAIF
assessment rates that are lower than comparable BIF assessment rates.
Proposals for the merging of the BIF and the SAIF are from time to time
discussed by Congress.
Interstate Banking and Branching. The BHC Act currently permits bank holding
companies in any state to acquire banks and bank holding companies located in
any other state, subject to certain conditions, including certain nationwide-
and state-imposed concentration limits. The Bank has the ability, subject to
certain restrictions, to acquire by acquisition or merger branches outside its
home state. The establishment of new interstate branches is also possible in
those states with laws that expressly permit it. Interstate branches are
subject to certain laws of the states in which they are located. Competition
may increase further as banks branch across state lines and enter new markets.
Community Reinvestment Act and Fair Lending Developments. The Bank is
subject to certain fair lending requirements and reporting obligations
involving home mortgage lending operations and Community Reinvestment Act
("CRA") activities. The CRA generally requires the federal banking agencies to
evaluate the record of a financial institution in meeting the credit needs of
its local communities, including low- and moderate-income neighborhoods. A
bank may be subject to substantial penalties and corrective measures for a
violation of certain fair lending laws. The federal banking agencies may take
compliance with such laws and CRA obligations into account when regulating and
supervising other activities.
A bank's compliance with its CRA obligations is based a performance-based
evaluation system which bases CRA ratings on an institution's lending service
and investment performance. When a bank holding company applies for approval
to acquire a bank or other bank holding company, the Federal Reserve Board
will review the assessment of each subsidiary bank of the applicant bank
holding company, and such records may be the basis for denying the
application. Based on an examination conducted in April 1997, the Bank was
rated "Satisfactory" in complying with its CRA obligations.
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. The Bank's total allowance for loan losses is comprised of two
components--allocated and unallocated.
The Bank utilizes several methodologies to test the overall adequacy of the
allowance. The two primary methodologies, the classification migration model
and the individual loan review analysis methodology, provide
7
<PAGE>
the basis for determining the overall adequacy of the allowance. These
methodologies are augmented by ancillary analyses, which include historical
loss analyses, peer group comparisons, and analyses based on the federal
regulatory interagency policy for loan and lease losses.
The 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.
The unallocated portion, or the amount in excess of the allowance
requirement, is composed of two elements. The first element consists of an
amount that is approximately 10% of the required allowance amount. This
element recognizes that a certain degree of estimation risk is associated with
the classification migration and individual loan review analysis
methodologies. The other element represents the amount that, in the
management's opinion, is necessary to mitigate the foreign transaction risk
associated with credit lines extended to financial institutions in foreign
countries. This amount is based on a range of 2% to 4% of the total credit
facility extended to these foreign financial institutions.
Employees. The Company does not have any employees other than executive
officers who are also executive officers of the Bank. Such employees are not
separately compensated for their employment with the Company. As of December
31, 1999, the Bank had a total of 341 full-time employees and 43 part-time
employees. Employees are not represented by a union or collective bargaining
group. The management of the Bank believes that its employee relations are
satisfactory.
8
<PAGE>
ITEM 2. PROPERTIES
The Company owns no real property but utilizes the main office of the Bank.
The Company pays no rent or other consideration for use of this facility. The
Bank owns the land and buildings at 11 of its 23 branch offices and all of its
administrative locations. Those locations include:
<TABLE>
<CAPTION>
Office Name Address Owned/Leased
----------- ------- ------------
<S> <C> <C>
Alhambra Valley 403 W. Valley Blvd. Owned
Alhambra, CA 91803
Alhambra-Main 1881 West Main St. Owned
Alhambra, CA 91801
Arcadia 200 E. Duarte Road Owned
Arcadia, CA 91006
Artesia 18512 Gridley Road Owned
Artesia, CA 90701
Commercial Loan Center 475 Huntington Dr. Owned
San Marino, CA 91108
Cupertino 10945 Wolfe Road Leased
Cupertino, CA 95014
Diamond Bar 379 S. Diamond Bar Blvd. Leased
Diamond Bar, CA 91765
El Monte 9550 Flair Drive Leased
El Monte, CA 91731
Geary Street 4355 Geary Street #101 Owned
San Francisco, CA 94111
Headquarters 415 Huntington Dr. Owned
San Marino, CA 91108
Lincoln Heights 2601 No. Broadway Owned
Los Angeles, CA 90031
Los Angeles 942 North Broadway Leased
Chinatown Los Angeles, CA 90012
Market Street 444 Market Street Leased
Financial District San Francisco, CA 94111
Milpitas 642 Barber Lane Leased
Milpitas, CA 95035
Montebello 2825 Via Campo Leased
Montebello, CA 90640
Monterey Park 101 W. Garvey Ave. Leased
Monterey Park, CA 91754
Rolling Hills 27421 Hawthorne Blvd. Owned
Rolling Hills Estates, CA 90274
Rosemead 8168 East Garvey Ave. Owned
Rosemead, CA 91770
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Office Name Address Owned/Leased
----------- ------- ------------
<S> <C> <C>
Rowland Heights 18458 Colima Road Leased
Rowland Heights, CA 91748
San Francisco- 1241 Stockton St. Leased
Chinatown San Francisco, CA 94133
San Marino 805 Huntington Dr. Owned
San Marino, CA 91108
Silverlake 2496 Glendale Blvd. Owned
Los Angeles, CA 90039
South Pasadena 1001 Fair Oaks Ave. Owned
S. Pasadena, CA 91030
Westminster 9032 Bolsa Avenue Leased
Westminster, CA 92683
</TABLE>
The Company added 8 new banking locations as a result of the acquisition of
American International Bank in January 2000. Those locations include:
<TABLE>
<CAPTION>
Office Name Address Owned/Leased
----------- ------- ------------
<S> <C> <C>
Alhambra 1635 West Main St. Leased
Alhambra, CA 91801
Artesia 18355 Pioneer Blvd. Leased
Artesia, CA 90701
Carson 22020 S. Avalon Blvd. Leased
Carson, CA 90745
Glendale 520 N. Central Ave. Leased
Glendale, CA 91203
Industry 18645 E. Gale Ave., Suite 100 Leased
City of Industry, CA 91748
Los Angeles Main 624 S. Grand Ave. Leased
Los Angeles, CA 90017
Tarzana 18321 Ventura Blvd. Leased
Tarzana, CA 91536
Torrance 23670 Hawthorne Blvd. Owned
Torrance, CA 90505
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Neither the Bank nor the Company is involved in any material legal
proceedings. The Bank, from time to time, is party to litigation which arises
in the ordinary course of business, such as claims to enforce liens, claims
involving the origination and servicing of loans, and other issues related to
the business of the Bank. In the opinion of management, the resolution of any
such issues would not have a material adverse impact on the financial
position, results of operations, or liquidity of the Bank or the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, no matters were submitted to shareholders
for a vote.
10
<PAGE>
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of February 29, 2000, the executive
officers of the Company, their positions, and their ages. Each officer is
appointed by the Board of Directors of the Company or the Bank and serves at
their pleasure.
<TABLE>
<CAPTION>
Name Age(1) Position with Company or Bank
---- ------ -----------------------------
<C> <C> <S>
Dominic Ng......... 41 Chairman of the Board, President, and Chief
Executive Officer of the Company and the Bank
Julia Gouw......... 40 Executive Vice President and Chief Financial
Officer of the Company and the Bank
Sandra Wong........ 46 Executive Vice President and Chief Credit Officer
of the Bank
Peter Yue.......... 53 Executive Vice President and Director of Retail
Banking of the Bank
Donald Chow........ 48 Executive Vice President, Director of Commercial
Lending of the Bank
Douglas Krause..... 43 Executive Vice President, General Counsel, and
Secretary of the Company and the Bank
Wayland Bourne..... 51 Senior Vice President, Commercial Services of the
Bank
Kwok-Yin Cheng..... 48 Senior Vice President, International Banking
Manager of the Bank
Mitchell Kitayama.. 43 Senior Vice President and Treasurer of the Bank
</TABLE>
- --------
(1) As of February 29, 2000
Biographical Information
The principal occupation during the past five years of each executive
officer is set forth below. All executive officers have held their present
positions for at least five years, unless otherwise stated.
Dominic Ng has served as a director and the President and Chief Executive
Officer of the Bank since October 1992, and was elected Chairman of the Board
in 1998. Mr. Ng has held the same positions with the Company since its
formation. Mr. Ng also served as the director in charge of Chinese Business
Services for the international accounting firm of Deloitte & Touche LLP. Mr.
Ng currently serves as a member of the of the Board of Visitors of The
Anderson School at UCLA, Board of Regents of Loyola Marymount University, and
serves, among others, as a director of the Los Angeles Chamber of Commerce,
and United Way of Greater Los Angeles. Mr. Ng also serves on the Board of ESS
Technology, Inc.
Julia Gouw has served as Executive Vice President and Chief Financial
Officer of the Bank since 1994 and as a director of the Bank since 1997, and
has held these same positions with the Company since its formation. Ms. Gouw
joined the Bank in July 1989 as Vice President and Controller. Prior to
joining the Bank, Ms. Gouw was a Senior Audit Manager with the international
accounting firm of KPMG Peat Marwick, LLP. Ms. Gouw is on the Board of
Visitors of UCLA School of Medicine, a member of the Financial Executives'
Institute and the California Society of CPA's and is a past president of the
Financial Managers Society--Los Angeles Chapter.
Sandra Wong joined the Bank in November 1998 as Executive Vice President and
Chief Credit Officer. Prior to joining the Bank, Ms. Wong was Senior Vice
President--Senior Credit Officer, Business Banking Division with Bank of
America, where she managed portfolio performance and credit standards for a $3
billion loan portfolio of small business customers.
Peter Yue serves as Executive Vice President and Director of Retail Banking.
Prior to joining the Bank in December 1999, Mr. Yue was a manager and
principal of Equal Escrow, Inc. He has also held prior positions as Vice
Chairman and Chief Executive Officer of Universal Bank, President and Chief
Executive Officer of American International Bank, and President and Chief
Executive Officer of First Public Savings Bank.
Donald Chow serves as Executive Vice President and Commercial Lending
Manager of the Bank. Mr. Chow has been with the Bank since April 1994. Mr.
Chow has over 25 years of experience in commercial lending. Before joining the
Bank as Senior Vice-President, Mr. Chow was First Vice President and Senior
Credit Officer for Mitsui Manufacturers Bank. Mr. Chow was also employed for
over 10 years with Security Pacific National Bank where he held a number of
positions, including Vice President and unit leader of commercial real estate
lending.
11
<PAGE>
Douglas Krause serves as Executive Vice President, General Counsel, and
Secretary of the Bank and holds these same positions with the Company since
its formation. Prior to joining the Bank in 1996 as Senior Vice President, Mr.
Krause was Corporate Senior Vice President and General Counsel of Metrobank.
Prior to that, Mr. Krause was with the law firms of Dewey Ballantine and
Jones, Day, Reavis and Pogue specializing in financial services. Mr. Krause is
a member of the Consumer Financial Services Committee of the California Bar
Association.
Wayland Bourne serves as the Senior Vice President / Commercial Services of
the Bank. Mr. Bourne joined the Bank in 1996 and is responsible for cash
management, and commercial non-credit products, sales, and service. Prior to
joining the Bank, Mr. Bourne was a Senior Vice President at Metrobank, a
Southern California regional business bank, where he developed its cash
management and non-credit services programs. Mr. Bourne began his banking
career at Union Bank, where he held a number of senior level positions.
Kwok-Yin Cheng serves as Senior Vice President of International Banking.
Prior to joining the Bank in June 1999, he was General Manager of the Pacific
Rim Business Division of Union Bank and Senior Vice President and Manager at
Manufacturer's Bank.
Mitchell Kitayama serves as Senior Vice President and Treasurer of the Bank.
Prior to joining the Bank in 1997 as First Vice President and Asset Liability
Manager, he was Senior Vice President and Treasurer of First American Bank
Texas. Mr. Kitayama was previously also Vice President and Treasurer of
CorEast Savings Bank and Goldome Realty Credit Corp. He is currently a board
member of the Los Angeles Chapter of the American Diabetes Association.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
For information concerning the market for the Company's Common Stock and
related shareholder matters, see "Common Stock Price Range and Dividends"
contained in the 1999 Annual Report, which is incorporated herein by
reference, and "Item 1. BUSINESS -- Regulation and Supervision -- Restrictions
on Transfer of Funds to the Company by the Bank."
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Consolidated Financial Statements and the accompanying notes
presented elsewhere herein.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Interest and dividend
income................. $ 148,027 $ 126,708 $ 107,092 $ 96,876 $ 85,355
Interest expense........ 76,142 71,043 62,646 57,268 54,376
---------- ---------- ---------- ---------- ----------
Net interest income..... 71,885 55,665 44,446 39,608 30,979
Provision for loan
losses................. 5,439 5,356 5,588 4,398 6,200
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses............ 66,446 50,309 38,858 35,210 24,779
Noninterest income...... 14,693 10,027 8,493 5,571 3,502
SAIF recapitalization
expense................ -- -- -- 7,040 --
Noninterest expense..... 39,509 32,626 29,010 28,049 26,585
---------- ---------- ---------- ---------- ----------
Income before provision
for income taxes....... 41,630 27,710 18,341 5,692 1,696
Provision for income
taxes 13,603 9,682 7,330 2,486 653
---------- ---------- ---------- ---------- ----------
Net income (1) ......... $ 28,027 $ 18,028 $ 11,011 $ 3,206 $ 1,043
========== ========== ========== ========== ==========
Basic earnings per share
(1) $ 1.23 $ 0.76 $ 0.46 $ 0.13 $ 0.04
<CAPTION>
Diluted earnings per
share (1)............... $ 1.22 $ 0.76 $ 0.46 $ 0.13 $ 0.04
<S> <C> <C> <C> <C> <C>
Average number of shares
outstanding, basic..... 22,757 23,775 23,775 23,775 23,775
Average number of shares
outstanding, diluted... 22,895 23,775 23,775 23,775 23,775
At Year End:
Total assets............ $2,152,630 $2,058,160 $1,734,339 $1,621,547 $1,371,140
Loans receivable, net... 1,486,641 1,100,579 934,850 862,640 776,476
Investment securities... 496,426 682,436 374,810 406,468 353,435
Deposits................ 1,500,529 1,292,937 1,235,072 1,182,886 1,157,469
Federal Home Loan Bank
advances............... 482,000 563,000 211,000 55,000 61,000
Stockholders' equity.... 150,080 150,830 132,552 122,375 118,290
Shares outstanding...... 22,423 23,775 23,775 23,775 23,775
Book value per share.... $ 6.69 $ 6.34 $ 5.58 $ 5.15 $ 4.98
<CAPTION>
Financial Ratios:
<S> <C> <C> <C> <C> <C>
Return on assets........ 1.35% 1.00% 0.70% 0.22%(2) 0.08%
Return on equity........ 18.96 12.83 8.91 2.71 (2) 1.13
Average stockholders'
equity to average
assets................. 7.12 7.80 7.87 8.16 7.07
Net interest margin..... 3.62 3.22 2.92 2.82 2.47
Efficiency ratio (3).... 40.56 46.52 52.47 75.61 (2) 74.39
<CAPTION>
Asset Quality Ratios:
<S> <C> <C> <C> <C> <C>
Net chargeoffs to
average loans.......... 0.17% 0.11% 0.37% 0.37% 1.47%
Nonperforming assets to
year end total assets.. 0.75 0.99 1.25 1.28 1.57
Allowance for loan
losses to year end
total gross loans...... 1.38 1.47 1.29 1.15 1.11
</TABLE>
- --------
(1) Excluding the non-recurring Savings Association Insurance Fund ("SAIF")
recapitalization assessment, net income and earnings per share (basic and
diluted) for the year ended December 31, 1996 were $7.4 million and
$0.31, respectively.
(2) Excluding the SAIF recapitalization assessment, the Company's return on
assets, return on equity and efficiency ratios were 0.51%, 6.26% and
59.89%, respectively, during the year ended December 31, 1996.
(3) Represents noninterest expense, excluding the amortization of intangibles
and investments in affordable housing partnerships, divided by the
aggregate of net interest income before provision for loan losses and
noninterest income.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of
operations, financial condition, liquidity, and capital resources of East West
Bancorp, Inc. 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 Consolidated Financial Statements and the accompanying
notes presented elsewhere herein.
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.
East West Bancorp, Inc. is a bank holding company. Its primary subsidiary,
East West Bank (the "Bank") is a state chartered bank with 29 branch offices
located in Los Angeles, Orange, San Francisco and Santa Clara counties. The
Bank's results of operations are primarily dependent on its net interest
income, which is the difference between the interest income earned on its
assets, primarily loans and investments, and the interest expense on its
liabilities, primarily deposits and borrowings. Net interest income may be
affected significantly by general economic and competitive conditions and
policies of regulatory agencies, particularly with respect to market interest
rates. The results of operations are also significantly influenced by the
level of noninterest expense, such as employee salaries and benefits;
noninterest income, such as fees on deposit-related services; and the Bank's
provision for loan losses. The Bank has two wholly-owned subsidiaries--E-W
Services, Inc., which holds property used by the Bank in its operations, and
East-West Investments, Inc., which primarily serves as a trustee for the Bank
in connection with real estate secured loans.
Acquisition of American International Bank
On January 18, 2000, the Company completed its acquisition of American
International Bank ("AIB") for $33.1 million in an all-cash transaction.
American International Bank, with assets of $199 million and total
stockholders' equity of $19.9 million as of December 31, 1999, was a state-
chartered bank with eight branches in Southern California. Over its 21-year
history, 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 Asian-American
customer base.
Results of Operations
The Company reported net income of $28.0 million for 1999, compared with
$18.0 million for 1998 and $11.0 million for 1997, representing an increase of
55% for 1999 and 64% for 1998. On a per share basis, net income was $1.22,
$0.76 and $0.46 for 1999, 1998 and 1997, respectively. During 1999, the
increase in net earnings is largely attributable to the growth in the loan and
investment securities portfolios as well as a reduction in the Company's cost
of funds. Further, sustained growth in noninterest-related revenues, as well
as continuing efforts to manage operational expenses, despite the Company's
growth, have also contributed to the increase in net income. Earnings in 1998
improved over 1997 primarily due to an increase in the average balance of
earning assets, higher yields on loans, a decrease in the provision for loan
losses and an increase in noninterest income. The Company's return on average
total assets increased to 1.35% in 1999, from 1.00% in 1998 and 0.70% in 1997,
while the return on average stockholders' equity increased to 18.96% in 1999,
compared with 12.83% in 1998 and 8.91% in 1997.
15
<PAGE>
Components of Net Income
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(In millions)
<S> <C> <C> <C>
Net interest income.................................. $ 71.9 $ 55.7 $ 44.4
Provision for loan losses............................ (5.4) (5.4) (5.6)
Noninterest income................................... 14.7 10.0 8.5
Noninterest expense.................................. (39.5) (32.6) (29.0)
Provision for income taxes........................... (13.6) (9.7) (7.3)
------ ------ ------
Net income......................................... $ 28.0 $ 18.0 $ 11.0
====== ====== ======
Return on average total assets....................... 1.35% 1.00% 0.70%
====== ====== ======
</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 in 1999 totaled $71.9
million, a 29% increase over net interest income of $55.7 million in 1998.
Total interest and dividend income during 1999 increased 17% to $148.0
million compared with $126.7 million during 1997. The increase in interest and
dividend income is due primarily to a 15% growth in the Bank's average earning
assets. Growth in the Bank's average loan and investment portfolios of 30% and
28%, respectively, partially offset by an 82% decrease in average short-term
investments, propelled the net increase in average earning assets. The net
growth in average earning assets was funded largely by increases in FHLB
advances and time deposits, offset in part by an 84% decline in short-term
borrowings. Another source of funding for the Bank also came from a 47% growth
in average noninterest-bearing demand deposits.
Total interest expense during 1999 increased 7% to $76.1 million compared
with $71.0 million a year ago. The increase in interest expense is primarily
attributable to a 74% increase in average FHLB advances and partially offset
by a decrease in average short-term borrowings.
Net interest margin, defined as taxable equivalent net interest income
divided by average earning assets, increased 40 basis points to 3.62% in 1999,
compared with 3.22% in 1998. Despite a 23 basis point decrease in loan yields
resulting primarily from a decline in the average prime rate during 1999, the
overall yield on earning assets increased to 7.46% in 1999 from 7.33% in 1998.
This is primarily due to the increased volume of average loans and investment
securities during the year which more than compensated for the decline in loan
yields. Another factor that accounted for the increase in overall yields on
earning assets is an increase in the yield on investment securities to 5.83%
in 1999 from 5.53% in 1998. This is largely due to purchases of fixed rate
securities during the latter half of 1998. Also contributing to the increase
in net interest margin is the growth in noninterest-bearing demand deposits as
well as a 27 basis point decrease in the overall cost of funds to 4.26% in
1999, from 4.53% in 1998, primarily due to a reduction in the cost of funds
for all categories of interest-bearing liabilities.
Comparing 1998 to 1997, net interest income increased 25% to $55.7 million
derived primarily from a 13% growth in total average interest-earning assets,
partially offset by increases in FHLB advances and time deposits. Further,
loan yields increased to 8.54% in 1998 from 7.93% in 1997 which is reflective
of the shift in the composition of the loan portfolio from lower yielding
single family residential mortgage loans to higher yielding commercial real
estate, construction and business loans consistent with the Bank's increased
commercial lending activities.
16
<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 years ended December 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Interest-earning assets:
Short-term
investments............ $ 40,262 $ 2,381 5.91% $ 227,112 $ 13,302 5.86% $ 212,536 $ 12,409 5.84%
Taxable investment
securities (1)(2)...... 609,587 35,560 5.83 477,338 26,405 5.53 385,965 21,455 5.56
Loans receivable
(1)(3)................. 1,306,306 108,547 8.31 1,004,477 85,806 8.54 915,202 72,577 7.93
FHLB stock............. 29,203 1,539 5.27 20,140 1,195 5.93 10,764 651 6.05
---------- -------- ---------- -------- ---------- --------
Total interest-
earning assets....... 1,985,358 148,027 7.46 1,729,067 126,708 7.33 1,524,467 107,092 7.03
-------- ---- -------- ---- -------- ----
Noninterest-earning
assets:
Cash and due from
banks................ 34,185 25,231 18,618
Allowance for loan
losses............... (19,191) (14,253) (11,172)
Other assets......... 76,192 60,537 38,110
---------- ---------- ----------
Total assets....... $2,076,544 $1,800,582 $1,570,023
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
- --------------------
Interest-bearing
liabilities:
Checking accounts...... $ 87,828 $ 1,060 1.21 $ 78,066 $ 1,072 1.37 $ 78,209 $ 1,173 1.50
Money market
accounts............... 51,448 1,594 3.10 28,051 1,010 3.60 17,565 622 3.54
Savings deposits....... 216,590 3,954 1.83 213,675 5,048 2.36 211,619 5,192 2.45
Time deposits.......... 922,107 42,959 4.66 845,749 42,369 5.01 818,317 41,407 5.06
Short-term
borrowings............. 19,679 1,080 5.49 119,638 6,767 5.66 157,054 8,811 5.61
FHLB advances.......... 491,203 25,495 5.19 282,091 14,777 5.24 95,450 5,441 5.70
---------- -------- ---------- -------- ---------- --------
Total interest-
bearing liabilities.. 1,788,855 76,142 4.26 1,567,270 71,043 4.53 1,378,214 62,646 4.55
-------- ---- -------- ---- -------- ----
Noninterest-bearing
liabilities:
Demand deposits........ 116,129 78,802 56,202
Other liabilities...... 23,712 14,009 11,973
Stockholders' equity... 147,848 140,501 123,634
---------- ---------- ----------
Total liabilities
and stockholders'
equity............. $2,076,544 $1,800,582 $1,570,023
========== ========== ==========
Interest rate spread.... 3.20% 2.80% 2.48%
==== ==== ====
Net interest income and
net interest margin..... $ 71,885 3.62% $ 55,665 3.22% $ 44,446 2.92%
======== ==== ======== ==== ======== ====
</TABLE>
- ----
(1) Includes amortization of premiums and accretion of discounts on investment
securities and loans receivable. Also includes the amortization of
deferred loan fees.
(2) Average balances exclude unrealized gains or losses on available for sale
securities.
(3) Average balances include nonperforming loans.
17
<PAGE>
Analysis of Changes in Net Interest Margin
Changes in the Bank's net interest income are a function of changes in rates
and volumes of both interest-earning assets and interest-bearing liabilities.
The following table sets forth information regarding changes in interest
income and interest expense for the years indicated. The total change for each
category of interest-earning asset and interest-bearing liability is segmented
into the change attributable to variations in volume (changes in volume
multiplied by old rate) and the change attributable to variations in interest
rates (changes in rates multiplied by old volume). Nonaccrual loans are
included in average loans used to compute this table.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
--------------------------- ---------------------------
Changes Due to Changes Due to
Total Volume Rates Total Rates
Change (1) (1) Change Volume (1) (1)
-------- -------- ------- ------- --------- -------
(In thousands)
INTEREST-EARNING ASSETS:
Short-term investments.. $(10,921) $(11,051) $ 130 $ 893 $ 851 $ 42
Taxable investment
securities............. 9,155 7,649 1,506 4,950 5,079 (129)
Loans receivable, net... 22,741 25,011 (2,270) 13,229 7,080 6,149
FHLB stock.............. 344 458 (114) 544 567 (23)
-------- -------- ------- ------- ------- -------
Total interest
income............. $ 21,319 $ 22,067 $ (748) $19,616 $13,577 $ 6,039
======== ======== ======= ======= ======= =======
INTEREST-BEARING
LIABILITIES:
Checking accounts....... $ (12) $ (380) $ 368 $ (101) $ (2) $ (99)
Money market accounts... 584 701 (117) 388 371 17
Savings deposits........ (1,094) 70 (1,164) (144) 50 (194)
Time deposits........... 590 2,633 (2,043) 962 1,388 (426)
Short-term borrowings... (5,687) (5,492) (195) (2,044) (2,099) 55
FHLB advances........... 10,718 10,852 (134) 9,336 10,639 (1,303)
-------- -------- ------- ------- ------- -------
Total interest
expense............ $ 5,099 $ 8,384 $(3,285) $ 8,397 $10,347 $(1,950)
-------- -------- ------- ------- ------- -------
CHANGE IN NET INTEREST
INCOME................. $ 16,220 $ 13,683 $ 2,537 $11,219 $ 3,230 $ 7,989
======== ======== ======= ======= ======= =======
<S> <C> <C> <C> <C> <C> <C>
</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 $5.4 million for both 1999 and
1998 and $5.6 million for 1997. 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.
18
<PAGE>
Noninterest Income
Components of Noninterest Income
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
(In millions)
<S> <C> <C> <C>
Loan fees................................................. $ 2.28 $ 2.39 $1.69
Branch fees............................................... 3.39 2.58 2.09
Letters of credit fees and commissions.................... 4.11 2.79 1.17
Net gain on sales of securities available for sale........ 0.69 1.32 2.72
Net gain on trading securities............................ 1.90 -- --
Net gain on sale of affordable housing investments........ 0.40 -- --
Net gain on sale of branch................................ 0.68 -- --
Amortization of negative intangibles...................... 0.41 0.41 0.41
Other..................................................... 0.83 0.54 0.41
------ ------ -----
Total................................................... $14.69 $10.03 $8.49
====== ====== =====
</TABLE>
Noninterest income includes revenues earned from sources other than interest
income. These sources include: ancillary fees on loans, service charges and
fees on deposit accounts, fees and commissions generated from trade finance
activities and the issuance of letters of credit, and net gains on sales of
trading securities, investment securities available for sale, and affordable
housing investments.
Noninterest income increased 47% to $14.7 million during 1999. Included in
noninterest income are a one-time $676 thousand gain on sale of a branch and a
$402 thousand gain on sale of an investment in affordable housing
partnerships. Excluding these non-recurring sources of revenue, noninterest
income increased 36% to $13.6 million during 1999 primarily due to growth in
fee-based service income related to letters of credit fees and commissions and
branch services. Slightly offsetting these increases was a 4% decrease in
ancillary loan fees to $2.3 million primarily due to a decline in secondary
market activities.
Letters of credit fees and commissions increased $1.3 million, or 48%, to
$4.1 million during 1999. This increase is attributed primarily to a $925
thousand increase in issuance and maintenance fees related to standby letters
of credit. The remainder of the increase is attributed to trade finance
activities which experienced a 33% growth in the number of transactions
processed during 1999 in comparison to 1998.
Branch fees, which represent revenues derived from branch operations,
amounted to $3.4 million in 1999, a 31% increase from the $2.6 million earned
during 1998. This was primarily due to higher revenues derived from analysis
charges on commercial deposit accounts, increased fees related to transaction
accounts, and higher revenues from the sale of nonproprietary mutual funds.
Other contributions to noninterest income include $685 thousand and $1.3
million in gains on sales of available for sale securities for 1999 and 1998,
respectively. Gains on trading securities totaled $1.9 million during 1999.
There were no trading securities gains recorded in 1998.
Comparing 1998 to 1997, noninterest income increased $1.5 million, or 18%,
to $10.0 million. This is primarily due to higher revenues generated from
trade finance operations and the issuance and maintenance of standby letters
of credit which increased 139% to $2.8 million. Additionally, growth in
revenues from wire transfer operations, commercial deposit accounts, loan
servicing and secondary market operations further contributed to increased
noninterest income in 1998. Partially offsetting these increases is a 51%
decline in net gains on sales of available for sale securities.
19
<PAGE>
Noninterest Expense
Components of Noninterest Expense
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(In millions)
<S> <C> <C> <C>
Compensation and other employee benefits........ $18.48 $17.28 $15.73
Net occupancy................................... 5.65 4.97 4.65
Data processing................................. 1.40 1.25 1.24
Amortization of positive intangibles............ 1.57 1.24 1.24
Amortization of affordable housing investments.. 2.99 1.02 0.21
Deposit insurance premiums and regulatory
assessments.................................... 0.86 0.83 0.15
Other real estate owned operations, net......... (0.34) (0.38) 0.30
Other........................................... 8.90 6.42 5.49
------ ------ ------
Total......................................... $39.51 $32.63 $29.01
====== ====== ======
Efficiency ratio ............................... 41% 47% 52%
====== ====== ======
</TABLE>
Noninterest expense, which is comprised primarily of compensation and
employee benefits, occupancy and other operating expenses increased 21% to
$39.5 million during 1999. Compensation and employee benefits increased 7% to
$18.5 million which is reflective of the Company's continuing growth--through
organic expansion and through the acquisition of First Central Bank at the end
of May 1999. Additionally, the impact of annual salary and related cost
increases for existing employees, as well as increases in incentive
compensation tied to the Company's performance, further contributed to the
increase in compensation and employee benefits.
Occupancy expenses increased 14% to $5.6 million during 1999 primarily
reflecting four months of operations for the branches and administrative
offices of First Central Bank, prior to their integration with East West Bank
locations, an overhead factor which was not present during 1998. Additionally,
the impact of normal rent adjustments in existing leases, as well as increased
expenses related to the outsourcing of computer hardware maintenance further
contributed to the rise in occupancy expenses. This is partially offset by the
sale of the Irvine branch to People's Bank of California in May 1999.
The amortization of investments in affordable housing partnerships increased
194% to $2.99 million during 1999, compared with $1.0 million in 1998. The
increase in amortization reflects the impact of additional investment
purchases made since year-end 1998. Total investments in affordable housing
partnerships amounted to $26.5 million as of December 31, 1999, compared with
$18.6 million as of December 31, 1998.
The amortization of positive intangibles, which include premiums on deposits
acquired and excess of purchase price over fair value of net assets acquired
("goodwill"), increased 27% during 1999 as a result of the First Central Bank
acquisition. The amounts of goodwill and deposit premium recorded by the
Company for this transaction totaled $3.5 million and $2.5 million,
respectively, and are being amortized straight line over 15 and 7 years,
respectively.
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 38% to $8.9 million in 1999, compared with $6.4 million for 1998.
The increase in other operating expenses for both periods can be attributed to
the Company's growth, which includes the acquisition of First Central Bank as
well as organic expansion. Further, various expenses directly related to the
Company's change in status from a privately held institution to a public
company have also contributed to the increase in other operating expenses.
These expenses include, but are not limited to, legal fees, investor relations
expenses, Delaware corporation franchise taxes, SEC and NASDAQ fees, and
registrar and transfer agent fees.
Comparing 1998 to 1997, noninterest expense increased $3.6 million, or 13%,
to $32.6 million. The increase is comprised primarily of increases in
compensation and employee benefits of $1.6 million due to the hiring of
additional personnel in line with the Company's growth; occupancy expenses of
$328 thousand resulting from
20
<PAGE>
the opening of the Cupertino and Milpitas branches; amortization of affordable
housing partnerships of $807 thousand reflecting a full year of amortization
for investments purchased in 1997; deposit insurance premiums of $677 thousand
reflecting a full year of assessments without the benefit of the SAIF refund
received in 1997; and other operating expenses of $929 thousand attributed to
the Company's overall growth. These increased expenses were partially offset
by a decrease in expenses related to OREO operations of $680 thousand
reflecting reduced loss writedowns and increased rental income collected from
OREO properties.
Despite the Company's growth over the past several years, continuing efforts
to closely manage operational expenses have resulted in a significant
improvement in the Company's efficiency ratio, which represents noninterest
expense (excluding the amortization of intangibles and investments in
affordable housing partnerships) divided by the aggregate of net interest
income before provision for loan losses and noninterest income (excluding the
amortization of intangibles). The Company's efficiency ratio improved to 41%
in 1999, compared to 47% in 1998 and 52% in 1997.
Provision for Income Taxes
The provision for income taxes increased 40% to $13.6 million during 1999,
compared with $9.7 million in 1998. This is primarily due to higher pretax
income partially offset by tax credits from qualified affordable housing
investments. Tax credits utilized during 1999 totaled $3.2 million, compared
to $1.7 million for 1998. The 1999 provision reflects an effective tax rate of
32.7%, compared with 34.9% for 1998. Comparing 1998 to 1997, the provision for
income taxes increased 32% to $9.7 million, compared to $7.3 million for 1997.
The 1997 provision reflects an effective tax rate of 40.0% and tax credits of
$337 thousand.
Balance Sheet Analysis
The Company's total assets increased $94.5 million, or 5%, to $2.15 billion,
as of December 31, 1999. The increase in total assets was comprised primarily
of a $386.1 million growth in loans receivable, partially offset by decreases
in short-term investments of $114.0 million and investment securities
available for sale of $186.0 million. The increase in total assets was funded
by an increase of $207.6 million in deposits, partially offset by decreases in
FHLB advances of $81.0 million and other borrowings of $32.4 million.
Investment Securities Held for Trading
Investment securities held for trading are investment grade securities which
are generally held by the Bank for a period of seven days or less. Net gains
from trading securities amounted to $1.9 million during 1999. There were no
purchases and sales of investment securities held for trading during 1998.
Investment Securities Available for Sale
Income from investing activities provides a significant portion of the
Bank's total income. Management generally maintains an investment portfolio
with an adequate mix of fixed rate and adjustable rate securities with
relatively short maturities to minimize overall interest rate risk. The Bank
has a substantial investment in residential mortgage-backed securities,
consisting of pass-through certificates issued by GNMA, FHLMC, FNMA and
private issuers. As of December 31, 1999, the carrying value of mortgage-
backed securities totaled $426.4 million, or 20% of total assets. At December
31, 1999, the Bank held $1.0 million, $144.4 million, $239.1 million, and
$41.9 million of mortgage-backed securities issued by GNMA, FHLMC, FNMA and
private issuers, respectively. Mortgage-backed securities with a total
carrying value of $220.6 million, or 52% of the total portfolio, had
adjustable interest rates at December 31, 1999. At December 31, 1999, $132.3
million of mortgage-backed securities were pledged as collateral for public
funds.
21
<PAGE>
The following table sets forth the carrying values of investment securities
available for sale at the end of each of the past three years:
<TABLE>
<CAPTION>
At December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
U.S. Treasury securities......................... $ 975 $ -- $ --
U.S. Government agency securities................ 68,871 -- --
Mortgage-backed securities....................... 426,378 682,436 374,810
Obligations of states and political
subdivisions.................................... 202 -- --
-------- -------- --------
Total investment securities available for sale.. $496,426 $682,436 $374,810
======== ======== ========
</TABLE>
Total investment securities available for sale decreased 27% to $496.4
million as of December 31, 1999. Total repayments, including calls and
redemptions, totaled $409.5 million during 1999. Proceeds from such repayments
were utilized to purchase additional available for sale securities and to fund
loan originations and purchases. During 1999, the Bank recorded net gains
totaling $685 thousand on sales of available for sale securities. Proceeds
from sales of securities were applied towards the repayment of FHLB advances
as well as funding a portion of the loan originations and loan purchases made
during 1999.
The following table sets forth certain information regarding the carrying
values, weighted average yields, and contractual maturity distribution,
excluding periodic principal payments, of the Bank's investment securities
available for sale portfolio at December 31, 1999:
<TABLE>
<CAPTION>
After Five Years
After One Year but but within
Within One Year within Five Years Ten Years After Ten Years Total
---------------- ------------------- ----------------- ----------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- ---------- -------- --------- ------- --------- ------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury........... $ 975 5.05% $ -- --% $ -- --% $ -- --% $ 975 5.05%
U.S. Government agency.. -- -- 10,525 5.77 -- -- 58,346 6.58 68,871 6.45
Mortgage-backed
securities............. -- -- -- -- 59,656 6.11 366,722 6.32 426,378 6.29
Obligations of states
and political
subdivisions........... -- -- 202 4.71 -- -- -- 202 4.71
------- ---------- --------- --------- --------
Total.................. $ 975 5.05 $ 10,727 5.75 $ 59,656 6.11 $ 425,068 6.34 $496,426 6.31
======= ========== ========= ========= ========
</TABLE>
Loans
The Bank offers a broad range of products designed to meet the credit needs
of its borrowers. The Bank's lending activities consist of residential
mortgage loans, multifamily residential real estate loans, commercial real
estate loans, construction loans, commercial business and trade finance loans,
and consumer loans. Net loans receivable increased 35% to $1.5 billion at
December 31, 1999, essentially reflecting the Bank's continuing trend of
replacing lower yielding assets, such as short-term investments and available
for sale securities, in favor of higher yielding assets. Excluding the $55.0
million of loans acquired from First Central Bank, organic loan growth during
1999 was 30%.
The Bank experienced strong loan demand throughout 1999. It continued to
focus its lending efforts on originating multifamily and commercial real
estate and commercial business loan products, as evidenced by the composition
of net loan growth during 1999. Excluding loans acquired from First Central
Bank, the growth in loans is comprised primarily of increases in multifamily
loans of $134.5 million or 80%, commercial real estate loans of $125.4 million
or 35%, construction loans of $41.2 million or 52%, and commercial business
loans, including trade finance products, of $21.7 million or 10%.
22
<PAGE>
The following table sets forth the composition of the loan portfolio at the
end of each of the past five years:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential, one to
four units........... $ 278,161 18.4% $ 270,444 24.2% $356,478 37.5% $425,270 48.7% $474,192 60.4%
Residential,
multifamily.......... 311,193 20.6 167,545 15.0 144,147 15.2 141,649 16.2 150,333 19.1
Commercial and
industrial real
estate............... 518,074 34.4 358,850 32.0 269,028 28.3 214,599 24.5 142,423 18.1
Construction.......... 122,363 8.1 78,922 7.0 27,020 2.8 11,607 1.3 2,151 0.3
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total real estate
loans.............. 1,229,791 81.5 875,761 78.2 796,673 83.8 793,125 90.7 769,099 97.9
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Other loans:
Business, commercial.. 248,865 16.5 223,318 20.0 138,408 14.6 71,672 8.2 11,880 1.5
Automobile............ 5,284 0.4 4,972 0.4 5,259 0.6 3,877 0.4 840 0.1
Other consumer........ 23,834 1.6 15,156 1.4 9,137 1.0 5,953 0.7 3,680 0.5
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total other loans... 277,983 18.5 243,446 21.8 152,804 16.2 81,502 9.3 16,400 2.1
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total gross
loans............ 1,507,774 100.0% 1,119,207 100.0% 949,477 100.0% 874,627 100.0% 785,499 100.0%
===== ===== ===== ===== =====
Unearned fees, premiums
and discounts, net..... (289) (2,122) (2,354) (1,903) (288)
Allowance for loan
losses................. (20,844) (16,506) (12,273) (10,084) (8,735)
---------- ---------- -------- -------- --------
Loans receivable,
net................ $1,486,641 $1,100,579 $934,850 $862,640 $776,476
========== ========== ======== ======== ========
</TABLE>
23
<PAGE>
Residential Mortgage Loans. The Company offers first mortgage loans secured
by one-to-four unit residential properties located in the Bank's primary
lending area. At December 31, 1999, $278.2 million or 18% of the loan
portfolio was secured by one-to-four family residential real estate mortgages,
compared to $270.4 million or 24% at December 31, 1998. The decrease in the
percentage of residential mortgage loans in comparison to the total loan
portfolio reflects the Bank's strategy of de-emphasizing the origination of
single family mortgage loans for its portfolio. Under the Bank's lending
strategy, substantially all new fixed-rate single family residential loans are
sold into the secondary market.
Multifamily and Commercial Real Estate Loans. The Bank has historically
originated a limited number of mortgage loans secured by multifamily and
commercial real estate as part of its business operations. In recent years,
the Bank has increased its emphasis on such lending activities. While real
estate lending activities are collateralized by real property, these
transactions are subject to similar credit evaluation, underwriting and
monitoring standards as those applied to commercial loans. Multifamily and
commercial real estate loans accounted for $311.2 million or 21% and $518.1
million or 34%, respectively, of the Bank's loan portfolio at December 31,
1999. At year-end 1998, multifamily and commercial real estate loans amounted
to $167.5 million or 15% and $358.9 million or 32%, respectively.
Construction Loans. The Bank offers loans to finance the construction of
income-producing or owner-occupied buildings. The Bank limits its exposure in
construction loans to no more than 25% of total loans. At December 31, 1999,
construction loans accounted for $122.4 million or 8% of the Bank's loan
portfolio. This compares with $78.9 million or 7% of the loan portfolio at
December 31, 1998.
Commercial Loans. The Bank finances small and middle-market businesses in a
wide spectrum of industries throughout California. The Bank offers commercial
loans for working capital, accounts receivable and inventory lines. At
December 31, 1999, commercial loans accounted for $145.0 million or 10% of the
Bank's loan portfolio compared to $118.2 million or 11% at December 31, 1998.
Trade Finance. The Bank offers a variety of international finance and trade
services and products, including letters of credit, revolving lines of credit,
import loans, bankers' acceptances, working capital lines, domestic purchase
financing, and pre-export financing. Total fee income generated from trade
finance activities has grown significantly from $26 thousand in 1994 to $1.8
million in 1999. A substantial portion of this business involves California-
based customers engaged in import activities. Management does not believe that
these activities have been significantly adversely affected by the economic
crisis in Asia over the past several years.
At December 31, 1999, loans to finance international trade totaled $103.9
million or 7% of the Bank's loan portfolio. Of this amount, approximately 99%
was made to borrowers on the import side of international trade. At December
31, 1998, such loans amounted to $105.1 million or 9% of the Bank's loan
portfolio. These financings are generally made through letters of credit
ranging from $100 thousand to $1 million. All trade finance transactions are
U.S. dollar denominated.
Affordable Housing. The Bank is engaged in a variety of lending and credit
enhancement programs to finance the development of affordable housing
projects, which generally are eligible for federal low income housing tax
credits. As of December 31, 1999, the Bank had outstanding $131.7 million of
letters of credit, which were issued to enhance the ratings of revenue bonds
used to finance affordable housing projects. This compares to $138.1 million
as of year-end 1998. Credit facilities for individual projects generally range
in size from $1 million to $10 million.
24
<PAGE>
The following table presents the maturity schedule of the Bank's loan
portfolio at December 31, 1999. All loans are shown maturing based upon
contractual maturities, and include scheduled repayments but not potential
prepayments. Demand loans, loans having no stated schedule of repayments and
no stated maturity, and overdrafts are reported as due within one year. Loan
balances have not been reduced for undisbursed loan proceeds, unearned
discounts, and the allowance for loan losses. Nonaccrual loans of $10.9
million are included in the within one year category:
<TABLE>
<CAPTION>
After One
Within but within More than
One Year Five Years Five Years Total
-------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Residential, one to four units... $ 9,088 $ 33,094 $235,979 $ 278,161
Residential, multifamily......... 10,356 95,173 205,664 311,193
Commercial and industrial real
estate.......................... 94,455 372,719 50,900 518,074
Construction..................... 102,718 19,645 -- 122,363
Business, commercial............. 225,813 21,992 1,060 248,865
Other consumer................... 7,109 7,446 14,563 29,118
-------- -------- -------- ----------
Total.......................... $449,539 $550,069 $508,166 $1,507,774
======== ======== ======== ==========
</TABLE>
As of December 31, 1999, excluding nonaccrual loans, outstanding loans
scheduled to be repriced within one year, after one but within five years, and
in more than five years, are as follows:
<TABLE>
<CAPTION>
After One
Within but within More than
One Year Five Years Five Years Total
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Total fixed rate.................... $ 92,807 $163,358 $24,237 $ 280,402
Total variable rate................. 1,185,762 18,813 22,797 1,227,372
---------- -------- ------- ----------
Total............................. $1,278,569 $182,171 $47,034 $1,507,774
========== ======== ======= ==========
</TABLE>
Nonperforming Assets
Loans are continually monitored by management and the Board of Directors.
The Bank's policy is to place a loan on nonaccrual status if either (i)
principal or interest payments are past due in excess of 90 days; or (ii) the
full collection of principal or interest becomes uncertain, regardless of the
length of past due status. When a loan reaches nonaccrual status, any interest
accrued on the loan is reversed and charged against current income. In
general, subsequent payments received are applied to the outstanding principal
balance of the loan. Nonaccrual loans that demonstrate a satisfactory payment
trend for several months are returned to full accrual status subject to
management's assessment of the full collectibility of the account. Nonaccrual
loans totaled $10.9 million at December 31, 1999, compared to $9.8 million at
year-end 1998. Nonaccrual loans as a percentage of total loans outstanding
were 0.73% and 0.88% at December 31, 1999 and 1998, respectively. Loans
totaling $10.5 million were placed on nonaccrual status during 1999. The
increase in nonaccrual loans was partially offset by $6.2 million in payoffs,
$2.3 million in loans brought current and three loans totaling $909 thousand
that were transferred to other real estate owned. The increase in nonaccrual
loans during 1999 is comprised of $1.2 million in residential single family
loans and $8.2 million in commercial business loans and $1.1 million in trade
finance loans.
Restructured loans or loans that have had their original terms modified
totaled $4.7 million at December 31, 1999, compared with $5.9 million year-end
1998. The net decrease in restructured loans reflects payments received offset
by the addition of two commercial loans.
25
<PAGE>
Other real estate owned ("OREO") includes properties acquired through
foreclosure or through full or partial satisfaction of loans. The difference
between the fair value of the real estate or other collateral, less the
estimated costs of disposal, and the loan balance at the time of transfer to
OREO is reflected in the allowance for loan losses as a charge-off. Any
subsequent declines in fair value of the OREO after the date of transfer are
recorded through a provision for writedowns on OREO. Routine holding costs,
net of any income and gains and losses on disposal, are reported as
noninterest expense. Other real estate owned totaled $577 thousand and
$4.6 million at December 31, 1999 and 1998, respectively. Additions to OREO,
comprised primarily of single family residential properties, totaled $1.1
million during 1999. The Bank sold seventeen properties with a combined book
value of $4.7 million during 1999. Net gains amounting to $538 thousand were
recognized on OREO sales during 1999. The Bank is actively marketing the
remaining properties.
The following table sets forth information regarding nonaccrual loans,
restructured loans and other real estate owned as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans................. $10,933 $ 9,762 $ 8,490 $11,613 $ 7,496
Loans past due 90 days or more
but not on nonaccrual........... -- 129 2,403 206 --
------- ------- ------- ------- -------
Total nonperforming loans...... 10,933 9,891 10,893 11,819 7,496
------- ------- ------- ------- -------
Restructured loans............... 4,700 5,936 7,487 5,485 7,604
Other real estate owned, net..... 577 4,600 3,217 3,491 6,388
------- ------- ------- ------- -------
Total nonperforming assets....... $16,210 $20,427 $21,597 $20,795 $21,488
======= ======= ======= ======= =======
Total nonperforming assets to
total assets.................... 0.75% 0.99% 1.25% 1.28% 1.57%
Allowance for loan losses to
nonperforming loans............. 190.65 166.88 112.67 85.32 116.53
Nonperforming loans to total
gross loans..................... 0.73 0.88 1.15 1.35 0.95
</TABLE>
At December 31, 1999 and 1998, the Bank had classified $20.9 million and
$10.0 million, respectively, of its loans as impaired, with specific reserves
of $1.3 million and $350 thousand, respectively. Total chargeoffs associated
with loans classified as impaired at December 31, 1999 amounted to $1.1
million, compared to $1.6 million for impaired loans at year-end 1998. The
Bank's average recorded investment in impaired loans at December 31, 1999 and
1998 was $21.4 million and $10.5 million, respectively. During 1999 and 1998,
gross interest income that would have been recorded on impaired loans, had
they performed in accordance with their original terms, totaled $2.0 million
and $1.1 million, respectively. Of this amount, actual interest recognized on
impaired loans, on a cash basis, was $1.6 million and $890 thousand,
respectively.
26
<PAGE>
Allowance for Loan Losses
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. While management believes that
the allowance for loan losses is adequate at December 31, 1999, future
additions to the allowance will be subject to continuing evaluation of
estimated and known, as well as inherent, risks in the loan portfolio.
At December 31, 1999, the allowance for loan losses amounted to $20.8
million, or 1.38% of total loans, compared with $16.5 million, or 1.47% of
total loans, at December 31, 1998. The following table summarizes activity in
the allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance balance,
beginning of year....... $ 16,506 $ 12,273 $ 10,084 $ 8,735 $ 14,515
Allowance from
acquisition............. 1,150 -- -- -- --
Provision for loan
losses.................. 5,439 5,356 5,588 4,398 6,200
Actual charge-offs:
1-4 family residential
real estate........... 26 196 469 530 1,666
Multifamily real
estate................ 44 588 1,595 1,919 5,251
Commercial and
industrial real
estate................ -- 60 1,079 985 5,350
Business, commercial... 2,786 1,689 986 92 --
Automobile............. 19 130 5 28 27
Other.................. 2 3 2 17 46
---------- ---------- -------- -------- --------
Total charge-offs.... 2,877 2,666 4,136 3,571 12,340
---------- ---------- -------- -------- --------
Recoveries:
1-4 family residential
real estate........... 17 172 12 49 --
Multifamily real
estate................ 207 1 275 174 35
Commercial and
industrial real
estate................ 29 845 385 284 164
Business, commercial... 358 480 41 3 --
Automobile............. 14 45 19 9 9
Other.................. 1 -- 5 3 152
---------- ---------- -------- -------- --------
Total recoveries..... 626 1,543 737 522 360
---------- ---------- -------- -------- --------
Net charge-offs.... 2,251 1,123 3,399 3,049 11,980
---------- ---------- -------- -------- --------
Allowance balance, end of
year.................... $ 20,844 $ 16,506 $ 12,273 $ 10,084 $ 8,735
========== ========== ======== ======== ========
Average loans
outstanding............. $1,306,306 $1,004,477 $915,202 $819,868 $814,970
========== ========== ======== ======== ========
Total loans outstanding,
end of year............. $1,507,774 $1,119,207 $949,477 $874,627 $785,499
========== ========== ======== ======== ========
Net charge-offs to
average loans........... 0.17% 0.11% 0.37% 0.37% 1.47%
Allowance for loan losses
to total gross loans
at end of year.......... 1.38 1.47 1.29 1.15 1.11
</TABLE>
Net chargeoffs totaled $2.3 million, or 0.17% of average loans outstanding,
during 1999. This compares to net chargeoffs of $1.1 million, or 0.11% of
average loans outstanding, during 1998. Despite the reduced level of net
chargeoffs and nonperforming assets during 1999 and 1998, in comparison to the
preceding three years, the Bank recorded provisions for loan losses of $5.4
million during 1999 and 1998 to compensate for both the growth--35% in 1999
and 18% in 1998--as well as the changing composition of the Bank's loan
portfolio. The overall portfolio continues to shift away from residential
mortgage loans to commercial real estate and business loans. At December 31,
1999, multifamily, commercial real estate, construction and commercial
business loans, collectively, comprised 80% of the total loan portfolio,
compared to only 74% at year-end 1998 and 61% at year-end 1997.
27
<PAGE>
The following table reflects management's allocation of the allowance for
loan losses by loan category and the ratio of each loan category to total
loans as of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- ------------
Amount % Amount % Amount % Amount % Amount %
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1-4 family residential
real estate............. $ 345 18.4% $ 500 24.2% $ 894 37.5% $ 996 48.7% $1,327 60.4%
Multifamily real
estate.................. 2,735 20.6 2,435 15.0 3,022 15.2 3,445 16.2 3,298 19.1
Commercial and
industrial real estate.. 3,110 34.4 1,373 32.0 1,059 28.3 2,044 24.5 2,772 18.1
Construction............ 2,597 8.1 2,339 7.0 404 2.8 66 1.3 23 0.3
Business, commercial.... 9,244 16.5 7,679 20.0 5,249 14.6 1,357 8.2 377 1.5
Automobile.............. 30 0.4 45 0.4 33 0.6 27 0.4 6 0.1
Consumer and other...... 9 1.6 22 1.4 32 1.0 23 0.7 19 0.5
Year 2000 exposure...... -- 600 -- -- --
Unallocated............. 2,774 1,513 1,580 2,126 913
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
Total................. $20,844 100.0% $16,506 100.0% $12,273 100.0% $10,084 100.0% $8,735 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ====== =====
</TABLE>
28
<PAGE>
Included in the allowance for loan losses as of December 31, 1998 was $600
thousand in reserves that were earmarked to absorb exposure to "Year 2000"
issues. No such allocation was deemed necessary at December 31, 1999 based on
positive customer feedback indicating a lack of Year 2000-related problems
that had a negative impact on asset quality. The increase in the allowance
amount at December 31, 1999 is primarily due to the increased allowance on
commercial business loans as a result of higher levels of criticized and
classified assets within this loan category.
The volume of multifamily loans increased to 21% of the total loan
portfolio, compared to 15% as of year-end 1998. Despite this substantial shift
in the concentration level, loss reserves allocated to this loan category
increased by only $300 thousand which actually represents a decrease to 13% of
the total allowance amount, compared to 15% as of December 31, 1998. This is
primarily due to the fact that almost 99% of the loans in this pool are not
classified (i.e. rated "Pass"). Loss factors for multifamily loans that are
rated "Pass" at December 31, 1999 decreased 36% in comparison to loss factors
for this same category at year-end 1998.
The $1.7 million increase in allocated loss reserves on commercial real
estate loans is primarily driven by the increase in the volume of loans in
this loan category, which rose $159.2 million or 44%.
The allowance for loan losses of $20.8 million at December 31, 1999 exceeded
the Bank's allocated allowance by $2.8 million, or 13% of the total allowance.
This compares to an unallocated allowance of $1.5 million, or 9%, as of
December 31, 1998. The $2.8 million unallocated allowance at December 31, 1999
is comprised of two elements. First, the Bank has set aside $1.8 million, or
approximately 10% of the allocated allowance amount of $18.1 million at
December 31, 1999, to compensate for the estimation risk associated with the
classification migration and individual loan review analysis methodologies .
The remaining $1 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 $23.5 million. Loss
factors, ranging from 2% to 4% of the total credit facility, have been
assigned to absorb the loss exposure on this type of credit offering.
The unallocated allowance at December 31, 1998 of $1.5 million, which
represents approximately 10% of the allocated allowance amount of $14.4
million, was set aside to compensate for the estimation risk associated with
the Bank's reserve methodologies.
Deposits
The Bank offers a wide variety of retail deposit account products to both
consumer and commercial deposit customers. Time deposits, consisting primarily
of retail fixed-rate certificates of deposit, comprised 67% of the deposit
portfolio at December 31, 1999, compared to 66% at year-end 1998. Non-time
deposits--including noninterest bearing demand accounts, interest-bearing
checking accounts, savings deposits and money market accounts--accounted for
33% of the deposit portfolio at December 31, 1999, compared to 34% at year-end
1998.
Deposits increased $207.6 million, or 16%, to $1.50 billion at December 31,
1999. The increase in deposits reflects $92.6 million in deposits acquired
through First Central Bank in May 1999, partially offset by $17.1 million of
deposits sold to People's Bank of California in connection with the sale of
the Bank's Irvine branch during the same month. Excluding these transactions,
internal deposit growth amounted to $132.1 million, or 10%, during 1999,
primarily due to a 12% increase in time deposits of $103.4 million, resulting
from the growth in brokered deposits and various promotions associated with
the Chinese New Year holiday and the Year 2000. Although the Company
occasionally promotes certain time deposit products, its efforts are largely
concentrated in increasing the volume of low-cost transaction accounts which
generate higher fee income and are a less costly source of funds in comparison
to time deposits. This is evidenced by an organic growth in noninterest-
bearing demand deposits of $17.0 million, or 17%, and money market accounts of
$17.2 million, or 44%, both almost entirely from commercial accounts.
Included in time deposits are $82.7 million and $3.7 million of brokered
deposits at December 31, 1999 and 1998, respectively. The increase of $79.0
million essentially reflects the replacement of Federal Home Loan Bank
advances with brokered deposits as an alternate source of funding. As part of
its overall preparation to
29
<PAGE>
mitigate potential Year 2000 liquidity contingencies, 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.
Public deposits increased 10% to $119.8 million as of December 31, 1999,
compared with $109.2 million at year-end 1998. The balance of public funds at
year-end 1999 is comprised almost entirely of deposits from the State of
California. Notwithstanding the increases in brokered and public deposits
during 1999, the Bank's principal market strategy continues to be based on its
reputation as a community bank that provides quality products and personal
customer service.
Time deposits greater than $100 thousand totaled $513.8 million, accounting
for 34% of the deposit portfolio at December 31, 1999. These accounts,
consisting primarily of deposits by consumers and public funds, had a weighted
average interest rate of 5.11% at December 31, 1999. The following table
provides the remaining maturities at December 31, 1999 of time deposits
greater than $100 thousand (in thousands):
<TABLE>
<S> <C>
3 months or less............................................... $294,639
Over 3 months through 6 months................................. 95,297
Over 6 months through 12 months 83,993
Over 12 months................................................. 39,916
--------
Total........................................................ $513,845
========
</TABLE>
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 decreased 98% to
$600 thousand at December 31, 1999, compared to $33.0 million at December 31,
1998. At December 31, 1999, the balance of short-term borrowings consisted
entirely of federal funds purchased. In contrast, the balance of short-term
borrowings at December 31, 1998 was comprised entirely of securities sold
under agreements to repurchase. During 1999, the Bank favored utilizing
federal funds purchased as a source of short-term liquidity over securities
sold under agreements to repurchase, primarily because federal funds purchased
do not require the pledging of collateral. The overall decrease in short-term
borrowings during the year was largely due to runoffs on short-term
investments and investment securities available for sale.
The following table provides information on securities sold under agreements
to repurchase for the past three years:
<TABLE>
<CAPTION>
As of and for the Year Ended
December 31,
------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Average balance outstanding during the
year...................................... $ 9,159 $ 118,588 $ 157,054
Maximum amount outstanding at any month-end
during the year........................... $ 33,000 $ 191,635 $ 300,000
Weighted average interest rate during the
year...................................... 5.05% 5.62% 5.61%
Total short-term borrowings at end of
year...................................... $ -- $ 33,000 $ 139,000
Weighted average interest rate at end of
year...................................... -- % 5.75% 6.08%
</TABLE>
FHLB advances decreased 14% to $482.0 million as of December 31, 1999, a
decrease of $81.0 million from December 31, 1998. The decrease in FHLB
advances resulted primarily from the growth in brokered deposits as an
alternate source of funding, and to a lesser extent, from runoffs in short-
term investments and investment securities. At December 31, 1999 and 1998,
FHLB advances had a weighted average interest rate of 5.87% and 4.95%,
respectively. Only $14.0 million, or 3% of outstanding FHLB advances at
December 31, 1999, had remaining maturities greater than one year.
30
<PAGE>
Capital Resources
The primary source of capital for the Company is the retention of net after
tax earnings. At December 31, 1999, stockholders' equity totaled $150.1
million, a decrease of less than 1% from $150.8 million as of December 31,
1998. The decrease is due primarily to: (i) repurchases of $14.7 million or
1,485,863 shares of common stock in connection with the Company's stock
repurchase programs, and to a much lesser degree, from forfeitures of
restricted stock awards; (ii) payment of quarterly 1999 cash dividends
totaling $2.7 million; and (iii) a net increase of $11.8 million in unrealized
losses on available-for-sale securities. These transactions were offset by (i)
net income of $28.0 million during 1999; (ii) net issuance of common stock
totaling $218 thousand under the Company's Employee Stock Purchase Plan; and
(iii) stock compensation cost of $249 thousand related to the Company's
Restricted Stock Award Program initiated during the latter part of 1999.
Management is committed to maintaining capital at a level sufficient to
assure shareholders, customers and regulators that the Company and its bank
subsidiary are financially sound. The Company and its bank subsidiary are
subject to risk-based capital regulations adopted by the federal banking
regulators in January 1990. These guidelines are used to evaluate capital
adequacy and are based on an institution's asset risk profile and off-balance
sheet exposures. According to the regulations, institutions whose Tier 1 and
total capital ratios meet or exceed 6% and 10%, respectively, are deemed to be
"well-capitalized." At December 31, 1999, the Company's Tier 1 and total
capital ratios were 9.3% and 10.6%, respectively, compared to 10.3% and 11.4%,
respectively, at December 31, 1998.
The following table compares the Company's and the Bank's actual capital
ratios at December 31, 1999, to those required by regulatory agencies for
capital adequacy and well-capitalized classification purposes:
<TABLE>
<CAPTION>
Minimum Well
East West East West Regulatory Capitalized
Bancorp Bank Requirements Requirements
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Total Capital (to Risk-Weighted
Assets)........................ 10.6% 10.6% 8.0% 10.0%
Tier 1 Capital (to Risk-Weighted
Assets)........................ 9.3 9.3 4.0 6.0
Tier 1 Capital (to Average
Assets)........................ 7.3 7.3 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 1999, the Company experienced a net cash outflow of $231.6 million
from its investing activities primarily due to the growth in the Bank's loan
portfolio. Operating and financing activities, on the other hand, provided net
cash inflows of $39.6 million and $74.4 million, respectively. Increases in
interest income on loans and investment securities and net proceeds from sales
of loans held for sale accounted for the increase in net cash inflow from
operating activities, while growth in deposits during the year can be
attributed for the increase in net cash inflow from financing activities.
31
<PAGE>
As a means of augmenting its liquidity, the Bank has established federal
funds lines with four correspondent banks and several master repurchase
agreements with major brokerage companies. At December 31, 1999, the Bank's
available borrowing capacity includes approximately $4.3 million in repurchase
arrangements, $82.4 million in federal funds line facilities, and $72.0
million in unused FHLB advances. Management believes its liquidity sources to
be stable and adequate. At December 31, 1999, management was not aware of any
information that would result in or that was reasonably likely to have a
material effect on the Bank's liquidity position.
The liquidity of the parent company, East West Bancorp, Inc. is primarily
dependent on the payment of cash dividends by its subsidiary, East West Bank,
subject to limitations imposed by the Financial Code of the State of
California. During 1999, total dividends paid by the Bank to East West
Bancorp, Inc. totaled $17.5 million, compared with $73 thousand during 1998.
As of December 31, 1999, approximately $39.5 million of undivided profits of
the Bank was available for dividends to the Company.
Interest Rate Sensitivity Management
The Bank's success is largely dependent upon its ability to manage interest
rate risk, which is the impact of adverse fluctuations in interest rates on
the Bank's net interest income and net portfolio value. Although in the normal
course of business the Bank manages other risks, such as credit and liquidity
risk, management considers interest rate risk to be its most significant
market risk and could potentially have the largest material effect on the
Bank's financial condition and results of operations.
The fundamental objective of the asset liability management process is to
manage the Bank's exposure to interest rate fluctuations while maintaining
adequate levels of liquidity and capital. The Bank's strategy is formulated by
the Asset/Liability Committee, which coordinates with the Board of Directors
to monitor the Bank's overall asset and liability composition. The Committee
meets regularly to evaluate, among other things, the sensitivity of the Bank's
assets and liabilities to interest rate changes, the book and market values of
assets and liabilities, unrealized gains and losses on its available-for-sale
portfolio (including those attributable to hedging transactions), purchase and
securitization activity, and maturities of investments and borrowings.
The Bank's overall strategy is to minimize the adverse impact of immediate
incremental changes in market interest rates (rate shock) on net interest
income and net portfolio value. Net portfolio value is defined as the present
value of assets, minus the present value of liabilities and off-balance sheet
instruments. The attainment of this goal requires a balance between
profitability, liquidity and interest rate risk exposure. The table below
shows the estimated impact of changes in interest rates on net interest income
and market value of equity as of December 31, 1999 and 1998, 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 December 31, December 31,
Interest Rates --------------------- ---------------------
(Basis Points) 1999 1998 1999 1998
-------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
+200 2.6 % 4.5 % (13.0)% (7.7)%
+100 2.1 % 4.4 % (5.3)% (1.1)%
-100 (2.7)% (4.6)% 8.5 % (4.8)%
-200 (5.9)% (9.3)% 8.5 % (11.0)%
</TABLE>
- --------
(1) The percentage change represents net interest income for twelve months in
a stable interest rate environment versus net interest income in the
various rate scenarios.
(2) The percentage change represents net portfolio value of the Bank in a
stable rate environment versus net portfolio value in the various rate
scenarios.
All interest-earning assets, interest-bearing liabilities and related
derivative contracts are included in the interest rate sensitivity analysis at
December 31, 1999 and 1998. At December 31, 1999 and 1998, the Bank's
estimated changes in net interest income and net portfolio value were within
the ranges established by the Board of Directors.
32
<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 December 31, 1999 and 1998. The Bank does not consider these
financial instruments to be materially sensitive to interest rate
fluctuations. Historically, the balances of these financial instruments have
remained fairly constant over various economic conditions. The information
presented below is based on the repricing date for variable rate instruments
and the expected maturity date for fixed rate instruments.
<TABLE>
<CAPTION>
Expected Maturity or Repricing Date by Year
--------------------------------------------------------
After Fair Value at
2000 2001 2002 2003 2004 2004 Total Dec. 31, 1999
---------- ------- ------- ------- ------- -------- ---------- -------------
(Dollars in thousands)
At December 31, 1999:
- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Short-term investments.. $ 10,000 $ -- $ -- $ -- $ -- $ -- $ 10,000 $ 10,000
Weighted average rate.. 4.00% -- % -- % -- % -- % -- % 4.00%
Investment securities
available-for-sale
(fixed rate)........... $ 49,783 $41,527 $35,429 $30,313 $24,322 $110,906 $ 292,280 $ 275,783
Weighted average rate.. 6.13% 6.14% 6.14% 6.14% 6.15% 6.16% 6.15%
Investment securities
available- for-sale
(variable rate)........ $ 225,040 $ -- $ -- $ -- $ -- $ -- $ 225,040 $ 220,643
Weighted average rate.. 6.43% -- % -- % -- % -- % -- % 6.43%
Total gross loans....... $1,299,273 $78,110 $44,223 $32,686 $27,286 $ 26,196 $1,507,774 $1,511,241
Weighted average rate.. 8.42% 8.10% 8.02% 8.16% 8.21% 7.65% 8.37%
Liabilities:
Checking accounts....... $ 89,545 $ -- $ -- $ -- $ -- $ -- $ 89,545 $ 89,545
Weighted average rate.. 1.22% -- % -- % -- % -- % -- % 1.22%
Money market accounts... $ 69,434 $ -- $ -- $ -- $ -- $ -- $ 69,434 $ 69,434
Weighted average rate.. 3.38% -- % -- % -- % -- % -- % 3.38%
Savings deposits........ $ 211,818 $ -- $ -- $ -- $ -- $ -- $ 211,818 $ 211,818
Weighted average rate.. 1.85% -- % -- % -- % -- % -- % 1.85%
Time deposits........... $ 930,167 $36,894 $ 1,250 $ 667 $ 2,202 $ 30,000 $1,001,180 $1,002,176
Weighted average rate.. 4.70% 5.03% 5.06% 5.09% 5.50% 7.00% 4.79%
Short-term borrowings... $ 600 $ -- $ -- $ -- $ -- $ -- $ 600 $ 600
Weighted average rate.. 5.75% -- % -- % -- % -- % -- % 5.75%
FHLB advances........... $ 468,000 $ -- $ -- $14,000 $ -- $ -- $ 482,000 $ 482,507
Weighted average rate.. 5.86% -- % -- % 5.94% -- % -- % 5.87%
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity or Repricing Date by Year
------------------------------------------------------
After Fair Value at
1999 2000 2001 2002 2003 2003 Total Dec. 31, 1998
-------- ------- ------- ------- -------- ------- ---------- -------------
(Dollars in thousands)
At December 31, 1998:
- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Short-term investment .. $124,000 $ -- $ -- $ -- $ -- $ -- $ 124,000 $ 124,000
Weighted average rate.. 5.82% --% --% --% --% --% 5.82%
Investment securities
available-
for-sale (fixed rate).. $ 45,855 $31,741 $21,956 $15,176 $ 10,482 $23,210 $ 148,420 $ 148,255
Weighted average rate.. 6.47% 6.47% 6.47% 6.47% 6.47% 6.46% 6.47%
Investment securities
available-
for-sale (variable
rate).................. $534,304 $ -- $ -- $ -- $ -- $ -- $ 534,304 $ 534,181
Weighted average rate.. 6.01% --% --% --% --% --% 6.01%
Total gross loans....... $993,680 $46,152 $25,217 $17,867 $ 16,133 $20,158 $1,119,207 $1,129,881
Weighted average rate.. 8.01% 7.98% 8.42% 8.37% 8.40% 8.23% 8.03%
Liabilities:
Checking accounts....... $ 78,923 $ -- $ -- $ -- $ -- $ -- $ 78,923 $ 78,923
Weighted average rate.. 1.15% --% --% --% --% --% 1.15%
Money market accounts... $ 39,536 $ -- $ -- $ -- $ -- $ -- $ 39,536 $ 39,536
Weighted average rate.. 2.93% --% --% --% --% --% 2.93%
Savings deposits........ $219,390 $ -- $ -- $ -- $ -- $ -- $ 219,390 $ 219,390
Weighted average rate.. 1.79% --% --% --% --% --% 1.79%
Time deposits........... $813,869 $35,050 $ 552 $ 677 $ 737 $ 1,085 $ 851,970 $ 852,045
Weighted average rate.. 4.72% 5.74% 5.80% 5.41% 5.08% 6.25% 4.76%
Short-term borrowings... $ 33,000 $ -- $ -- $ -- $ -- $ -- $ 33,000 $ 33,016
Weighted average rate.. 5.75% --% --% --% --% --% 5.75%
FHLB advances........... $291,000 $17,000 $ -- $ -- $255,000 $ -- $ 563,000 $ 565,115
Weighted average rate.. 4.77% 5.71% --% --% 5.09% --% 4.95%
</TABLE>
Expected maturities of assets are contractual maturities adjusted for
projected payment based on contractual amortization and unscheduled
prepayments of principal as well as repricing frequency. Expected maturities
for deposits are based on contractual maturities adjusted for projected
rollover rates and changes in pricing for deposits with no stated maturity
dates. The Bank utilizes assumptions supported by documented analyses for the
expected maturities of its loans and repricing of its deposits. It also relies
on third party data providers for prepayment projections for amortizing
securities. The actual maturities of these instruments could vary
significantly if future prepayments and repricing differ from the Bank's
expectations based on historical experience.
The fair values of short-term investments approximate their book values due
to their short maturities. The fair values of available for sale securities
are based on bid quotations from third party data providers. The fair values
of loans are estimated for portfolios with similar financial characteristics
and takes into consideration discounted cash flows based on expected
maturities or repricing dates utilizing estimated market discount rates as
projected by third party data providers.
Transaction deposit accounts, which include checking, money market and
savings accounts, are presumed to have equal book and fair values because the
interest rates paid on these accounts are based on prevailing market rates.
The fair value of time deposits is based upon the discounted value of
contractual cash flows, which is estimated using current rates offered for
deposits of similar remaining terms. The fair value of short-term borrowings
approximates book value due to their short maturities. The fair value of FHLB
advances is estimated by discounting the cash flows through maturity or the
next repricing date based on current rates offered by the FHLB for borrowings
with similar maturities.
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.
34
<PAGE>
The Bank enters into interest rate swap agreements for the purposes of
converting fixed rate loans and deposits to floating rate assets and
liabilities. As of December 31, 1999, the total gross notional amount of
interest rate swaps was $58.5 million. This includes two swap agreements
totaling $30.0 million entered into with two financial institutions during
1999. Both agreements are callable after one year and are used to convert
fixed rate certificates of deposit into floating rate liabilities. At December
31, 1999, the net unrealized loss on the entire swap agreement portfolio was
$1.4 million compared to a net unrealized loss of $1.5 million at December 31,
1998.
The Bank has also entered into interest rate cap agreements which are
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 resulting net gain realized from this
transaction amounted to $65 thousand for the three months ended December 31,
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. As of December 31, 1998, the net unrealized loss
on interest rate caps was $580 thousand.
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 December 31, 1999 and 1998. The fair values reflected in
the table are based on quoted market prices from broker dealers making a
market for these derivatives.
<TABLE>
<CAPTION>
Expected Maturity
----------------------------------------- Average
After Unrealized Expected
2000 2001 2002 2003 2003 Total Gain (Loss) Maturity
----- ------- ------- ------- ------- ------- ---------- ---------
(Dollars in thousands)
At December 31, 1999:
- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
<CAPTION>
Expected Maturity
----------------------------------------- Average
After Unrealized Expected
1999 2000 2001 2002 2002 Total Gain (Loss) Maturity
----- ------- ------- ------- ------- ------- ---------- ---------
(Dollars in thousands)
At December 31, 1998:
- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate swap
agreements:
Notional amount......... $ -- $ -- $10,000 $18,500 $ -- $28,500 $(1,518) 3.5 Years
Weighted average receive
rate................... -- % -- % 5.69% 5.70% -- % 5.70%
Weighted average pay
rate................... -- % -- % 6.46% 6.45% -- % 6.46%
Interest rate cap
agreements:
Notional amount......... $ -- $ -- $18,000 $18,000 $ -- $36,000 $ (580) 3.1 Years
LIBOR cap rate.......... -- % -- % 6.50% 7.00% -- % 6.75%
</TABLE>
Year 2000
Many computer programs were designed and developed using only two digits in
date fields, resulting in the inability to recognize the year 2000 or years
thereafter. This "Year 2000" issue created risks for the Bank from unforseen
or unanticipated problems in its internal computer systems as well as from
computer systems of the Federal Reserve Bank, correspondent banks, customers,
and vendors. Failures of these systems or untimely corrections could have had
a material adverse impact on the Bank's ability to conduct its business and
results of operations.
35
<PAGE>
The Bank's computer systems and programs are designed and supported by
companies specifically in the business of providing such products and
services. The Bank formed a Year 2000 committee comprised of certain of the
Bank's officers to address the "Year 2000" issue. The committee's Year 2000
plan included holding awareness seminars; evaluating existing hardware,
software, ATMs, vaults, alarm systems, communication systems, and other
electrical devices; testing critical application programs and systems, both
internally and externally; establishing a contingency plan; and upgrading
hardware and software as necessary.
During 1999, the Bank successfully completed the awareness, assessment,
remediation, and testing and implementation phases of its Year 2000 plan. All
of the Bank's critical systems are programmed, serviced or provided by outside
system vendors. All of the systems that were identified in the assessment
phase as critical to the Bank's operations were tested and certified as
compliant by the various "system owners" of the Bank, in accordance with the
Federal Financial Institutions Examination Council's ("FFIEC") established
time frame. Bank personnel reviewed, coordinated, and monitored the progress
of "secondary" systems vendors, borrowers, and other third parties to ensure
that these systems were "Year 2000" compliant. In addition, as discussed
below, manual data processing of business functions was also part of the
Bank's contingency plan.
In addition to these software applications, much of the Bank's hardware and
network infrastructure were replaced as part of the "Year 2000" plan. The
principal elements of this process involved the replacement of the router
network and the replacement or upgrading of personal computers. The hardware
and network infrastructure replacement cost of $750 thousand represented the
largest portion of the "Year 2000" plan total budget. The Bank's total "Year
2000" budget was $1.0 million. Actual expenditures incurred by the Bank
totaled $1.4 million, $1.1 million of which was incurred during 1999.
Approximately $1.1 million of the total "Year 2000" expenditures were
capitalized and are being amortized over their useful lives.
The Bank's non-information technology and environmental systems were
reviewed by the Bank's administrative services personnel and vendor
indications were received in writing for all such systems. The Bank also
obtained written indications of "Year 2000" compliance or readiness from the
local energy company and from telecommunications companies on which the Bank
depends.
The Bank's contingency plan provided for changing outside vendors if current
vendors were unable to meet their schedules to be "Year 2000" compliant. It
also called for manual processing and other action by the Bank in the event a
problem was not discovered in a critical system that has previously been
tested and certified as compliant. The manual processing of functions provided
for in the Bank's contingency plans were reviewed, updated, and Board-
approved. The Bank's contingency plan was validated by the Internal Audit
Department in accordance with the FFIEC's "Year 2000" established time frame.
On January 1, 2000, Bank personnel from various operational departments
performed "Year 2000" rollover system validation procedures for previously
identified mission-critical applications and systems, including the general
ledger, loans, deposits, wire transfers and ATMs. No deficiencies were noted
in these critical applications and systems. The local area network (LAN) and
wide area network (WAN) were also validated with a similar outcome. These
results were reviewed with a representative from the Bank's primary regulator
after the validation procedures were completed later that day. During the
following week, the same representative conducted a follow-up site visit
during which various reports and reconciliations were reviewed. Again, no
deficiencies were noted.
To date, no unusual system problems have been noted and there have been no
negative impact on the Bank's customers. The payroll system has successfully
processed several payroll cycles without incident. With respect to cash
demands from customers and line of credit usage, no significant unusual trends
were noted both before and after the "Year 2000" date rollover.
Business Segments
For information regarding the Company's business segments, see Footnote 18,
entitled "Segment Information," of the 1999 Annual Report which is
incorporated herein by reference.
36
<PAGE>
ITEM 7A: 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."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements of the Company, see "Supplementary Financial
Information," and "Consolidated Financial Statements and Notes," including the
"Independent Auditor's Report" thereon, in the 1999 Annual Report, which is
incorporated herein by reference. See "ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K" below for financial statements filed as a
part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as hereinafter noted, the information concerning directors and
executive officers of the Company is incorporated by reference from the
section entitled "Election of Directors" of the Company's Proxy Statement,
which is filed as Exhibit No. 99 to this Annual Report on Form 10-K. For
information concerning executive officers of the Company, see "ITEM 4(A).
EXECUTIVE OFFICERS OF THE REGISTRANT."
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
from the section entitled "Compensation of Directors and Executive Officers"
of the Company's Proxy Statement, which is filed as Exhibit No. 99 to this
Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
Management is incorporated by reference from the sections entitled "Principal
Shareholders," and "Election of Directors" of the Company's Proxy Statement,
which is filed as Exhibit No. 99 to this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated by reference from the section entitled "Certain Transactions" of
the Company's Proxy Statement, which is filed as Exhibit No. 99 to this Annual
Report on Form 10-K.
37
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
(1) The following financial statements included in the registrant's 1999
Annual Report to Shareholders are incorporated herein by reference. Page
number references are to the 1999 Annual Report to Shareholders.
<TABLE>
<CAPTION>
Page
----
<S> <C>
East West Bancorp, Inc. and Subsidiary:
Report of Management.................................................. 40
Independent Auditors' Report.......................................... 41
Consolidated Balance Sheets at December 31, 1999 and 1998............. 42
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998, and 1997................................................. 43
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1999, 1998, and 1997........................ 44
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.................................................. 45
Notes to Consolidated Financial Statements............................ 47
</TABLE>
(2) The following additional information for the years 1999, 1998 and 1997
is submitted herewith:
All schedules are omitted because they are not applicable, not material or
because the information is included in the financial statements or the notes
thereto.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of 1999.
38
<PAGE>
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Description
------- -------------------
<C> <S>
2 Plan of Reorganization and Merger Agreement between East West
Bancorp, Inc., East-West Bank and East West Merger Co., Inc.*
3(i) Certificate of Incorporation of the Registrant*
3(ii) Bylaws of the Registrant*
4.1 Specimen Certificate of Registrant*
4.2 Registration Rights Agreement*
4.3 Warrant Agreement*
10.1 Employment Agreement with Dominic Ng*+
10.2 Employment Agreement with Julia Gouw*+
10.5 Employment Agreement with Douglas P. Krause*+
10.6 East West Bancorp, Inc. 1998 Stock Incentive Plan and Forms of
Agreements*+
10.6.1 Amendment to East West Bancorp, Inc. 1998 Stock Incentive Plan and
Forms of Agreements+
10.7 East West Bancorp, Inc. 1998 Employee Stock Purchase Plan*+
10.9 Employment Agreement with Sandra Wong+
10.10 Employment Agreement with Donald Sang Chow+
10.10.1 Amendment to Employment Agreement with Donald Sang Chow+
21 Subsidiaries of the Registrant*
27 Financial Data Schedule
99 Proxy Statement for Annual Meeting of Stockholders to be held on May
10, 2000
</TABLE>
- --------
* Incorporated by reference from Registrant's Registration Statement on Form
S-4 filed with the Commission on November 13, 1998 (File No. 333-63605).
+ Denotes management contract or compensatory plan or arrangement.
39
<PAGE>
REPORT OF MANAGEMENT
To our shareholders:
Financial Statements
The management of East West Bancorp, Inc. and subsidiaries (the "Company")
is responsible for the preparation, integrity, and fair presentation of its
published financial statements and all other financial information presented
in this annual report. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and, as
such, include amounts based on informed judgments and estimates made by
management.
Internal Control
Management is responsible for establishing and maintaining effective
internal control over financial reporting, including safeguarding of assets,
for financial presentations in conformity with both generally accepted
accounting principles and the Federal Financial Institutions Examination
Council instructions for the Consolidated Reports of Condition and Income
("Call Report instructions"). The internal control contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control,
including the possibility of human error and the circumvention or overriding
of controls. Accordingly, even effective internal control can provide only
reasonable assurance with respect to consolidated financial statement
preparation. Further, because of changes in conditions, the effectiveness of
internal control may vary over time.
Management assessed the Company's internal control over financial reporting,
including safeguarding of assets, for financial presentations in conformity
with both generally accepted accounting principles and Call Report
instructions as of December 31, 1999. This assessment was based on criteria
for effective internal control over financial reporting, including
safeguarding of assets, described in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management believes that the Company
maintained effective internal control over financial reporting, including
safeguarding of assets, presented in conformity with both generally accepted
accounting principles and Call Report instructions, as of December 31, 1999.
The Audit Committee of the Board of Directors is comprised entirely of
outside directors who are independent of the Company's management. The Audit
Committee is responsible for recommending to the Board of Directors the
selection of independent auditors. It meets periodically with management, the
independent auditors, and the internal auditors to ensure that they are
carrying out their responsibilities. The Committee is also responsible for
performing an oversight role by reviewing and monitoring the financial,
accounting and auditing procedures of the Company in addition to reviewing the
Company's financial reports. The independent auditors and the internal
auditors have full and free access to the Audit Committee, with or without the
presence of management, to discuss the adequacy of internal control over
financial reporting and any other matters which they believe should be brought
to the attention of the Committee.
Compliance with Laws and Regulations
Management is also responsible for ensuring compliance with federal laws and
regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the Federal Deposit Insurance Corporation ("FDIC") as safety and soundness
laws and regulations.
Management assessed its compliance with the designated safety and soundness
laws and regulations and has maintained records of its determinations and
assessments as required by the FDIC. Based on this assessment, management
believes that the Company has complied, in all material respects, with the
designated safety and soundness laws and regulations for the year ended
December 31, 1999.
<TABLE>
<S> <C>
Dominic Ng Julia Gouw
Chairman, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
</TABLE>
40
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
East West Bancorp, Inc. and Subsidiaries
San Marino, California
We have audited the accompanying consolidated balance sheets of East West
Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 1999 and
1998, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December
31, 1999 and 1998, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 14, 2000
41
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
(Dollars in
thousands)
<S> <C> <C>
Assets
- ------
Cash and cash equivalents.............................. $ 43,497 $ 161,131
Investment securities available for sale, at fair value
(with amortized cost of $517,320 in 1999 and $683,335
in 1998).............................................. 496,426 682,436
Loans receivable, net of allowance for loan losses of
$20,844 in 1999 and $16,506 in 1998................... 1,486,641 1,100,579
Investment in Federal Home Loan Bank stock, at cost.... 26,954 32,874
Other real estate owned................................ 577 4,600
Investments in affordable housing partnerships......... 26,485 18,602
Premises and equipment, net............................ 22,646 23,406
Premiums on deposits acquired, net..................... 3,812 2,648
Excess of purchase price over fair value of net assets
acquired, net......................................... 6,770 3,590
Accrued interest receivable and other assets........... 30,503 28,294
Deferred income taxes.................................. 8,319 --
---------- ----------
TOTAL................................................ $2,152,630 $2,058,160
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Customer deposit accounts.............................. $1,500,529 $1,292,937
Short-term borrowings.................................. 600 33,000
Federal Home Loan Bank advances........................ 482,000 563,000
Notes payable.......................................... 1,532 1,820
Accrued expenses and other liabilities................. 15,861 12,871
Deferred income taxes.................................. -- 1,259
---------- ----------
Total liabilities.................................... 2,000,522 1,904,887
---------- ----------
FAIR VALUE OF NET ASSETS ACQUIRED IN EXCESS OF PURCHASE
PRICE, NET............................................ 2,028 2,443
STOCKHOLDERS' EQUITY
Common stock (par value of $0.001 per share)
Authorized -- 50,000,000 shares
Issued -- 23,908,731 shares and 23,775,000 shares in
1999 and 1998, respectively
Outstanding -- 22,422,868 shares and 23,775,000 shares
in 1999 and 1998, respectively....................... 24 24
Additional paid in capital............................. 111,306 109,976
Retained earnings...................................... 67,001 41,718
Deferred compensation.................................. (863) --
Treasury stock, at cost: 1,485,863 shares at December
31, 1999.............................................. (14,659) --
Accumulated other comprehensive loss, net of tax....... (12,729) (888)
---------- ----------
Total stockholders' equity........................... 150,080 150,830
---------- ----------
TOTAL................................................ $2,152,630 $2,058,160
========== ==========
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees.... $ 108,547 $ 85,806 $ 72,577
Investment securities available for
sale............................... 35,451 26,405 20,056
Investment securities held for
trading............................ 109 -- --
Short-term investments.............. 2,381 13,302 13,808
Federal Home Loan Bank stock........ 1,539 1,195 651
------------ ------------ ------------
Total interest and dividend
income........................... 148,027 126,708 107,092
------------ ------------ ------------
INTEREST EXPENSE
Customer deposit accounts........... 49,567 49,499 48,394
Short-term borrowings............... 1,080 6,767 8,811
Federal Home Loan Bank advances..... 25,495 14,777 5,441
------------ ------------ ------------
Total interest expense............ 76,142 71,043 62,646
------------ ------------ ------------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES...................... 71,885 55,665 44,446
PROVISION FOR LOAN LOSSES............. 5,439 5,356 5,588
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES...................... 66,446 50,309 38,858
------------ ------------ ------------
NONINTEREST INCOME
Loan fees........................... 2,282 2,389 1,688
Branch fees......................... 3,388 2,579 2,091
Letters of credit fees and
commissions........................ 4,111 2,785 1,166
Net gain on sales of investment
securities available for sale...... 685 1,320 2,717
Net gain on trading securities...... 1,904 -- --
Net gain on sales of affordable
housing partnerships............... 402 -- --
Net gain on sale of branch.......... 676 -- --
Amortization of fair value of net
assets acquired in excess of
purchase price..................... 415 415 415
Other operating income.............. 830 539 416
------------ ------------ ------------
Total noninterest income.......... 14,693 10,027 8,493
------------ ------------ ------------
NONINTEREST EXPENSE
Compensation and employee benefits.. 18,481 17,281 15,732
Net occupancy....................... 5,649 4,974 4,646
Data processing..................... 1,399 1,245 1,239
Amortization of premiums on deposits
acquired and excess of purchase
price over fair value of net assets
acquired........................... 1,572 1,241 1,241
Amortization of investments in
affordable housing partnerships.... 2,991 1,017 210
Deposit insurance premiums and
regulatory assessments............. 862 825 148
Other real estate owned operations,
net................................ (340) (380) 300
Other operating expenses............ 8,895 6,423 5,494
------------ ------------ ------------
Total noninterest expense......... 39,509 32,626 29,010
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME
TAXES................................ 41,630 27,710 18,341
PROVISION FOR INCOME TAXES............ 13,603 9,682 7,330
------------ ------------ ------------
NET INCOME............................ $ 28,027 $ 18,028 $ 11,011
============ ============ ============
BASIC EARNINGS PER SHARE.............. $ 1.23 $ 0.76 $ 0.46
DILUTED EARNINGS PER SHARE............ $ 1.22 $ 0.76 $ 0.46
AVERAGE NUMBER OF SHARES OUTSTANDING--
BASIC................................ 22,757 23,775 23,775
AVERAGE NUMBER OF SHARES OUTSTANDING--
DILUTED.............................. 22,895 23,775 23,775
</TABLE>
See notes to consolidated financial statements.
43
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Total
Common Paid-In Retained Deferred Treasury Loss, Net of Comprehensive Stockholders'
Stock Capital Earnings Compensation Stock Tax Income Equity
------ ---------- -------- ------------ -------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1997................... $24 $109,976 $12,679 $ -- $ -- $ (304) $122,375
Comprehensive income
Net income for the
year.................. 11,011 $ 11,011 11,011
Net unrealized loss on
securities............ (834) (834) (834)
--------
Comprehensive income.... $ 10,177
--- -------- ------- ------- -------- -------- -------- --------
BALANCE, DECEMBER 31,
1997................... 24 109,976 23,690 -- -- (1,138) 132,552
Comprehensive income
Net income for the
year.................. 18,028 $ 18,028 18,028
Net unrealized gain on
securities............ 250 250 250
--------
Comprehensive income.... $ 18,278
--- -------- ------- ------- -------- -------- -------- --------
BALANCE, DECEMBER 31,
1998................... 24 109,976 41,718 -- -- (888) 150,830
Comprehensive income
Net income for the
year.................. 28,027 $ 28,027 28,027
Net unrealized loss on
securities............ (11,841) (11,841) (11,841)
--------
Comprehensive income.... $ 16,186
--------
Stock compensation
cost................... 249 249
Issuance of 105,003
shares under Restricted
Stock Plan............. 1,112 (1,112) --
Issuance of 28,728
shares under Employee
Stock Purchase Plan.... 218 218
Purchase of 1,485,863
shares of treasury
stock.................. (14,659) (14,659)
Dividends declared on
common stock........... (2,744) (2,744)
--- -------- ------- ------- -------- -------- --------
BALANCE, DECEMBER 31,
1999................... $24 $111,306 $67,001 $ (863) $(14,659) $(12,729) $150,080
=== ======== ======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------ -------
(In thousands)
<S> <C> <C> <C>
Disclosure of reclassification amount for December
31:
Unrealized holding gain (loss) arising during
period, net of tax benefit (expense) of $7,620 in
1999, $(595) in 1998, and $(531) in 1997.......... $(11,430) $1,109 $ 797
Less: Reclassification adjustment for gain included
in net income, net of tax expense of $274 in 1999,
$461 in 1998, and $1,086 in 1997.................. (411) (859) (1,631)
-------- ------ -------
Net unrealized gain (loss) on securities, net of
tax benefit (expense) of $7,894 in 1999, $(134) in
1998, and $555 in 1997............................ $(11,841) $ 250 $ (834)
======== ====== =======
</TABLE>
See notes to consolidated financial statements.
44
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................. $ 28,027 $ 18,028 $ 11,011
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 4,139 4,539 3,185
Deferred compensation expense............. 249 -- --
Deferred tax benefit...................... (2,477) (1,690) (1,633)
Provision for loan losses................. 5,439 5,356 5,588
Provision for other real estate owned
losses................................... 169 341 412
Net gains on sales of investment
securities and other assets.............. (2,925) (2,685) (3,729)
Gain on sale of trading securities........ (1,904) -- --
Federal Home Loan Bank stock dividends.... (1,608) (921) (641)
Proceeds from sale of trading securities.. 117,366 -- --
Purchases of trading securities........... (115,527) -- --
Proceeds from sale of loans held for
sale..................................... 46,225 92,729 73,205
Originations of loans held for sale....... (37,341) (91,987) (62,885)
Increase in accrued interest receivable
and other assets, net of effects from
purchase of First Central Bank........... (2,379) (14,373) (934)
Increase in accrued expenses and other
liabilities, net of effects from purchase
of First Central Bank.................... 2,115 3,410 420
--------- --------- ---------
Total adjustments....................... 11,541 (5,281) 12,988
--------- --------- ---------
Net cash provided by operating
activities............................. 39,568 12,747 23,999
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans......................... (188,713) (167,267) (126,655)
Purchases of:
Investment securities available for sale.. (420,587) (883,989) (638,295)
Loans receivable.......................... (208,171) (41,230) (8,098)
Federal Home Loan Bank stock.............. (1,809) (18,072) (3,166)
Investment in affordable housing
partnership.............................. (10,707) (3,411) (12,983)
Premises and equipment.................... (1,476) (1,389) (2,365)
Proceeds from sale of:
Investment securities available for sale.. 177,758 279,504 622,009
Other real estate owned................... 5,278 1,695 5,194
Investment in affordable housing
partnership.............................. 3,267 -- --
Premises and equipment.................... 4 13 3
Repayments, maturity and redemption of
investment securities available for sale... 409,499 332,678 92,198
Redemption of Federal Home Loan Bank stock.. 9,337 -- --
Repayments on foreclosed properties......... 250 -- 4
Payment for purchase of First Central Bank,
net of cash received....................... (5,295) -- --
Investment in nonbank entity................ (250) -- --
--------- --------- ---------
Net cash used in investing activities... (231,615) (501,468) (72,154)
--------- --------- ---------
</TABLE>
(Continued)
See notes to consolidated financial statements.
45
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1999 1998 1997
------------ ----------- ---------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits................. $ 190,523 $ 57,865 $ 52,186
Proceeds from sale of deposits......... 17,795 -- --
Proceeds from Federal Home Loan Bank
advances.............................. 19,810,100 4,150,821 313,397
Repayment of Federal Home Loan Bank
advances.............................. (19,891,100) (3,798,820) (157,397)
Net decrease in short-term borrowings.. (32,400) (106,000) (105,000)
Repayment of notes payable on
affordable housing investments........ (3,320) (1,615) --
Issuance of common stock............... 218 -- --
Repurchase of common stock............. (14,659) -- --
Dividends paid on common stock......... (2,744) -- --
------------ ----------- ---------
Net cash provided by financing
activities........................ 74,413 302,251 103,186
------------ ----------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................. (117,634) (186,470) 55,031
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR.................................... 161,131 347,601 292,570
------------ ----------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR... $ 43,497 $ 161,131 $ 347,601
============ =========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.......................... $ 76,624 $ 70,565 $ 61,677
Income tax payments, net............... 17,350 10,225 10,050
Noncash investing and financing
activities:
Other real estate acquired through
foreclosure......................... 4,080 4,706 6,710
Loans made to facilitate sales of
other real estate owned............. 2,945 1,488 1,690
Investment in affordable housing
partnerships acquired through notes
payable............................. 3,033 1,820 1,615
Net unrealized gain (loss) on
securities available for sale....... (11,841) 250 (834)
Mortgage loans securitized to
investment securities available for
sale................................ -- 35,875 43,466
</TABLE>
See notes to consolidated financial statements.
46
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
East West Bancorp, Inc., a registered bank holding company (the "Company"),
offers a full range of banking services to individuals and small to large
businesses through its subsidiary bank, East West Bank and its subsidiaries
(the "Bank"), which operates 29 branches located throughout California. The
Company specializes in financing international trade and lending for
commercial, construction, and residential real estate projects. The Company's
revenues are derived from providing financing for residential and commercial
real estate and business customers, as well as investing activities. Funding
for lending and investing activities is obtained through acceptance of
customer deposits, Federal Home Loan Bank advances and other borrowing
activities.
Reverse Stock Split -- In June 1998, the Articles of Incorporation of the
Bank were amended to decrease the authorized common shares of the Bank from
200,000,000 shares to 50,000,000 shares. The amendment was made in conjunction
with the 118,875 for 550,000 reverse stock split effective June 11, 1998.
Change in Ownership -- On June 12, 1998, previous shareholders of the Bank
sold all of the Bank's common stock to various institutional and accredited
investors. No person or group of persons acting in concert was permitted to
purchase more than 9.9% of the number of outstanding shares of the Bank's
common stock immediately after the sale. Since there was not a control group
in this transaction, generally accepted accounting principles did not require
the assets and liabilities of the Bank to be revalued.
Formation of Bank Holding Company -- On August 27, 1998, at the direction of
the Board of Directors of the Bank, the Company was incorporated under the
laws of the State of Delaware for the purpose of becoming a bank holding
company by acquiring all of the outstanding common stock of the Bank. This
reorganization, which was accounted for in a manner similar to a pooling of
interests and completed on December 30, 1998, provided the Company with
greater operating and financial flexibility and permits expansion into a
broader range of financial services and other business activities.
Branch Sale -- On May 21, 1999, the Company completed the sale of its Irvine
branch to another bank. The assets and liabilities assumed by the acquiring
bank were $83 thousand and $17.1 million, respectively. The net gain from the
sale of this branch amounted to $676 thousand.
Acquisition of First Central Bank, N.A. -- On May 28, 1999, the Bank
acquired all of the issued and outstanding stock of First Central Bank, N.A.
First Central Bank was a national bank with three branches in Southern
California. The Bank acquired approximately $55.0 million in gross loans and
assumed approximately $92.6 million in deposits as a result of this
transaction.
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 (except for
intangible assets) has been reflected in deferred income taxes.
47
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized below are the assets and liabilities recorded at fair value at the
date of acquisition:
<TABLE>
<CAPTION>
Values of
Assets Acquired
and Liabilities
Assumed
---------------
(In thousands)
<S> <C>
Cash, cash equivalents and other investments.................. $ 46,570
Loans receivable.............................................. 54,305
Property and equipment........................................ 363
Excess of purchase price over fair value of net assets
acquired..................................................... 3,513
Premium on deposits acquired.................................. 2,450
Other assets.................................................. 914
--------
Total assets.................................................. 108,115
--------
Deposits...................................................... 92,569
Other liabilities............................................. 1,240
Deferred income taxes......................................... 833
--------
Total liabilities............................................. 94,642
--------
Purchase price and other acquisition costs.................... $ 13,473
========
</TABLE>
Basis of Presentation -- The consolidated financial statements are prepared
in accordance with generally accepted accounting principles and general
practices within the banking industry and have been restated for the
reorganization. The following is a summary of significant principles used in
the preparation of the accompanying financial statements. In preparing the
financial statements, management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities and the disclosure of income
and expenses for the periods presented in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
Principles of Consolidation -- The financial statements include the accounts
of the Company and the Bank. All material intercompany transactions and
accounts have been eliminated in consolidation.
Investment Securities -- Investment securities available for sale are
reported at estimated fair value, with unrealized gains and losses, net of the
related tax effect, excluded from operations and reported as a separate
component of other comprehensive income. Amortization of premiums and
accretion of discounts on debt securities are recorded as yield adjustments on
such securities using the effective interest method. The specific
identification method is used for purposes of determining cost in computing
realized gains and losses on investment securities sold.
Derivative Financial Instruments -- The Company is a party to certain
derivative transactions, including interest rate swaps and interest rate caps.
These contracts were entered into for purposes of reducing the Company's
interest rate risk. The carrying values of derivative financial instruments
are included in other assets.
Interest Rate Swap Agreements -- Interest rate swaps were entered into for
the purposes of modifying the interest rate characteristics of certain loans
within the Company's loan portfolio. The interest rate swaps involve no
exchange of principal either at inception or upon maturity; rather, they
involve the periodic exchange of interest payments arising from an underlying
notional principal amount. Interest rate swaps are accounted for using
settlement accounting and are reported at their initial cost, and unrealized
gains or losses resulting from changes in their fair value are not recorded in
the financial statements. Revenues or expenses associated with these
agreements are accounted for on an accrual basis and are recognized as an
adjustment to interest income on loans receivable, based on the interest rates
currently in effect for such contracts.
48
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest Rate Cap Agreements -- Prior to October 1, 1999, the Company used
interest rate caps for purposes of hedging against fluctuations in the fair
value of the Company's investment securities available-for-sale portfolio. The
interest rate caps involve the payment of a one-time premium to a counterparty
who, if interest rates rise above a predetermined level, will make payments to
the Company at an agreed-upon rate for the term of the agreement or until such
time as interest rates fall below the cap level. The premiums paid for the
interest rate caps were amortized to interest income on investments over the
term of the agreements. The interest rate caps were reported at their
estimated fair values, with unrealized gains and losses recognized as a
separate component of accumulated other comprehensive income or loss (net of
tax effects) consistent with the hedged securities. Amounts receivable on the
cap agreements were accrued and recognized as interest income on investments.
Effective October 1, 1999, the Company ceased using interest rate caps to
hedge against fluctuations in the investment securities available for sale
portfolio. Interest rate caps continue to be recorded 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.
Loans Receivable -- Loans receivable, which management has the intent and
ability to hold for the foreseeable future or until maturity, are stated at
their outstanding principal, reduced by an allowance for loan losses and net
deferred loan fees or costs on originated loans and unamortized premiums or
discounts on purchased loans. Discounts or premiums on purchased loans are
amortized to income using the interest method over the remaining period to
contractual maturity adjusted for anticipated prepayments. Interest on loans
is calculated using the simple-interest method on daily balances of the
principal amount outstanding. Accrual of interest is discontinued on a loan
when management believes, after considering economic and business conditions
and collection efforts, that the borrower's financial condition is such that
collection of interest is doubtful. Generally, loans are placed on nonaccrual
status when they become 90 days past due. When interest accrual is
discontinued, all unpaid accrued interest is reversed against current
earnings. In general, subsequent payments received are applied to the
outstanding principal balance of the loan. A loan is returned to accrual
status when the borrower has demonstrated a satisfactory payment trend subject
to management's assessment of the borrower's ability to repay the loan.
Loans held for sale are carried at the lower of aggregate cost or market
value. Origination fees on loans held for sale, net of certain costs of
processing and closing the loans, are deferred until the time of sale and are
included in the computation of the gain or loss from the sale of the related
loans. A valuation allowance is established if the market value of such loans
is lower than their cost and operations are charged for valuation adjustments.
Nonrefundable fees and direct costs associated with the origination or
purchase of loans are deferred and netted against outstanding loan balances.
The deferred net loan fees and costs are recognized in interest income as an
adjustment to yield over the loan term using the effective interest method.
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due (principal and interest) according to the contractual
terms of the loan agreement. Impaired loans are measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as an expedient, at the loan's observable market price or
the fair value of the collateral if the loan is collateral dependent, less
costs to sell.
Provision and Allowance for Loan Losses -- The determination of the balance
in the allowance for loan losses is based on an analysis of the loan portfolio
and reflects an amount that, in management's judgment, is adequate to provide
for probable losses after giving consideration to estimated losses on
specifically identified
49
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
impaired loans, as well as the characteristics of the loan portfolio, current
economic conditions, past credit loss experience and such other factors as
deserve current recognition in estimating credit losses. The allowance for
loan losses is increased by charges to income and decreased by charge-offs
(net of recoveries). Consumer and other homogeneous smaller balance loans are
reviewed on a collective basis for impairment.
Other Real Estate Owned -- Other real estate owned represents real estate
acquired through foreclosure and is recorded at fair value at the time of
foreclosure. Loan balances in excess of fair value of the real estate acquired
at the date of foreclosure are charged against the allowance for loan losses.
After foreclosure, valuations are periodically performed by management and the
real estate is carried at the lower of carrying value or fair value less costs
to sell. Any subsequent operating expenses or income, reduction in estimated
values, and gains or losses on disposition of such properties are charged to
current operations. Revenue recognition upon disposition of the property is
dependent on the sale having met certain criteria relating to the buyer's
initial investment in the property sold.
Real Estate Investment -- The Company owns certain limited partnership
interests in projects of affordable housing for lower income tenants. Four of
the investments in which the Company has significant influence are recorded
using the equity method of accounting. The remaining investments are being
amortized using the level-yield method over the life of the related tax
credits. The tax credits are being recognized in the consolidated financial
statements to the extent they are utilized on the Company's tax returns.
Premises and Equipment -- Company premises and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization
are computed based on the straight-line method over the estimated useful lives
of the various classes of assets. The ranges of useful lives for the principal
classes of assets are as follows:
<TABLE>
<S> <C>
Buildings and building
improvements 25 years
Furniture, fixtures and
equipment 3 to 10 years
Leasehold improvements Term of lease or useful life, whichever is shorter
</TABLE>
Intangible Assets -- Excess of purchase price over fair value of net assets
acquired and fair value of net assets acquired in excess of purchase price,
also known as goodwill, are generally amortized using the straight-line method
over 25 years. Goodwill related to the acquisition of First Central Bank, N.A.
is amortized using the straight-line method over 15 years. Premiums on
deposits, which represent the intangible value of depositor relationships
resulting from deposit liabilities assumed in acquisitions, are generally
amortized using the straight-line method over 10 years. Premiums on deposits
related to the First Central Bank acquisition are amortized over 7 years using
the straight-line method. Goodwill and premiums on deposits are assessed
periodically for other than temporary impairment. In management's opinion, no
significant events or changes in circumstances have occurred that would
warrant a permanent writedown of these assets.
Stock of Federal Home Loan Bank of San Francisco -- As a member of the
Federal Home Loan Bank ("FHLB") of San Francisco, the Company is required to
own common stock in the FHLB of San Francisco based upon the Company's balance
of residential mortgage loans and outstanding FHLB advances. FHLB stock is
carried at cost and may be sold back to FHLB at its carrying value. Both cash
and stock dividends received are reported as dividend income.
Securities Sold Under Agreements to Repurchase -- The Company enters into
sales of securities under repurchase agreements with primary dealers, which
provide for the repurchase of the same security with substantially the same
terms as the security sold. The repurchase agreements are typically
collateralized by mortgage-backed securities that are normally held by a third
party custodian. In the event that the fair market value of the securities
decreases below the carrying amount of the related repurchase agreement, the
counterparty
50
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
is required to designate an equivalent value of additional securities. These
agreements are accounted for as financings, and the obligations of the Company
to repurchase the securities are reflected as liabilities. The securities
underlying the agreements remain in the asset accounts in the consolidated
balance sheets.
Income Taxes -- Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of assets
and liabilities and their financial reporting amounts at each year-end, based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
Accounting for Stock-Based Compensation -- The Company has adopted Statement
of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which establishes financial accounting and reporting standards
for stock-based employee compensation plans. These standards include the
recognition of compensation expense over the vesting period of the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123
permits entities to continue to apply the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
provide only the pro forma net income and pro forma net earnings per share
disclosures as if the fair-value based method defined in SFAS No. 123 had been
applied. Under APB Opinion No. 25, compensation expense for fixed options
would be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 in accounting for its
stock option plan and provide the pro forma disclosure requirements of SFAS
No. 123 in the footnotes to its consolidated financial statements.
In addition to stock options, the Company also grants restricted stock
awards to certain officers and employees. The Company records the cost of the
restricted shares at market. The restricted stock grant is reflected as a
component of common stock and additional paid-in capital with an offsetting
amount of deferred compensation in the consolidated statement of stockholders'
equity. The restricted shares awarded become fully vested after three years of
continued employment from the date of grant. The Company becomes entitled to
an income tax deduction in an amount equal to the taxable income reported by
the holders of the restricted shares when the restrictions are released and
the shares are issued. The deferred compensation cost reflected in
stockholders' equity is being amortized as compensation expense over three
years using the straight-line method. Restricted shares are forfeited if
officers and employees terminate prior to the lapsing of restrictions. The
Company records forfeitures of restricted stock as treasury share repurchases
and any compensation cost previously recognized is reversed.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- A sale is recognized when the Company
relinquishes control over a financial asset and is compensated for such asset.
The difference between the net proceeds received and the carrying amount of
the financial assets being sold or securitized is recognized as a gain or loss
on sale.
Earnings Per Share -- Basic EPS is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock, or resulted from issuance of common
stock that would be shared in earnings of the Company. The basic and diluted
earnings per share and the presentation of common stock and additional paid in
capital for all periods presented have been adjusted to reflect the 118,875
for 550,000 reverse stock split, which was effective June 11, 1998.
Comprehensive Income -- The term "comprehensive income" describes the total
of all components of comprehensive income including net income. "Other
comprehensive income" refers to revenues, expenses, and gains and losses that
are included in comprehensive income but are excluded from net income as they
have been
51
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recorded directly in equity under the provisions of other Financial Accounting
Standard Board statements. The Company presents the comprehensive income
disclosure as a part of the statements of changes in stockholders' equity, by
identifying each element of other comprehensive income, including net income.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities -- SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended
by SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133, was
issued in June 1998 and made effective for fiscal years beginning after June
2000. It requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
Management of the Company does not believe that the adoption of this standard
will have a material impact on the Company's results of operations or
financial position when adopted.
Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise -- In October
1998, SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise, was issued and is effective for the first fiscal quarter beginning
after December 15, 1998. SFAS No. 134 amended SFAS No. 65, Accounting for
Certain Mortgage Banking Activities, which established accounting and
reporting standards for certain activities of mortgage banking enterprises and
other enterprises that conduct operations that are substantially similar. SFAS
No. 134 requires that after the securitization of mortgage loans held for
sale, the resulting mortgage-backed securities and other retained interests
should be classified in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, based on the company's ability and
intent to sell or hold those investments. The adoption of this statement did
not have a material impact on the Company's results of operations or financial
position.
Reclassifications -- Certain reclassifications have been made to the prior
year financial statements to conform to the current year presentation.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, amounts due from banks, and short-
term investments with maturities of less than three months. Short-term
investments, which include federal funds sold and securities purchased under
agreements to resell, are recorded at cost, which approximates market.
Information concerning securities purchased under agreements to resell is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Dollars in
thousands)
<S> <C> <C>
Balance at year-end...................................... $ -- $124,000
Average balance during the year.......................... $ 32,358 $216,832
Maximum month-end balance during the year................ $101,000 $263,700
Weighted average interest rate during the year........... 5.79% 5.82%
Weighted average interest rate at end of year............ -- % 5.82%
</TABLE>
52
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Securities purchased under agreements to resell are collateralized by
mortgage-backed securities and mortgage or commercial loans. The collateral is
normally held by a third party custodian. The purchase is overcollateralized
to insure against unfavorable market price movements. In the event that the
fair market value of the securities decreases below the carrying amount of the
related repurchase agreement, the counterparty is required to designate an
equivalent value of additional securities. The counterparties to these
agreements are nationally recognized investment banking firms that meet credit
eligibility criteria and with whom a master repurchase agreement has been duly
executed.
The Company is required to maintain a percentage of its deposits as reserves
at the Federal Reserve Bank. The daily average reserve requirement was
approximately $1.0 million and $5.7 million at December 31, 1999 and 1998,
respectively.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
An analysis of the available-for-sale investment securities portfolio is
presented as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
As of December 31, 1999:
US Treasury securities.......... $ 985 $ -- $ (10) $ 975
US 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........................ $517,320 $ 53 $(20,947) $496,426
======== ===== ======== ========
As of December 31, 1998:
Mortgage-backed securities...... $683,335 $ 471 $ (1,370) $682,436
======== ===== ======== ========
</TABLE>
The scheduled maturities of investment securities available for sale at
December 31, 1999 are presented as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
--------- ---------
(In thousands)
<S> <C> <C>
Due within one year...................................... $ 985 $ 975
Due after one year through five years.................... 11,198 10,727
Due after five years through ten years................... 61,766 59,656
Due after ten years...................................... 443,371 425,068
-------- --------
Total................................................... $517,320 $496,426
======== ========
</TABLE>
Expected maturities of mortgage-backed securities can differ from
contractual maturities because borrowers have the right to prepay obligations.
In addition, such factors as prepayments and interest rates may affect the
yield on the carrying value of mortgage-backed securities.
Proceeds from sales of securities during 1999, 1998 and 1997 were $177.8
million, $279.5 million and $622.0 million, respectively, with related gross
realized gains of $685 thousand, $1.4 million and $3.3 million. There were no
gross realized losses from sales of securities during 1999. Gross realized
losses on securities sales amounted to $31 thousand and $543 thousand during
1998 and 1997, respectively.
At December 31, 1999 and 1998, investment securities with a carrying value
of $492.1 million and $636.3 million, respectively, were pledged to secure
public deposits, securities sold under agreements to repurchase, FHLB
advances, interest rate swap agreements and for other purposes required or
permitted by law.
53
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative positions are integral components of the Company's asset and
liability management activities. Therefore, the Company does not believe it is
meaningful to separately analyze the derivatives component of its risk
management activities in isolation from related positions.
The Company uses derivative instruments, primarily interest rate swap and
cap agreements, as part of its management of asset and liability positions in
connection with its overall goal of minimizing the impact of interest rate
fluctuations on the Company's net interest margin or its stockholders' equity.
Derivatives are used as hedges against market fluctuations in the Company's
available-for-sale securities portfolio, and to effectively convert certain
fixed rate commercial real estate loans to floating rate assets. For the years
ended December 31, 1999 and 1998, all interest rate swaps were designated for
purposes of converting fixed rate loans to floating rate.
Interest rate cap agreements were designated as hedges against the
available-for-sale securities portfolio during the year ended December 31,
1998 and the nine months ended September 30, 1999. Due to the volatility of
the correlation between the Treasury yield curve and fixed mortgage-backed
securities, the Company ceased using interest rate cap agreements to hedge
against fluctuations in the investment securities available-for-sale portfolio
effective October 1, 1999. Accordingly, changes in the fair value of interest
rate caps amounting to $65 thousand for the three months ended December 31,
1999 were recorded in current earnings.
The following table reflects summary information on derivative contracts
used to hedge the Company's interest rate risk as of December 31, 1999 and
1998. Amounts included in the estimated fair value column do not include gains
or losses from changes in the value of the underlying asset or liability being
hedged. Notional amounts are not exchanged but serve as a point of reference
for calculating payments and do not represent exposure to credit or market
risk. Amounts shown as unamortized premiums paid for interest rate swaps
represent the cost basis of such instruments resulting from a prior mark-to-
market adjustment upon sale of a previously hedged item, and subsequent
redesignation to the current hedged item.
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------
Unamortized Gross Gross Estimated
Notional Premium Unrealized Unrealized Fair
Amount Paid Gains Losses Value
-------- ----------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest rate swap
agreements:
Maturing on July 21,
2009,
pay 7.00% fixed and
receive 3-month
LIBOR................. $15,000 $-- $-- $(706) $(706)
Maturing on June 23,
2009,
pay 7.00% fixed and
receive 3-month
LIBOR................. 15,000 -- -- (623) (623)
Maturing on November 13,
2002,
pay 6.31% fixed and
receive 3-month
LIBOR................. 14,000 286 -- (96) 190
Maturing on January 17,
2002,
pay 6.89% fixed and
receive 3-month
LIBOR................. 4,500 -- -- (17) (17)
Maturing on October 10,
2001,
pay 6.46% fixed and
receive 3-month
LIBOR................. 10,000 -- 34 -- 34
Interest rate cap
agreements reclassified
as trading securities:
Maturing on October 24,
2002, 7.00%
LIBOR cap.............. 18,000 326 -- (128) 198
Maturing on April 10,
2001, 6.50%
LIBOR cap.............. 18,000 132 -- (74) 58
</TABLE>
54
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------
Unamortized Gross Gross Estimated
Notional Premium Unrealized Unrealized Fair
Amount Paid Gains Losses Value
-------- ----------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest rate swap
agreements:
Maturing on November 13,
2002,
pay 6.31% fixed and
receive 3-month LIBOR.. $14,000 $382 $-- $(935) $(553)
Maturing on January 17,
2002,
pay 6.89% fixed and
receive 3-month LIBOR.. 4,500 -- -- (217) (217)
Maturing on October 10,
2001,
pay 6.46% fixed and
receive 3-month LIBOR.. 10,000 -- -- (366) (366)
Interest rate cap
agreements:
Maturing on October 24,
2002, 7.00%
LIBOR cap............... 18,000 442 -- (354) 88
Maturing on April 10,
2001, 6.50%
LIBOR cap............... 18,000 231 -- (226) 5
</TABLE>
The estimated fair values of derivative financial instruments were
determined using quoted market prices from dealers. The Company is exposed to
credit-related losses in the event of nonperformance by counterparties to
financial instruments but does not expect any counterparties to fail to meet
their obligations. The Company deals only with highly rated counterparties.
The current credit exposure of derivatives is represented by the estimated
fair value of contracts having positive fair values at the reporting date.
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of loans receivable:
<TABLE>
<CAPTION>
December 31
----------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential, one to four units..................... $ 278,161 $ 270,444
Residential, multifamily........................... 311,193 167,545
Commercial and industrial real estate.............. 518,074 358,850
Construction....................................... 122,363 78,922
---------- ----------
Total real estate loans.......................... 1,229,791 875,761
---------- ----------
Other loans:
Business, commercial............................... 248,865 223,318
Automobile......................................... 5,284 4,972
Other consumer..................................... 23,834 15,156
---------- ----------
Total other loans................................ 277,983 243,446
---------- ----------
Total gross loans.............................. 1,507,774 1,119,207
Unearned fees, premiums and discounts, net........... (289) (2,122)
Allowance for loan losses............................ (20,844) (16,506)
---------- ----------
Loans receivable, net.......................... $1,486,641 $1,100,579
========== ==========
</TABLE>
Loans held for sale were $736 thousand and $9.0 million at December 31, 1999
and 1998, respectively. These loans are accounted for at the lower of
aggregate cost or market. Accrued interest on loans receivable amounted to
$9.2 million and $6.8 million at December 31, 1999 and 1998, respectively.
55
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An analysis of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year...................... $16,506 $12,273 $10,084
Provision for loan losses....................... 5,439 5,356 5,588
Recoveries...................................... 626 1,543 737
Chargeoffs...................................... (2,877) (2,666) (4,136)
Allowance from acquisition...................... 1,150 -- --
------- ------- -------
Balance, end of year............................ $20,844 $16,506 $12,273
======= ======= =======
The following is a summary of interest foregone on impaired loans for the
years ended December 31:
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Interest income that would have been recognized
had the loans performed in accordance with
their original terms........................... $ 1,980 $ 1,057 $ 1,403
Less: Interest income recognized on impaired
loans.......................................... (1,562) (890) (1,129)
------- ------- -------
Interest foregone on impaired loans............. $ 418 $ 167 $ 274
======= ======= =======
</TABLE>
There were no commitments to lend additional funds to borrowers whose loans
are included above.
The following table provides information on impaired loans for the periods
indicated:
<TABLE>
<CAPTION>
As of and for the Year
Ended
-------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Recorded investment with related allowance...... $ 7,773 $ 745 $ 3,055
Recorded investment with no related allowance... 13,078 9,239 14,539
------- ------- -------
Total recorded investment..................... 20,851 9,984 17,594
Allowance on impaired loans..................... (1,254) (350) (1,550)
------- ------- -------
Net recorded investment in impaired loans..... $19,597 $ 9,634 $16,044
======= ======= =======
Average total recorded investment in impaired
loans.......................................... $21,368 $10,522 $18,763
</TABLE>
Loans serviced for others amounted to approximately $208.5 million and
$195.5 million at December 31, 1999 and 1998, respectively.
Credit Risk and Concentration -- Substantially all of the Company's real
estate loans are secured by real properties located in California. In
addition, although most of the Company's trade finance activities are related
to trade with Asia, all of the Company's loans are made to companies domiciled
in the United States.
6. REAL ESTATE INVESTMENT
The Company has invested in certain limited partnerships that were formed to
develop and operate several apartment complexes designed as high-quality
affordable housing for lower income tenants throughout the United States. The
Company's ownership in each limited partnership varies from 1% to 19.8%. Four
of the investments are being accounted for using the equity method of
accounting, since the Company exercises significant control over the
partnership. The remaining investments are being amortized on a level yield
method over the life of the related tax credits. Each of the partnerships must
meet the regulatory requirements for
56
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
affordable housing for a minimum 15 year compliance period to fully utilize
the tax credits. If the partnerships cease to qualify during the compliance
period, the credit may be denied for any period in which the project is not in
compliance and a portion of the credit previously taken is subject to
recapture with interest.
The remaining federal tax credits to be utilized over a multiple-year period
is $22.9 million as of December 31, 1999. The Company's usage of tax credits
approximated $3.2 million and $1.7 million during 1999 and 1998, respectively.
Investment amortization amounted to $3.0 million and $1.0 million for the
years ended December 31, 1999 and 1998, respectively.
Notes Payable -- The Company financed the purchase of certain real estate
tax credits in partnerships of which multiple properties are currently under
construction. This transaction was financed with nonrecourse notes which are
collateralized by the Company's partnership interest in the real estate
investment tax credits. The notes are payable upon demand and if defaulted,
interest will be imposed at an annual rate equal to the lesser of 16% per
annum or the highest rate permitted by applicable law. No interest is due if
the notes are paid on demand. The Company has no liabilities in addition to
the notes payable indicated above or any contingent liabilities to the
partnership.
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Land...................................................... $ 9,796 $ 9,796
Office buildings.......................................... 11,084 11,084
Leasehold improvements.................................... 2,704 2,595
Furniture, fixtures and equipment......................... 9,682 9,731
------- -------
33,266 33,206
Accumulated depreciation and amortization................. (10,620) (9,800)
------- -------
Net..................................................... $22,646 $23,406
======= =======
</TABLE>
8. CUSTOMER DEPOSIT ACCOUNTS
Customer deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Demand deposits (non-interest bearing)................... $ 128,552 $ 103,118
Checking accounts (interest bearing)..................... 89,545 78,923
Money market accounts.................................... 69,434 39,536
Savings deposits......................................... 211,818 219,390
---------- ----------
499,349 440,967
---------- ----------
Time deposits:
Less than $100,000..................................... 487,335 465,045
$100,000 or greater.................................... 513,845 386,925
---------- ----------
1,001,180 851,970
---------- ----------
Total deposits........................................... $1,500,529 $1,292,937
========== ==========
</TABLE>
57
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
$100,000 Less
or Than
Greater $100,000 Total
-------- -------- ----------
(In thousands)
<S> <C> <C> <C>
2000............................................ $473,929 $443,600 $ 917,529
2001............................................ 7,362 34,883 42,245
2002............................................ 2,329 6,190 8,519
2003............................................ -- 621 621
2004 and thereafter............................. 30,225 2,041 32,266
-------- -------- ----------
Total......................................... $513,845 $487,335 $1,001,180
======== ======== ==========
</TABLE>
Accrued interest payable was $958 thousand and $582 thousand at December 31,
1999 and 1998, respectively. Interest expense on customer deposits by account
type is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Checking accounts....................................... $ 1,056 $ 1,072 $ 1,173
Money market accounts................................... 1,593 1,010 622
Savings deposits........................................ 3,960 5,048 5,192
Time deposits:
Less than $100,000..................................... 21,533 23,234 24,771
$100,000 or greater.................................... 21,425 19,135 16,636
------- ------- -------
Total................................................... $49,567 $49,499 $48,394
======= ======= =======
</TABLE>
9. SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased and securities sold
under agreements to repurchase. Federal funds purchased generally mature
within one business day from the date of transaction while securities sold
under agreements to repurchase generally mature within 90 days from the
transaction date. At December 31, 1999, total short-term borrowings consisted
entirely of federal funds purchased amounting to $600 thousand. There were no
outstanding federal funds purchased at December 31, 1998. At December 31,
1998, total short-term borrowings were comprised entirely of $33.0 million in
securities sold under agreements to repurchase. Information concerning
securities sold under agreements to repurchase is summarized as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------
1999 1998
------- --------
(Dollars in
thousands)
<S> <C> <C>
Balance at year-end........................................ $ -- $ 33,000
Average balance during the year............................ $ 9,159 $118,588
Highest month-end balance during the year.................. $33,000 $191,635
Weighted average interest rate during the year............. 5.05% 5.62%
Weighted average interest rate at end of year.............. -- % 5.75%
Mortgage-backed securities underlying the agreements at
year-end:
Amortized cost............................................. $ -- $ 37,240
Estimated fair value....................................... $ -- $ 37,225
</TABLE>
58
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. FEDERAL HOME LOAN BANK ADVANCES
FHLB advances and weighted average interest rates are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
------------- -------------
(Dollars in thousands)
Maturing during
Year Ending
December 31,
---------------
<S> <C> <C> <C> <C>
1999......................................... $ -- -- % $291,000 4.77%
2000......................................... 468,000 5.87 17,000 5.71
2003......................................... 14,000 5.94 255,000 5.09
-------- ---- -------- ----
Total...................................... $482,000 5.87% $563,000 4.95%
======== ==== ======== ====
</TABLE>
At December 31, 1999 and 1998, all advances outstanding are fixed interest
rate for a specific term. Some advances are secured by certain real estate
loans with remaining principal balances of approximately $600.4 million and
$382.7 million at December 31, 1999 and 1998, respectively.
11. INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current income tax expense:
Federal............................................ $11,155 $ 8,801 $ 6,732
State.............................................. 4,925 2,571 2,231
------- ------- -------
Total current income tax expense................. 16,080 11,372 8,963
------- ------- -------
Deferred income tax expense (benefit):
Federal............................................ (2,062) (1,837) (1,413)
State.............................................. (415) 147 (220)
------- ------- -------
Total deferred income tax benefit................ (2,477) (1,690) (1,633)
------- ------- -------
Provision for income taxes........................... $13,603 $ 9,682 $ 7,330
======= ======= =======
</TABLE>
The difference between the effective tax rate implicit in the consolidated
financial statements and the statutory federal income tax rate can be
attributed to the following:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Federal income tax provision at statutory rate...... 35.0% 35.0% 35.0%
State franchise taxes, net of federal tax effect.... 7.0 6.4 7.1
Low income housing tax credits...................... (7.7) (6.1) (1.8)
Other, net.......................................... (1.6) (0.4) (0.3)
------- ------- -------
Effective income tax rate........................... 32.7% 34.9% 40.0%
======= ======= =======
</TABLE>
59
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax (assets) liabilities are presented below:
<TABLE>
<CAPTION>
December 31
------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Core deposit premium.................................... $ 2,749 $ 1,998
Depreciation............................................ 3,111 3,269
FHLB stock dividends.................................... 3,184 2,478
Deferred loan fees...................................... 4,125 3,099
Other, net.............................................. 3,194 1,701
-------- --------
Total gross deferred tax liabilities................. 16,363 12,545
-------- --------
Deferred tax assets:
Bad debt deduction...................................... (8,151) (6,359)
Purchased loan discounts................................ (1,455) (1,599)
Deferred compensation accrual........................... (1,058) (553)
California franchise tax................................ (1,443) (894)
Unrealized loss on securities........................... (8,860) (592)
Other, net.............................................. (3,715) (1,289)
-------- --------
Total gross deferred tax assets...................... (24,682) (11,286)
-------- --------
Net deferred tax (assets) liabilities.............. $ (8,319) $ 1,259
======== ========
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
Credit Extensions -- In the normal course of business, there are various
outstanding commitments to extend credit which are not reflected in the
accompanying consolidated financial statements. While the Company does not
anticipate losses as a result of these transactions, commitments are included
in determining the appropriate level of the allowance for loan losses.
Loan commitments are agreements to lend to a customer provided there is no
violation of any condition established in the agreement. Commitments generally
have fixed expiration dates or other termination clauses. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future funding requirements.
The Company uses the same credit policies in making commitments and
conditional obligations as it does in extending loan facilities to customers.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Company
upon extension of credit is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties. As of December 31, 1999 and 1998, undisbursed loan commitments
amounted to $290.8 million and $226.3 million, respectively. In addition, the
Company committed to fund mortgage loan applications in process amounting to
$34.8 million and $17.8 million as of December 31, 1999 and 1998,
respectively.
Commercial letters of credit are issued to facilitate domestic and foreign
trade transactions while standby letters of credit are issued to make payments
on behalf of customers when certain specified future events occur. As of
December 31, 1999 and 1998, commercial and standby letters of credit totaled
$151.7 million and $182.8 million, respectively.
60
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Litigation -- The Company is a party to various legal proceedings arising in
the normal course of business. While it is difficult to predict the ultimate
outcome of such litigation, the Company does not expect that such litigation
will have a material adverse effect on its financial position and results of
operations.
Lease Commitments -- The Company conducts a portion of its operations
utilizing leased premises and equipment under operating leases. Rental expense
amounted to $1.6 million, $1.4 million and $1.1 million for the years ended
December 31, 1999, 1998, and 1997, respectively.
Future minimum rental payments under noncancelable leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, (In thousands)
------------ --------------
<S> <C>
2000.......................................................... $1,318
2001.......................................................... 1,111
2002.......................................................... 858
2003.......................................................... 689
2004.......................................................... 512
Thereafter.................................................... 1,509
------
Total....................................................... $5,997
======
</TABLE>
13. STOCK COMPENSATION PLANS
Stock Options
The Company adopted the 1998 Stock Incentive Plan (the "Plan") on June 25,
1998. Under the Plan, the Company may grant stock options, restricted stock,
or any form of award deemed appropriate not to exceed 1,902,000 shares of
common stock over a ten-year period. The stock options awarded under the Plan
are granted with a four-year or three-year vesting period and a ten-year
contractual life. At December 31, 1999, 60,000 options have been granted to
nonemployee directors under the Plan.
A summary of the Company's stock options as of and for the years ended
December 31, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,715,150 $10.00 -- $ --
Granted................. 72,200 10.42 1,716,850 10.00
Forfeited............... (33,876) 10.00 (1,700) 10.00
---------- ------ ---------- ------
Outstanding at end of
year................... 1,753,474 $10.02 1,715,150 $10.00
========== ====== ========== ======
Options exercisable at
year-end............... 426,834 None
Weighted average fair
value of options
granted during the
year................... $ 5.18 $ 4.08
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------
Weighted Average Weighted Average Number of
Remaining Exercise Exercisable
Range of Exercise Prices Number Contractual Life Price Options
------------------------ --------- ---------------- ---------------- -----------
<S> <C> <C> <C> <C>
$10.00 to $10.99........ 1,736,474 8.5 years $10.00 426,834
$11.00 to $11.99........ 10,000 10 years $11.44 --
$12.00 to $12.99........ 7,000 9.9 years $12.25 --
--------- -------
$10.00 to $12.99........ 1,753,474 8.5 years $10.02 426,834
========= =======
</TABLE>
61
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan, and accordingly, no compensation expense has been
recognized in the consolidated financial statements since the stock options
were granted at fair value. Had the Company determined compensation expense
based on the fair value at the grant date consistent with SFAS No. 123, the
Company's net income and earnings per share ("EPS") would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands,
except per
share data)
<S> <C> <C>
Net Income
As Reported................................................ $28,027 $18,028
Pro Forma.................................................. $27,241 $17,519
Basic EPS
As Reported................................................ $ 1.23 $ 0.76
Pro Forma.................................................. $ 1.20 $ 0.74
Diluted EPS
As Reported................................................ $ 1.22 $ 0.76
Pro Forma.................................................. $ 1.19 $ 0.74
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions in 1999
and 1998, respectively: dividend yield of 1.2% for both years; expected
volatility of 43.5% and 30.4%; risk-free interest rate of 6.7% and 4.8%; and
expected lives of 6.0 years and 6.5 years. There were no options outstanding
in 1997.
Restricted Stock
As part of the 1998 Stock Incentive Plan, the Company granted 105,003 shares
of restricted stock to certain officers and employees during 1999. The
weighted average price of the restricted shares as of the grant dates was
$10.59. At December 31, 1999, the balance of deferred compensation related to
the restricted stock awards totaled $863 thousand. During 1999, total related
noncash compensation cost amounted to $249 thousand. The Company was not
entitled to any income tax deduction for the year ended December 31, 1999 in
connection with the restricted stock award, since no restrictions have lapsed
and no shares have been issued.
Stock Purchase Plan
The Company has adopted the 1998 Employee Stock Purchase Plan (the "Purchase
Plan"), providing eligible employees of the Company participation in the
ownership of the Company through the right to purchase shares of the Company's
common stock at a discount. Under the terms of the Purchase Plan, employees
can purchase shares of the Company's common stock at 85% of the per-share
market price at the date of grant, subject to an annual limitation of common
stock valued at $25,000. The Purchase Plan qualifies as a noncompensatory plan
under Section 423 of the Internal Revenue Code, and accordingly, no
compensation expense is recognized under the plan.
The Purchase Plan covers a total of 1,000,000 shares of the Company's common
stock. During 1999, 28,728 shares totaling $218 thousand were sold to
employees under the Purchase Plan.
Warrants
In connection with the securities offering and change in ownership of the
Bank, warrants to purchase 475,500 shares of common stock of the Company were
issued to the placement agent in June 1998. The warrants are exercisable for a
five-year period at an exercise price of $10 per share.
62
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the diluted EPS computation to the amounts used in the
basic EPS computation for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
Net Number Per Share
Income of Shares Amounts
------- --------- ---------
(In thousands, except per
share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
Basic EPS...................... $28,027 22,757 $1.23
Effect of dilutive securities:
Stock Options................ -- 69
Restricted Stock............. -- 51
Stock Warrants............... -- 18
------- ------ -----
Diluted EPS.................... $28,027 22,895 $1.22
======= ====== =====
1998
Basic EPS...................... $18,028 23,775 $0.76
Effect of dilutive securities.. -- --
------- ------ -----
Diluted EPS.................... $18,028 23,775 $0.76
======= ====== =====
1997
Basic EPS...................... $11,011 23,775 $0.46
Effect of dilutive securities.. -- --
------- ------ -----
Diluted EPS.................... $11,011 23,775 $0.46
======= ====== =====
</TABLE>
14. STOCKHOLDER'S EQUITY
Stock Repurchase Program
During 1999, the Company's Board of Directors authorized the Company to
repurchase up to $21.0 million of its common stock under three different Stock
Repurchase Programs. As of December 31, 1999 the Company has repurchased
1,485,863 shares of common stock with a cost of $14.7 million. The Company is
holding the repurchased shares as treasury shares to be reissued in connection
with the Company's incentive stock plan and its employee stock purchase plan.
Quarterly Dividends
The Company has declared and paid a cash dividend of $0.03 per share during
the four quarters of 1999 to its shareholders totaling $2.7 million.
Risk-Based Capital
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies, including the
Federal Deposit Insurance Corporation ("FDIC"). Failure to meet minimum
capital requirements can initiate certain mandatory actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures
of the assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
63
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999 and 1998, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain specific total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table below. There are no conditions or events
since that notification which management believes have changed the category of
the Bank.
The actual and required capital ratios at December 31, 1999 and 1998 are
presented as follows:
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital (to Risk-Weighted
Assets)
Company......................... $174,917 10.6% $132,223 8.0% $165,279 10.0%
Bank............................ $174,885 10.6% $132,200 8.0% $165,250 10.0%
Tier I Capital (to Risk-Weighted
Assets)
Company......................... $154,255 9.3% $ 66,112 4.0% $ 99,168 6.0%
Bank............................ $154,226 9.3% $ 66,100 4.0% $ 99,150 6.0%
Tier I Capital (to Average
Assets)
Company......................... $154,255 7.3% $ 84,444 4.0% $105,555 5.0%
Bank............................ $154,226 7.3% $ 84,505 4.0% $105,631 5.0%
As of December 31, 1998:
Total Capital (to Risk-Weighted
Assets)
Company......................... $164,429 11.4% $115,145 8.0% $143,931 10.0%
Bank............................ $164,429 11.4% $115,145 8.0% $143,931 10.0%
Tier I Capital (to Risk-Weighted
Assets)
Company......................... $147,923 10.3% $ 57,572 4.0% $ 86,359 6.0%
Bank............................ $147,923 10.3% $ 57,572 4.0% $ 86,359 6.0%
Tier I Capital (to Average
Assets)
Company......................... $147,923 7.4% $ 80,215 4.0% $100,269 5.0%
Bank............................ $147,923 7.4% $ 80,215 4.0% $100,269 5.0%
</TABLE>
15. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan for the benefit of its
employees. The Company's contributions to the plan are determined annually by
the Board of Directors in accordance with plan requirements. For tax purposes,
eligible participants may contribute up to a maximum of 15% of their
compensation, not to exceed the dollar limit imposed by the Internal Revenue
Service. For the plan years ended December 31, 1999, 1998, and 1997, the
Company contributed $459 thousand, $400 thousand, and $239 thousand,
respectively.
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the
64
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
December 31
----------------------------------------------
1999 1998
---------------------- ----------------------
Carrying Carrying
or Contract Estimated or Contract Estimated
Amount Fair Value Amount Fair Value
----------- ---------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents............. $ 43,497 $ 43,497 $ 161,131 $ 161,131
Investment securities
available for sale...... 496,426 496,426 682,436 682,436
Loans receivable, net.... 1,486,641 1,490,108 1,100,579 1,111,253
FHLB stock............... 26,954 26,954 32,874 32,874
Accrued interest
receivable.............. 11,988 11,988 10,002 10,002
Liabilities:
Customer deposit
accounts:
Demand accounts........ 499,349 499,349 440,967 440,967
Time deposits.......... 1,001,180 1,002,176 851,970 852,045
Short-term borrowings.... 600 600 33,000 33,016
FHLB advances............ 482,000 482,507 563,000 565,115
Accrued interest
payable................. 958 958 2,738 2,738
Off-balance sheet financial
instruments:
Commercial letters of
credit.................. 13,394 17 14,954 19
Standby letters of
credit.................. 138,281 1,340 167,809 1,895
Commitments to extend
credit.................. 290,797 1,601 226,344 1,066
Derivatives:
Interest rate swaps.... 286 (1,122) 382 (1,136)
Interest rate caps..... 256 256 93 93
</TABLE>
The methods and assumptions used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value are
explained below:
Cash and Cash Equivalents -- The carrying amounts approximate fair values
due to the short-term nature of these instruments.
Investment Securities and Derivative Instruments -- The fair value is based
on quoted market price from securities brokers or dealers in the respective
instruments.
Loans and Accrued Interest Receivable -- Fair values are estimated for
portfolios of loans with similar financial characteristics, primarily fixed
and adjustable interest rate terms. The fair values of fixed rate mortgage
loans are based upon discounted cash flows utilizing applicable risk-adjusted
spreads relative to the current pricing for 15- and 30-year conventional loans
as well as anticipated prepayment schedules. The fair values of adjustable
rate mortgage loans are based upon discounted cash flows utilizing discount
rates that approximate the risk-adjusted pricing of available mortgage-backed
securities having similar rates and repricing characteristics as well as
anticipated prepayment schedules. No adjustments have been made for changes in
credit quality within the loan portfolio. It is management's opinion that the
allowance for loan losses pertaining to performing and nonperforming loans
results in a fair valuation of such loans. The carrying amount of accrued
interest receivable approximates fair value due to its short term nature.
65
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FHLB Stock -- The carrying amount approximates fair value, as the stock may
be sold back to the Federal Home Loan Bank at carrying value.
Deposits and Accrued Interest Payable -- The fair values of deposits are
estimated based upon the type of deposit products. Demand accounts, which
include passbooks and transaction accounts, are presumed to have equal book
and fair values, since the interest rates paid on these accounts are based on
prevailing market rates. The estimated fair values of time deposits are based
upon the contractual discounted cash flows estimated in current rate for the
deposits over the remaining terms. The carrying amount of accrued interest
payable approximates fair value due to its short term nature.
Short-term borrowings -- The fair values are estimated by discounting the
amounts contractually due under such agreements using the prevailing federal
funds rate at each reporting date.
FHLB Advances -- The fair values of FHLB advances are estimated based on the
discounted value of contractual cash flows, using rates currently offered by
the Federal Home Loan Bank of San Francisco for fixed-rate credit advances
with similar remaining maturities at each reporting date.
Commitments to Extend Credit, Commercial and Standby Letters of Credit --
The fair values of commitments are estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the counterparty's credit standing.
The fair value estimates presented herein are based on pertinent information
available to management as of each reporting date. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
17. RELATED PARTY TRANSACTIONS
The Company enters into certain related party transactions with its
affiliates in the normal course of business. These transactions are conducted
at market terms.
One of the Company's directors is a guarantor of an extension of credit to
two corporations in which the director is an executive officer and the
beneficial owner of over 10% of a class of equity securities of the two
corporations. At December 31, 1999, the total approved commitment amounted to
$1.1 million with an outstanding balance of $410 thousand.
18. SEGMENT INFORMATION
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.
66
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating segment results are based on the Company's internal management
reporting process, which reflects assignments and allocations of capital,
certain operating and administrative costs and the provision for loan losses.
Net interest income is based on the Company's internal funds transfer pricing
system which assigns a cost of funds or a credit for funds to assets or
liabilities based on their type, maturity or repricing characteristics.
Noninterest income and noninterest expense, including depreciation and
amortization, directly attributable to a segment are assigned to that
business. Indirect costs, including overhead expense, are allocated to the
segments based on several factors, including, but not limited to, full-time
equivalent employees, loan volume and deposit volume. The provision for credit
losses is allocated based on new loan originations for the period. The Company
evaluates overall performance based on profit or loss from operations before
income taxes not including nonrecurring gains and losses.
Any future changes in the Company's management structure or reporting
methodologies may result in changes in the measurement of operating segment
results. Results for prior periods will be restated for comparability in the
event of future changes in management structure or reporting methodologies.
The following tables present the operating results and other key financial
measures for the individual operating segments for the years ended December
31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
--------------------------------------------------------------
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
-------- ---------- -------- ----------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income......... $ 29,088 $ 39,568 $ 38,959 $ 38,161 $ 2,251 $ 148,027
Charge for funds used... (17,198) (23,149) (33,472) (26,810) -- (100,629)
-------- -------- -------- -------- -------- ----------
Interest spread on
funds used............ 11,890 16,419 5,487 11,351 2,251 47,398
-------- -------- -------- -------- -------- ----------
Interest expense........ (40,032) (3,015) (33,100) -- 5 (76,142)
Credit on funds
provided............... 58,161 5,417 37,051 -- -- 100,629
-------- -------- -------- -------- -------- ----------
Interest spread on
funds provided........ 18,129 2,402 3,951 -- 5 24,487
-------- -------- -------- -------- -------- ----------
Net interest income... $ 30,019 $ 18,821 $ 9,438 $ 11,351 $ 2,256 $ 71,885
======== ======== ======== ======== ======== ==========
Depreciation and
amortization........... $ 1,364 $ (7) $ 345 $ -- $ 2,437 $ 4,139
Segment profit.......... 7,822 14,500 9,919 9,389 -- 41,630
Segment assets.......... 398,324 655,739 506,434 468,340 123,793 2,152,630
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------------
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
-------- ---------- -------- ----------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income......... $ 17,036 $ 29,496 $ 40,901 $ 37,368 $ 1,907 $ 126,708
Charge for funds used... (10,530) (17,032) (36,871) (31,423) -- (95,856)
-------- -------- -------- -------- -------- ----------
Interest spread on
funds used............ 6,506 12,464 4,030 5,945 1,907 30,852
-------- -------- -------- -------- -------- ----------
Interest expense........ (43,253) (1,324) (26,466) -- -- (71,043)
Credit on funds
provided............... 61,317 1,950 32,589 -- -- 95,856
-------- -------- -------- -------- -------- ----------
Interest spread on
funds provided........ 18,064 626 6,123 -- -- 24,813
-------- -------- -------- -------- -------- ----------
Net interest income... $ 24,570 $ 13,090 $ 10,153 $ 5,945 $ 1,907 $ 55,665
======== ======== ======== ======== ======== ==========
Depreciation and
amortization........... $ 1,571 $ 762 $ 1,798 $ 14 $ 394 $ 4,539
Segment profit.......... 3,227 12,200 8,605 3,678 -- 27,710
Segment assets.......... 248,291 410,775 839,309 433,538 126,247 2,058,160
</TABLE>
67
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------------
Retail Commercial Residential
Banking Lending Treasury Lending Other Total
-------- ---------- -------- ----------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income......... $ 8,516 $ 16,822 $ 34,515 $ 46,067 $ 1,172 $ 107,092
Charge for funds used... (5,258) (9,775) (32,768) (38,888) -- (86,689)
-------- -------- -------- -------- ------- ----------
Interest spread on
funds used............ 3,258 7,047 1,747 7,179 1,172 20,403
-------- -------- -------- -------- ------- ----------
Interest expense........ (47,895) (500) (14,251) -- -- (62,646)
Credit on funds
provided............... 66,098 956 19,635 -- -- 86,689
-------- -------- -------- -------- ------- ----------
Interest spread on
funds provided........ 18,203 456 5,384 -- -- 24,043
-------- -------- -------- -------- ------- ----------
Net interest income... $ 21,461 $ 7,503 $ 7,131 $ 7,179 $ 1,172 $ 44,446
======== ======== ======== ======== ======= ==========
Depreciation and
amortization........... $ 1,421 $ 127 $ 1,276 $ 19 $ 342 $ 3,185
Segment profit.......... 2,706 4,454 7,135 4,046 -- 18,341
Segment assets.......... 136,072 303,999 715,291 509,757 69,220 1,734,339
</TABLE>
68
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. EAST WEST BANCORP, INC. (parent company only)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
ASSETS
Investment in subsidiary................................... $150,051 $150,830
Investment in nonbank entity............................... 250 --
Other assets............................................... 36 42
-------- --------
Total assets............................................. $150,337 $150,872
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable........................................... $ 257 $ 42
-------- --------
Total liabilities........................................ 257 42
-------- --------
STOCKHOLDERS' EQUITY
Common stock (par value $0.001 per share)
Authorized -- 50,000,000 shares
Issued -- 23,908,731 shares and 23,775,000 shares in 1999
and 1998, respectively
Outstanding -- 22,422,868 shares and 23,775,000 shares in
1999 and 1998, respectively.............................. 24 24
Additional paid in capital................................. 111,306 109,976
Retained earnings.......................................... 67,001 41,718
Deferred compensation...................................... (863) --
Treasury stock, at cost: 1,485,863 shares at December 31,
1999...................................................... (14,659) --
Accumulated other comprehensive loss, net of tax........... (12,729) (888)
-------- --------
Total stockholders' equity............................... 150,080 150,830
-------- --------
Total liabilities and stockholders' equity............. $150,337 $150,872
======== ========
STATEMENTS OF INCOME
<CAPTION>
For the Year
Ended
December 31,
------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Dividends received from subsidiary......................... $ 17,494 $ 73
-------- --------
Total income............................................. 17,494 73
Other expense.............................................. 977 73
-------- --------
Total expense............................................ 977 73
Income before income taxes and equity in undistributed
income of subsidiary...................................... 16,517 --
Income tax benefit......................................... 448 --
Equity in undistributed income of subsidiary............... 11,062 18,028
-------- --------
Net income............................................... $ 28,027 $ 18,028
======== ========
</TABLE>
69
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year
Ended
December 31,
------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 28,027 $ 18,028
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of subsidiary............ (11,062) (18,028)
Net change in other assets.............................. 6 (42)
Net change in other liabilities......................... 215 42
Deferred compensation expense........................... 249 --
-------- --------
Net cash provided by operating activities................. 17,435 --
-------- --------
Cash flows from investing activities:
Investment in nonbank entity.............................. (250) --
-------- --------
Net cash used in investing activities..................... (250) --
-------- --------
Cash flows from financing activities:
Issuance of common stock.................................. 218 --
Repurchase of common stock................................ (14,659) --
Dividends paid............................................ (2,744) --
-------- --------
Net cash used in financing activities..................... (17,185) --
-------- --------
Net increase in cash and cash equivalents................. -- --
Cash and cash equivalents, beginning of year.............. -- --
-------- --------
Cash and cash equivalents, end of year.................... $ -- $ --
======== ========
</TABLE>
20. SUBSEQUENT EVENTS
On January 18, 2000, the Company completed its acquisition of American
International Bank ("AIB") for $33.1 million in an all cash transaction. 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 $10.0
million and core deposit premium of approximately $6.1 million, which are
being amortized using the straight-line method over 15 and 7 years,
respectively. At December 31, 1999, AIB had total assets of $198.8 million
(unaudited) and total stockholders' equity of $19.9 million (unaudited).
On January 20, 2000, the Company's Board of Directors declared a regular
quarterly cash dividend of $0.03 per share, payable on or about February 16,
2000 to shareholders of record at February 2, 2000.
70
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
1999
Interest and dividend income.... $39,525 $37,822 $36,018 $34,662
Interest expense................ 19,819 19,211 18,681 18,431
Net interest income............. 19,706 18,611 17,337 16,231
Provision for loan losses....... 1,433 1,320 1,486 1,200
Net interest income after
provision for loan losses...... 18,273 17,291 15,851 15,031
Noninterest income.............. 3,590 3,544 4,227 3,332
Noninterest expense............. 10,475 10,637 9,580 8,817
Income before provision for
income taxes................... 11,388 10,198 10,498 9,546
Provision for income taxes...... 3,502 3,169 3,398 3,534
Net income...................... 7,886 7,029 7,100 6,012
Basic and diluted earnings per
share.......................... 0.35 0.31 0.31 0.26
1998
Interest and dividend income.... $35,534 $32,177 $30,415 $28,582
Interest expense................ 19,349 18,348 17,162 16,184
Net interest income............. 16,185 13,829 13,253 12,398
Provision for loan losses....... 767 1,264 1,583 1,742
Net interest income after
provision for loan losses...... 15,418 12,565 11,670 10,656
Noninterest income.............. 2,600 3,150 2,358 1,919
Noninterest expense............. 8,276 8,356 7,937 8,057
Income before provision for
income taxes................... 9,742 7,359 6,091 4,518
Provision for income taxes...... 3,247 2,671 2,262 1,502
Net income...................... 6,495 4,688 3,829 3,016
Basic and diluted earnings per
share.......................... 0.27 0.20 0.16 0.13
</TABLE>
71
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2000
EAST WEST BANCORP, INC.
(Registrant)
By: /s/ Dominic Ng
___________________________________
Dominic Ng
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dominic Ng Chairman of the Board, March 30, 2000
____________________________________ President, Chairman, and
Dominic Ng Chief Executive Officer
(principal executive
officer)
/s/ Julia Gouw Executive Vice President, March 30, 2000
____________________________________ Chief Financial Officer,
Julia Gouw and Director (principal
financial and accounting
officer)
/s/ Herman Li Director March 30, 2000
____________________________________
Herman Li
/s/ Jack C. Liu Director March 30, 2000
____________________________________
Jack C. Liu
/s/ James P. Miscoll Director March 30, 2000
____________________________________
James P. Miscoll
/s/ Keith W. Renken Director March 30, 2000
____________________________________
Keith W. Renken
/s/ Kenneth P. Slosser Director March 30, 2000
____________________________________
Kenneth P. Slosser
/s/ Edward Zapanta Director March 30, 2000
____________________________________
Edward Zapanta
</TABLE>
72
<PAGE>
EXHIBIT 10.6.1
EAST WEST BANCORP, INC.
AMENDMENT NO. 1 TO
1998 SPIRIT OF OWNERSHIP
NON-QUALIFIED STOCK OPTION PROGRAM FOR EMPLOYEES
This Amendment No. 1 amends the 1998 Spirit of Ownership Non-Qualified
Stock Option Program for Employees ("Program") under which options to purchase
shares of common stock of East West Bancorp, Inc., a Delaware corporation (the
"Company"), may be granted from time to time to employees of the Company or one
or more of its subsidiaries.
NOW, THEREFORE, this Program is hereby amended by adding a new Section
13 thereto to read as follows:
13. Eligibility. Any employee whose compensation is required
-----------
under applicable securities laws and regulations to be
disclosed in the annual proxy of the company shall be
entitled to any grants under the Sprint of Ownership
program for that year and any grants under the Spirit of
Ownership Program previously made to such employee (and
not previously exercised) shall be null and void.
1
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into on this 16th day of November 1998 by
and between EAST-WEST BANK, (hereinafter referred to as "Bank"), and Sandra Wong
hereinafter referred to as "Executive").
W I T N E S S E T H
-------------------
WHEREAS, in order to insure the successful management of its business, Bank
desires to avail itself of the experience, skills, abilities and knowledge of
Executive; and
WHEREAS, both the Bank and the Executive desire to embody the terms and
conditions of Executive's employment in this written agreement which supersedes
all prior agreements, whether written or oral; and
WHEREAS, the employment, the duration thereof, the compensation to be paid to
Executive, and other terms and conditions of employment provided in this
Agreement were duly fixed, stated, approved and authorized for and on behalf of
the Bank by action of its Board of Directors at a meeting held on October 27,
1998, at which meeting a quorum was present and voted, exclusive of Executive.
NOW, THEREFORE, in consideration of the mutual covenants, terms and
conditions, hereinafter set forth, the sufficiency of which is acknowledged, the
parties hereto covenant and agree as follows:
1. TERM
----
Subject to the concurrence of all the appropriate state and/or federal
regulatory agencies, Bank agrees to employ Executive as Executive Vice President
and Chief Credit Officer, and Executive hereby accepts employment with Bank
commencing on November 16, 1998 ("Commencement Date") and shall continue for a
period of one(1) year(s) from and after the Commencement Date, unless sooner
terminated or extended pursuant to the provisions of Sections 6 and 7 hereof.
This period of employment shall be referred to herein as "the Term". The Bank
and Executive will commence good faith discussions regarding the renewal or
extension of this Agreement three (3) months prior to expiration of the Term of
this Agreement.
2. DUTIES
------
2.1 Generally. At the commencement of this Agreement Executive shall
---------
serve as Executive Vice President and Chief Credit Officer subject to the powers
by law vested in the Board of Directors of Bank and in Bank's shareholders.
During the term of this Employment Agreement, Executive shall perform his duties
faithfully, diligently and to the best of his ability, consistent
1
<PAGE>
with the highest and best standards of the banking industry and in compliance
with all applicable laws and the Bank's Articles of Association and Bylaws. The
Executive may be assigned other titles and job responsibilities at the sole
discretion of the Bank.
2.2 Performance. Executive shall devote substantially his full energies,
-----------
interest, abilities and productive time to the business of the Bank. Executive
shall at all times loyally and conscientiously perform all of these duties and
obligations hereunder and shall at all times strictly adhere to and obey, and
instruct and require all those working under and with him strictly to adhere and
obey, all Bank policies and procedures whether written or oral and all
applicable federal and state laws, statutes, rules and regulations to the end
that the Bank shall at all times be in full compliance with such laws, statutes,
rules and regulations.
3. COMPENSATION
------------
3.1 Operating Period. During the Term, Executive shall receive an annual
----------------
base salary in the amount of One Hundred Fifty Thousand Dollars ($150,000.00)
payable in accordance with the normal payroll practices of the Bank. Annual
salary increases shall be according to Bank policy which are based on merit and
the Bank's financial performance for the previous year. Annual increases are in
the sole discretion of the Bank.
3.2 Bonus. In addition to the base salary set forth in Section 3.1
-----
hereof, during the Term, Executive may participate in the Bank's Management
Incentive Program with the opportunity to earn an annual bonus, based upon
achievement. Bonus potential is established pursuant to the Management Incentive
Program currently at 30% of calendar year base salary earnings prorated for
service less than the full twelve (12) month cycle. The percentage may be
changed at the sole discretion of the Bank with or without notice. Executive
shall not receive any bonus if employment is terminated prior to Executive
completing any full calendar year; there shall be no proration of bonus
earnings. The Bank, in its sole discretion, may award a pro rata bonus at time
of termination. Executive is guaranteed 30% bonus payment for 1998 actual
earnings.
4. EXECUTIVE BENEFITS
------------------
4.1 Group Medical and Life Insurance Benefits. During the Term the
-----------------------------------------
Bank shall provide for Executive, at Bank's expense, participation in medical,
dental, accident and health, income continuation and life insurance benefits to
the same extent that such benefits are available to other executives and
eligible employees of the Bank. Dependent coverage may be subject to Executive
contributions. Nothing herein shall imply that the Bank may not reduce,
eliminate or modify existing benefits provisions applicable to all employees.
2
<PAGE>
4.2 Business Expense. Executive shall be entitled to reimbursement
----------------
by the Bank in accordance with Bank policy and procedures, for any ordinary and
necessary business expenses incurred by Executive in the performance of
Executive's duties and in acting for the Bank during the Term, which type of
expenditures shall be determined by the Board of Directors, provided that
executive furnishes to the Bank adequate records and other documentary evidence
for such expenditures.
4.3 Automobile. Executive shall receive an automobile allowance in
----------
the sum of seven hundred dollars ($700.00) per month during the term of this
agreement.
4.4 401(k). Executive may participate in the Bank's 401(k) Plan
------
subject to the terms and conditions thereof.
4.5 Vacation. Executive shall be entitled to a vacation, in
--------
accordance with standard Bank policies based on Corporate title and length of
service, each year during the Term, which vacation presently shall be four (4)
weeks and such vacation shall accrue at the rate of 13.33 hours for each month
of service under this Agreement. Any vacation time not used may be accrued for
use in future years, subject to a maximum accrual balance not to exceed 1 1/2
times annual accrual entitlement.
4.6 LTD (Long Term Disability). Executive will be required to join
--------------------------
the Executive Long Term Disability Plan. The Executive Long Term Disability Plan
is a contributory plan. All premiums will automatically be paid out of payroll
deductions. Participation is mandatory.
4.7 Employee Benefits. Executive shall be entitled to participate
-----------------
in all Bank employee benefits available to all employees, subject to meeting
standard eligibility requirements.
4.8 Employee Stock Incentive Plan. Executive will be eligible to
-----------------------------
participate in the Employee Stock Incentive Plan. The Executive will be awarded
10,000 shares the first year at a grant price of $10 per share, a minimum of
5,000 shares for the second and third year of employment at a grant price of the
current fair market value of the stock. Thereafter, participation in the plan is
at the sole discretion of the Bank.
4.9 Benefit Enhancements. Executive will be eligible for all and
--------------------
any benefit enhancements that are made to the executive benefit package.
5. PROPERTY RIGHTS
---------------
5.1 Trade Secrets. During the Term, Executive may have access to
-------------
and become acquainted with various trade secrets which are owned by the Bank and
which may regularly be used in the
3
<PAGE>
operation of the Bank. Executive shall not disclose any such trade secrets,
directly or indirectly, or use them in any way, during the Term or at any time
thereafter, except as required pursuant to the provisions of this Agreement. All
such trade secrets, including, but not by way of limitation, any and all files,
records, documents, specifications, equipment, customer lists and similar items
relating to the business of the Bank, whether prepared by Executive or otherwise
coming into Executive's possession, shall remain the exclusive property of the
Bank and shall not be removed from the premises of the Bank under any
circumstances whatsoever without the prior written consent of the Board of
Directors.
5.2 Other Property. Under termination of this Agreement, Executive
--------------
shall immediately deliver to the Board of Directors any and all property in
Executive's possession or under Executive's control belonging to the Bank, in
good condition, ordinary wear and tear and damage by any cause beyond
Executive's reasonable control excepted.
6. ADDITIONAL OBLIGATIONS
----------------------
6.1 Covenant Not to Compete. During the Term, Executive shall not,
-----------------------
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, stockholder, corporate officer of director, or in any other
individual or representative capacity, engage or participate in any business or
activity that is in any way in competition in any manner whatsoever with the
business of the Bank.
7. TERMINATION.
-----------
Pursuant to the provisions of all applicable federal and state statutes and
regulations including California Labor Code Section 2922, it is the specific
intent of the Bank and the Executive that the employment shall be "at will", and
any and all other provisions of this Agreement to the contrary notwithstanding,
Executive's employment hereunder may be terminated as follows:
7.1 Without Cause. In the sole and absolute discretion of the Board of
-------------
Directors for any cause whatsoever; provided, however, that if such termination
occurs during the Term, and is for any cause other than those causes
particularly described in Sections 7.2 or 7.3 hereof, Executive shall receive a
severance payment in the amount equal to six (6) months of the then current
annual salary in full and complete satisfaction of any and all rights which
Executive might enjoy hereunder. In the event that termination takes place
without cause in the first six (6) months of employment, the severance payment
provided herein shall be prorated based upon the length of service.
4
<PAGE>
7.2 Disability. Upon Executive's medical or psychological disability
----------
whereby Executive is unable to continue his duties hereunder, the employment is
terminated. If such termination occurs as a result of such disability,
Executive shall receive severance payment in an amount equal to six (6) months
of the annual base salary in effect hereunder at the date of such termination in
full and complete satisfaction of any and all rights which Executive might enjoy
hereunder other than the right, if any, to exercise any of the stock options
vested prior to such termination.
7.3 With Cause. In the event of Executive's death or willful breach or
----------
habitual neglect of his duties and obligations under this Agreement, his
conviction of a felony or the closing of the Bank under order of regulatory
authorities or any other governmental regulator of competent jurisdiction, in
which event Executive or Executive's estate shall not receive any severance
payment.
7.4. Severance After The Term of Agreement. In the event that this Agreement
-------------------------------------
expires and no subsequent Employment Agreement is entered into and Executive
remains in the employment of the Bank whereby employment remains "at will", if
the Bank terminates the Executive without cause, as defined above, the Executive
shall receive six (6) months of salary as severance pay in full and complete
satisfaction of any and all rights that Executive may have. If the Bank
terminates the Executive for cause, no severance pay shall be paid to Executive.
7.5. Severance Settlement. Severance payment shall be made in a lump sum,
---------------------
subject to required payroll withholding and IRS Form W-2 reporting.
7.6 Change of Control. If a Change of Control (as defined below) occurs
-----------------
during the term of this Agreement, and if Executive is terminated without cause
within twelve (12) months of such Change of Control, Executive shall receive a
severance payment equal to two times the annual base salary; this severance
payment shall be in lieu of the severance payment provided in Section 7.1 and
7.4 of this Agreement or under any severance payment to which Executive would
otherwise be entitled to under this Agreement or under any severance program of
general application of the Bank or any entity which might acquire control of
Bank. Change of Control means:
(I) any date upon which the directors of the Company who were last
nominated by the Board of Directors (the "Board") for election as directors
cease to constitute a majority of the directors of the Company;
5
<PAGE>
(II) the date of the first public announcement that any person or
entity, together with all Affiliates and Associates (as such capitalized terms
are defined in Rule 12b-2) promulgated under the Securities and Exchange Act of
1934, as amended (the "Exchange Act")) of such person or entity, shall have
become the Beneficial Owner (as defined in Rule 13d-3 promulgated under the
Exchange Act) of voting securities of the Company representing 51% or more of
the voting power of the Company (a "51% Stockholder"); provided, however, that
-------- -------
the terms "person" and "entity," as used in this clause (B), shall not include
(1) the Company or nay of its subsidiaries, (2) any employee benefit plan of the
Company or any of its subsidiaries, (3) any entity holding voting securities of
the Company for or pursuant to the terms of any such plan or (4) any person or
entity who was a 51% Stockholder on the date of adoption of the Plan by the
Board; or (5) the formation of a holding in which the shareholders of the
holding company after its formation are substantially the same as for the
Company prior to the holding company formation.
7.7. General Release of Claims. As a material inducement to the Bank to
-------------------------
enter into Sections 7.1, 7.2 and 7.4, Executive hereby irrevocably and
unconditionally releases, acquits, and forever discharges the Bank and each of
the Bank's owners, shareholders, predecessors, successors, assigns, agents,
directors, officers, employees, representatives, attorneys, divisions,
subsidiaries, affiliates (and agents, directors, officers, employees,
representatives and attorneys of such divisions, subsidiaries and affiliates),
and all persons acting by, through, under or in concert with any of them
(collectively "Releasees"), or any of them, from any and all complaints, claims,
liabilities, obligations, promises, agreements, controversies, damages, costs,
losses, debts and expenses (including attorney's fees and costs actually
incurred), of any nature whatsoever, including the Age Discrimination in
Employment Act and the Older Workers Benefit Protection Act, known or unknown
("Claim" or "Claims"), which Executive now has, owns, or holds, or claims to
have, own or hold, or which Executive at any time heretofore had, owned, or
held, or claimed to have, own, or hold, or which Executive at any time
hereinafter may have, own, or hold, or claim to have, own, or hold, against each
or any of the Releasees.
7.8. Civil Code Section 1542. Executive expressly waives and
-----------------------
relinquishes all rights and benefits afforded by Section 1542 of the Civil Code
of the State of California and does so understand and acknowledge the
significance and consequence of such specific waiver of Section 1542. Section
1542 of the Civil Code of the State of California states as follows:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by
6
<PAGE>
him must have materially affected his settlement with the debtor."
7.9 Indemnification. The Bank agrees to indemnify Executive to the
---------------
fullest extent possible pursuant to California law for any and all acts
performed during the course and scope of Executive's employment. At all times
during the employment, the Bank shall maintain directors and officers liability
insurance coverage for Executive.
8. ACKNOWLEDGMENT.
--------------
Executive hereby acknowledges that this Agreement may be subject to and
contingent upon the prior approval of the regulatory authorities and only to the
extent that any such prior approval is required. If such approval is not
obtained, this contract is null and void and unenforceable.
9. MISCELLANEOUS.
-------------
9.1 Notice. Any and all notices and other communications hereunder shall
------
be in writing and shall be deemed to have been duly given when delivered
personally or forty-eight (48) hours after being mailed, certified or registered
mail, return receipt requested, postage prepaid, to the addresses set forth
below or to such addresses as may from time to time be designated in writing.
East-West Bank
Attention: Human Resources Director
415 Huntington Drive
San Marino, CA. 91108
9.2 Time. Time is of the essence of this Agreement with respect to each
----
and every provision of this Agreement in which time is a factor.
9.3 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between Executive and the Bank pertaining to the subject matter hereof, fully
supersedes any and all prior agreements or understandings between Executive and
any other persons on behalf of the Bank pertaining to the subject matter hereof
and no change in modification of or addition, amendment or supplement to this
Agreement shall be valid unless set forth is writing and signed and dated by
Executive and the Bank.
9.4 Further Assurances. Executive and the Bank, without the necessity of
------------------
any further consideration, agree to execute and deliver such other documents and
take such other action as may be necessary to consummate more effectively the
purposes and subject matter of this Agreement.
7
<PAGE>
9.5 Applicable Law. The existence, validity, construction and
--------------
operational effect of this Agreement, any and all of these covenants,
agreements, representations, warranties, terms and conditions and the rights and
obligations of Executive and the Bank hereunder shall be determined in
accordance with the regulations of the applicable regulatory authorities
provided, however, that any provision of this Agreement which may be prohibited
by law or otherwise held invalid shall be ineffective only to the extent of such
prohibition or invalidity and shall not invalidate or otherwise render
ineffective any or all of the remaining provisions of this Agreement.
9.6 Controversy. In the event of any controversy, claim, or dispute
-----------
between Executive and the Bank arising out of or relating to this Agreement, the
prevailing party shall be entitled to recover as costs from the non-prevailing
party reasonable expenses, including, but not by way of limitation, attorneys'
fees and accountant's fees.
9.7 Arbitration. Any dispute regarding any aspect of this Agreement,
-----------
including but not limited to its formation, performance or breach ("arbitrable
dispute"), shall be submitted to arbitration in Los Angeles County, California,
before a single experienced employment arbitrator licensed to practice law in
California and selected in accordance with the Employment Dispute Resolution
Rules of the American Arbitration Association, as the exclusive forum for
resolving such claims or dispute. The arbitrator shall not have authority to
modify or change the Agreement in any respect. The prevailing party in any such
arbitration shall be awarded its costs, expenses, and actual attorneys' fees
incurred in connection with the arbitration. Bank and Executive shall each be
responsible for payment of one-half the amount of the arbitrator's fee(s). The
arbitrator's decision and/or award will be fully enforceable and subject to an
entry of judgment by the Superior Court of the State of California for the
County of Los Angeles. Should any part to this Agreement hereafter institute
any legal action or administrative proceeding against the other with respect to
any Claim waived by this Agreement or pursue any arbitrable dispute by any
method other than arbitration, the responding party shall recover from the
initiating party all damages, costs, expenses, and attorneys' fees incurred as a
result of such action.
9.8 Headings and Gender. The section headings used in this Agreement are
-------------------
intended solely for the convenience of reference and shall not in any way or
manner amplify, limit, modify or otherwise be used in the interpretation of any
of the provisions of this Agreement and the masculine, feminine or neuter gender
and the singular or plural number shall be deemed to include the others whenever
the context so indicates or requires.
8
<PAGE>
9.9 Successors. The covenants, agreements, representations, warranties,
----------
terms and conditions contained in this Agreement shall be binding upon and
insure to the benefit of the successors and assigns of Executive and the Bank,
provided however, that Executive may not assign any or all of his rights or
duties hereunder except upon the prior written consent of the Board of Directors
in its sole and absolute discretion.
DATED: November 16, 1999
EAST-WEST BANK
By:_______________________________
SILVIA ROSS, FVP AND HUMAN RESOURCES
DIRECTOR
_______________________________
EXECUTIVE
9
<PAGE>
Exhibit 10.10
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into on this 27th
day of March, 1995, by and between EAST-WEST FEDERAL BANK, a California banking
corporation (the "Company"), and Donald Sang Chow (the "Employee"), with respect
to the following facts:
A. The Company desires to be assured of the continued association and
services of the Employee in order to take advantage of his experience, knowledge
and abilities in the Company's business, and is willing to employ the Employee,
and the Employee desires to be so employed, on the terms and conditions set
forth in the Agreement.
B. The Employee from time to time in the course of his employment may
learn trade secrets and other confidential information concerning the Company,
and the Company desires to safeguard such trade secrets and confidential
information against unauthorized use and disclosure.
ACCORDINGLY, on the basis of the representations, warranties and covenants
contained herein, the parties hereto agree as follows:
1. EMPLOYMENT
----------
1.1 Employment. The Company hereby employs the Employee as Senior Vice
----------
President, and the Employee hereby accepts such employment, on the terms and
conditions set forth below, to perform during the term of the Agreement such
services as are required hereunder.
1.2 Duties. The Employee shall render such management services to the
------
Company, and shall perform such duties and acts, in each case consistent with
his position as Senior Vice President, as reasonably may be required by the
Company's Board of Directors (the "Board") in connection with any aspect of the
Company's business. The Employee will have such authority, power,
responsibilities and duties as are inherent to his positions (and the
undertakings applicable to his positions) and necessary to carry out his
responsibilities and the duties required of his hereunder.
1.3 Service to Others. During the period in which the Employee is
-----------------
employed by the Company, the Employee shall devote substantially all of his
productive time, ability and attention to, and shall diligently and
conscientiously use his best efforts to further, the Company's business, and
shall not, without the prior written consent of the Board, perform such
services, for any person other than the Company, which would materially
interfere with the performance of his duties hereunder. Notwithstanding the
foregoing provisions of this Section 1.3, while the Employee is employed by the
Company, he may devote reasonable time to activities other than those required
under this Agreement, including the supervision of his personal investments, and
activities involving professional, charitable, educational, religious and
similar types of organizations, speaking engagements, membership on the boards
of directors of
1
<PAGE>
other organizations, and similar type activities, to the extent that such other
activities do not inhibit or prohibit the performance of the Employee's duties
under this Agreement, or conflict in any material way with the business or
interests of the Company; provided, however, that the Employee shall not serve
on the board of any business, or hold any other position with any business
without the consent of the Board.
1.4 Place of Performance. In connection with his employment with the
--------------------
Company, the Employee will be based at the principal executive offices of the
Company located in the greater Los Angeles metropolitan area.
2. COMPENSATION
2.1 Compensation. As the total consideration for the services which the
------------
Employee renders hereunder, the Employee shall be entitled to the following:
(a) An annual base salary of $88,188, less income tax and other
applicable withholdings, payable in installments consistent with the payments
practices generally applicable to employees of the Company; provided, however,
that effective as of each January 1 during the term of the Employee's employment
by the Company, the Board and the Employee shall review the annual base salary
and, if appropriate, revise the same (provided that in no event shall the Salary
of the Employee be reduced to an amount that is less than $88,188 per year, or
to an amount that is less than the amount that he was previously receiving).
(b) An annual bonus for each fiscal year of the Company payable
not more than ninety (90) days after the end of the fiscal year. The amount of
the bonus for each year shall equal thirty percent (30%) of the Employee's
annual base salary if the target level of performance criteria is realized, with
a greater percentage payable if performance exceeds the target level and a
lesser percentage payable if performance is at least at the minimum level but
less than target). The exact amount of such increased or reduced percentage
shall be equal to the percentage by which actual performance is below or above
the target level criteria. The performance criteria for determining the bonus
shall be based on achievement of the financial budget for the Company, and such
additional criteria as may be determined by the Board.
(c) Participation in all benefit plans or programs sponsored by
the Company for executive officers in general, including, without limitation,
participation in any group health, medical reimbursement, dental, disability,
accidental death or dismemberment or life insurance plan (the costs, including
premiums, of which shall be paid exclusively by the Company), vacation, sick
leave, pension, profit sharing and salary continuation plans (including, without
limitation, the non-qualified deferred compensation plan and the 401(k) match
restoration plan); provided that the plans and programs shall be maintained by
the Company on terms no less favorable to the Employee than those plans and
programs in effect on the date hereof.
(d) Reimbursement of any and all reasonable and documented
2
<PAGE>
expenses incurred by the Employee from time to time in the performance of his
duties hereunder.
(e) Four (4) weeks paid vacation per year, and all paid holidays
observed by the Company. In scheduling vacations the Employee shall take into
consideration the needs and activities of the Company. If the Employee has not
been absent from the Company for two consecutive weeks in the preceding twelve
months, no less than two weeks shall be taken consecutively.
(f) The Company will, to the maximum extent permitted by law,
defend, indemnify and hold harmless the Employee and the Employee's heirs,
estate, executors and administrators against any costs, losses, claims, suits,
proceedings, damages or liabilities to which the Employee may become subject
which arise out of, are based upon or relate to the Employee's employment by the
Company (and any predecessor company to the Company), or the Employee's service
as an officer or member of the Board of Directors of the Company (or any
predecessor company to the Company), including without limitation reimbursement
for any legal or other expenses reasonably incurred by the Employee in
connection with investigation and defending against any such costs, losses,
claims, suits, proceedings, damages or liabilities. The Company shall maintain
directors and officers liability insurance in commercially reasonable amounts
(as reasonably determined by the Board), and the Employee shall be covered under
such insurance to the same extent as other senior management employees of the
Company.
Notwithstanding anything to the contrary contained herein, Employee shall not be
entitled to the payment of any severance benefit to the extent that such payment
shall be deemed a "golden parachute payment" as defined in Section 359.1(f) of
the Federal Deposit Insurance Corporation Rules and Regulations.
2.2 Illness. Subject to the limitations contained in Section 3.3, if
-------
the Employee shall be unable to render the services required hereunder on
account of personal injuries or physical or mental illness, he shall continue to
receive all payments provided in the Agreement; provided, however, that any such
payments may, at the sole option of the Company, be reduced by any amount that
the Employee receives for the period covered by such payments as disability
compensation under insurance policies, if any, maintained by the Company or
under government programs.
2.3 Excise Tax Gross-Up.
-------------------
(a) If the Employee becomes entitled to one or more payments
(with a "payment" including, without limitation, the vesting of an option or
other non-cash benefit or property), whether pursuant to the terms of this
Agreement or any other plan, arrangement, or agreement with the Company or any
affiliated company (the "Total Payments"), which are or become subject to the
tax imposed by section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code") or any similar tax that may hereafter be imposed (the "Excise
Tax"), the Company shall pay to the Employee at the time specified below an
additional amount (the "Gross-up Payment") (which shall include, without
limitation, reimbursement for any penalties
3
<PAGE>
and interest that may accrue in respect of such Excise Tax) such that the net
amount retained by the Employee, after reduction for any Excise Tax (including
any penalties or interest thereon) on the Total Payments and any federal, state
and local income or employment tax and Excise Tax on the Gross-up Payment
provided for by this Section 2.3, but before reduction for any federal, state,
or local income or employment tax on the Total Payments, shall be equal to the
sum of (a) the Total Payments, and (b) an amount equal to the product of any
deductions disallowed for federal, state, or local income tax purposes because
of the inclusion of the Gross-up Payment in the Employee's adjusted gross income
multiplied by the highest applicable marginal rate of federal, state, or local
income taxation, respectively, for the calendar year in which the Gross-up
Payment is to be made.
(b) For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amount of such Excise Tax:
(i) The Total Payments shall be treated as "parachute payments" within the
meaning of section 280G(b)(2) of the Code, and all "excess parachute
payments" within the meaning of section 280G(b)(1) of the Code shall be
treated as subject to the Excise Tax, unless, and except to the extent
that, in the written opinion of independent compensation consultants or
auditors of nationally recognized standing ("Independent Advisors")
selected by the Company and reasonably acceptable to the Employee, the
Total Payments (in whole or in part) do not constitute parachute payments,
or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered within the meaning
of section 280G(b)(4) of the Code in excess of the base amount within the
meaning of section 280G(b)(3) of the Code or are otherwise not subject to
the Excise Tax.
(ii) The amount of the Total Payments which shall be treated as subject to the
Excise Tax shall be equal to the lesser of (A) the total amount of the
Total Payments or (B) the total amount of excess parachute payments within
the meaning of section 280G(b)(1) of the Code (after applying clause (i)
above).
(iii) The value of any non-cash benefits or any deferred payment or benefit
shall be determined by the Independent Advisors in accordance with the
principles of sections 280G(d)(3) and (4) of the Code.
(c) For purposes of determining the amount of the Gross-up
Payment, the Employee shall be deemed (A) to pay federal income taxes at the
highest marginal rate of federal income taxation for the calendar year in which
the Gross-up Payment is to be made; (B) to pay any applicable state and local
income taxes at the highest marginal rate of taxation for the calendar year in
which the Gross-up Payment is to be made, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes if paid in such year (determined without regard to limitations on
deductions based upon the amount of the Employee's adjusted gross income); and
(C) to have otherwise allowable deductions for federal, state, and local income
tax purposes at least equal to those disallowed because of the inclusion of the
Gross-up Payment in the Employee's adjusted gross income. In the event that
4
<PAGE>
the Excise Tax is subsequently determined to be less than the amount taken into
account hereunder at the time the Gross-up Payment is made, the Employee shall
repay to the Company at the time that the amount of such reduction in Excise Tax
is finally determined (but, if previously paid to the taxing authorities, not
prior to the time the amount of such reduction is refunded to the Employee or
otherwise realized as a benefit by the Employee) the portion of the Gross-up
Payment that would not have been paid if such Excise Tax had been applied in
initially calculating the Gross-up Payment, plus interest on the amount of such
repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the
event that the Excise Tax is determined to exceed the amount taken into account
hereunder at the time the Gross-up Payment is made (including by reason of any
payment the existence or amount of which cannot be determined at the time of the
Gross-up Payment), the Company shall make an additional Gross-up Payment in
respect of such excess (plus any interest and penalties payable with respect to
such excess) at the time that the amount of such excess is finally determined.
(d) The Gross-up Payment provided for above shall be paid on the
30th day (or such earlier date as the Excise Tax becomes due and payable to the
taxing authorities) after it has been determined that the Total Payments (or any
portion thereof) are subject to the Excise Tax; provided, however, that if the
amount of such Gross-up Payment or portion thereof cannot be finally determined
on or before such day, the Company shall pay to the Employee on such day an
estimate, as determined by the Independent Advisors, of the minimum amount of
such payments and shall pay the remainder of such payments (together with
interest at the rate provided in section 1274(b)(2)(B) of the Code), as soon as
the amount thereof can be determined. In the event that the amount of the
estimated payments exceeds the amount subsequently determined to have been due,
such excess shall constitute a loan by the Company to the Employee, payable on
the fifth day after demand by the Company (together with interest at the rate
provided in section 1274(b)(2)(B) of the Code). If more than one Gross-up
Payment is made, the amount of each Gross-up Payment shall be computed so as not
to duplicate any prior Gross-up Payment. The Company shall have the right to
control all proceedings with the Internal Revenue Service that may arise in
connection with the determination and assessment of any Excise Tax and, at its
sole option, the Company may pursue or forego any and all administrative
appeals, proceedings, hearings, and conferences with any taxing authority in
respect of such Excise Tax (including any interest or penalties thereof);
provided, however, that the Company's control over any such proceedings shall be
limited to issues with respect to which a Gross-up Payment would be payable
hereunder, and the Employee shall be entitled to settle or contest any other
issue raised by the Internal Revenue Service or any other taxing authority. The
Employee shall cooperate with the Company in any proceedings relating to the
determination and assessment of any Excise Tax and shall not take any position
or action that would materially increase the amount of any Gross-up Payment
hereunder.
3. TERM OF EMPLOYMENT AND TERMINATION
----------------------------------
3.1 Term. Unless sooner terminated pursuant to Section 3.2 of the
----
Agreement, the term of employment under the Agreement shall be for a period
commencing on the date hereof and ending on the third anniversary date thereof;
provided, however, that such
- --------
5
<PAGE>
term of employment automatically shall be renewed daily, such
that at any time the remaining term shall be equal to three years. However,
additional day-to-day renewals may be terminated by either party by delivering
written notice of such termination to the other party; provided that such
cessation of the automatic renewals shall be effective on the date specified in
such written notice; and further provided that such cessation of the automatic
renewals by the Board shall be effective only if it is pursuant to a performance
evaluation of the Employee by the Board or a finding by a bank regulatory
authority in a report of examination or otherwise that management of the Company
is unsatisfactory or inadequate.
3.2 At Will Employment. Each party hereby acknowledges and agrees that,
------------------
except as expressly set forth in Section 3.3, (i) the Employee's employment
under this Agreement is AT WILL and can be terminated at the option of either
the Company or the Employee in their sole and absolute discretion, for any or no
reason whatsoever, with or without cause, and (ii) no representations,
warranties or assurances have been made concerning the length of such employment
by the Company.
3.3 Duties Upon Termination.
-----------------------
In the event that employment under the Agreement is terminated,
neither the Company nor the Employee shall have any remaining duties or
obligations hereunder, except that (i) the Company shall pay to the Employee, or
his estate, such compensation as is due pursuant to Section 2.1, prorated
through the date of termination, (ii) the Employee shall continue to be bound by
Section 4 of the Agreement and (iii) in the event that such employment is
terminated (A) by the Company for any reason other than "for cause" (as defined
below) or (B) by the Employee with "just reason" (as defined below), the Company
shall pay or provide to the Employee, or his estate, (I) a lump sum payment, not
later than 30 days after such termination of employment, equal to the greater of
(A) the remaining payments due to the Employee under this contract, including
the contributions that would have been made on the Employee's behalf to any
employee benefit plans of the Bank during the remaining term of the agreement or
(B) three times the sum of the Employee's annual salary rate in effect on the
date of termination plus the annual bonus for the most recent fiscal year prior
to the fiscal year in which occurs the Employee's termination of employment, and
(II) participation in all benefit plans and programs sponsored by the Company
for executive officers in general, all as set forth in Section 2.1(c), and all
long-term incentive compensation (including, without limitation, stock options,
shall vest at the date of such termination of employment.
(b) The Company shall be deemed to have terminated the
employment of the Employee "for cause" if, but only if, such termination (i)
shall result solely from the Employee's continued and willful failure or refusal
to substantially perform his duties in accordance with the terms of the
Agreement and shall have been approved by 66.66% of the Board (excluding the
Employee if a Board member); provided, however, that the Employee first shall
--------
have received written notice specifying the acts or omissions alleged to
constitute such failure or refusal and such failure or refusal continues after
the Employee shall have had reasonable opportunity (but in no event less than
thirty (30) days) to correct the same; (ii) the
6
<PAGE>
Employee is subject to a removal proceedings brought by a bank regulatory
authority; or (iii) the Employee is formally charged with a felony involving
dishonesty or moral turpitude; provided, however, that in the case of clause
(ii) next above, if the removal proceeding is unsuccessful, or in the case of
clause (iii) next above, if the Employee is not convicted of the felony, the
Employee shall not be treated as having been terminated "for cause" and shall be
entitled to prompt payment of all amounts described in clause 3.3(a)(iii). For
purposes of this paragraph (b), no act, or failure to act, on the Employee's
part shall be deemed "willful" unless done, or omitted to be done, by the
Employee not in good faith and without reasonable belief that the Employee's
action or omission was in the best interest of the Company.
(c) The Employee shall be deemed to have terminated his
employment with "just reason" if such termination shall result, in whole or in
part, from any of the following events:
(i) the breach by the Company of any material provision
of this Agreement;
(ii) receipt by the Employee of a notice from the Company
that the Company intends to terminate employment
under this Agreement;
(iii) the failure of a successor or assign of the
Company's rights under this Agreement to assume the
Company's duties hereunder;
(iv) the Company directs the Employee to perform any
unlawful act;
(v) the Employee's duties are materially reduced;
(vi) a relocation of Employee's principal place of
employment by more than 25 miles by automobile from
415 Huntington Drive, San Marino, California;
(vii) liquidation or dissolution of the Bank; or
(viii) the death or disability of the Employee.
7
<PAGE>
(d) The Employee shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise. The Company shall not be entitled to set off against the amounts
payable to the Employee under this Agreement any amounts owed to the Company by
the Employee, any amounts earned by the Employee in other employment after
termination of his employment with the Company, or any amounts which might have
been earned by the Employee in other employment had he sought such other
employment.
4. TRADE SECRETS
-------------
4.1 Trade Secrets. The Employee shall not, without the prior written
-------------
consent of the Board in each instance, disclose or use in any way, during the
term of his employment by the Company and for one (1) year thereafter, except as
required in the course of such employment, any confidential business or
technical information or trade secret of the Company acquired in the course of
such employment, whether or not patentable, copyrightable or otherwise protected
by law, and whether or not conceived of or prepared by his (collectively, the
"Trade Secrets") including, without limitation, any information concerning
customer lists, products, procedures, operations, investments, financing, costs,
employees, accounting, marketing, salaries, pricing, profits and plans for
future development, the identity, requirements, preferences, practices and
methods of doing business of specific parties with whom the Company transacts
business, and all other information which is related to any product, service or
business of the Company, other than information which is generally known in the
industry in which the Company transacts business or is acquired from public
sources; all of which Trade Secrets are the exclusive and valuable property of
the Company; provided, however, that, following termination of employment, the
Employee shall be entitled to retain a copy of any rolodex or other compilation
maintained by his of the names of business contacts with their addresses,
telephone numbers and similar information.
4.2 Tangible Items. All files, accounts, records, documents, books,
--------------
forms, notes, reports, memoranda, studies, compilations of information,
correspondence and all copies, abstracts and summaries of the foregoing, and all
other physical items related to the Company, other than a merely personal item,
whether of a public nature or not, and whether prepared by the Employee or not,
are and shall remain the exclusive property of the Company and shall not be
removed from the premises of the Company, except as required in the course of
employment by the Company, without the prior written consent of the Board in
each instance, and the same shall be promptly returned to the Company by the
Employee on the expiration or termination of his employment by the Company or at
any time prior thereto upon the request of the Company.
4.3 Injunctive Relief. The Employee hereby acknowledges and agrees that
-----------------
it would be difficult to fully compensate the Company for damages resulting from
the breach or threatened breach of this Section 4 and, accordingly, that the
Company shall be entitled to seek temporary and injunctive relief, including
temporary restraining orders, preliminary injunctions and permanent injunctions,
to enforce such provisions without the necessity of proving actual damages and
without the necessity of posting any bond or other undertaking in connection
8
<PAGE>
therewith. This provision with respect to injunctive relief shall not, however,
diminish the Company's right to claim and recover damages.
4.4 "Company". For the purposes of this Section 4 of the Agreement
-------
only, the term "Company" shall mean collectively East-West Bank, a California
banking corporation, and its successors, assigns and nominees, and all
individuals, corporations and other entities that directly, or indirectly
through one or more intermediaries, control or are controlled by or are under
common control with any of the foregoing.
5. MISCELLANEOUS
-------------
5.1 Severable Provisions. The provisions of the Agreement are
--------------------
severable, and if any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions, and any
partially unenforceable provisions to the extent enforceable, shall nevertheless
be binding and enforceable.
5.2 Successors and Assigns. All of the terms, provisions and
----------------------
obligations of the Agreement shall inure to the benefit of and shall be binding
upon the parties hereto and their respective heirs, representatives, successors
and assigns. Notwithstanding the foregoing, neither the Agreement nor any rights
hereunder shall be assigned, pledged, hypothecated or otherwise transferred by
the Employee without the prior written consent of the Board in each instance.
5.3 Governing Law. The validity, construction and interpretation of
-------------
the Agreement shall be governed in all respects by the laws of the State of
California applicable to contracts made and to be performed within that State.
5.4 Headings. Section and subsection headings are not to be considered
--------
part of the Agreement and are included solely for convenience and reference and
in no way define, limit or describe the scope of the Agreement or the intent of
any provisions hereof.
5.5 Entire Agreement. The Agreement constitutes the entire agreement
----------------
between the parties hereto pertaining to the subject matter hereof, and
supersedes all prior agreements, understandings, negotiations and discussions,
whether oral or written, relating to the subject matter of the Agreement. No
supplement, modification, waiver or termination of the Agreement shall be valid
unless executed by the party to be bound thereby. No waiver of any of the
provisions of the Agreement shall be deemed to or shall constitute a waiver of
any other provisions hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
5.6 Notice. Any notice or other communication required or permitted
------
hereunder shall be in writing and shall be deemed to have been given (i) if
personally delivered, when so delivered, (ii) if mailed, one (1) week after
having been placed in the United States mail, registered or certified, postage
prepaid, addressed to the party to whom it is directed at the address set forth
below or (iii) if given by telex or telecopier, when such notice or other
9
<PAGE>
communication is transmitted to the telex or telecopier number specified below
and the appropriate answerback or telephonic confirmation is received. Either
party may change the address to which such notices are to be addressed by giving
the other party notice in the manner herein set forth.
5.7 Attorneys' Fees. The Company will reimburse the Employee for the
---------------
reasonable attorney fees incurred in connection with the negotiation of this
Agreement. In the event any party takes legal action to enforce any of the terms
of the Agreement, the unsuccessful party to such action shall pay the successful
party's expenses, including attorneys' fees, incurred in such action.
5.8 Third Parties. Nothing in the Agreement, expressed or implied, is
-------------
intended to confer upon any person other than the Company or the Employee any
rights or remedies under or by reason of the Agreement.
5.9 Arbitration. Any controversy arising out of or relating to this
-----------
Agreement or the transactions contemplated hereby shall be referred to
arbitration before the American Arbitration Association strictly in accordance
with the terms of this Agreement and the substantive law of the State of
California. The board of arbitrators shall convene at a place mutually
acceptable to the parties in the State of California and, if the place of
arbitration cannot be agreed upon, arbitration shall be conducted in Los
Angeles. The parties hereto agree to accept the decision of the board of
arbitrators, and judgment upon any award rendered hereunder may be entered in
any court having jurisdiction thereof. Neither party shall institute a
proceeding hereunder until that party has furnished to the other party, by
registered mail, at least thirty (30) days' prior written notice of its intent
to do so.
5.10 Construction. This Agreement was reviewed by legal counsel for
------------
each party hereto and is the product of informed negotiations between the
parties hereto. If any part of this Agreement is deemed to be unclear or
ambiguous, it shall be construed as if it were drafted jointly by the parties.
Each party hereto acknowledges that no party was in a superior bargaining
position regarding the substantive terms of this Agreement.
5.11 Consent to Jurisdiction. Subject to Section 5.9, each party
-----------------------
hereto, to the fullest extent it may effectively do so under applicable law,
irrevocably (i) submits to the exclusive jurisdiction of any court of the State
of California or the United States of America sitting in the City of Los Angeles
over any suit, action or proceeding arising out of or relating to this
Agreement, (ii) waives and agrees not to assert, by way of motion, as a defense
or otherwise, any claim that it is not subject to the jurisdiction of any such
court, any objection that it may now or hereafter have to the establishment of
the venue of any such suit, action or proceeding brought in any such court and
any claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum, (iii) agrees that a judgment in any such
suit, action or proceeding brought in any such court shall be conclusive and
binding upon such party and may be enforced in the courts of the United States
of America or the State of California (or any other courts to the jurisdiction
of which such party is or may be subject) by a suit upon such
10
<PAGE>
judgment and (iv) consents to process being served in any such suit, action or
proceeding by mailing a copy thereof by registered or certified air mail,
postage prepaid, return receipt requested, to the address of such party
specified in or designated pursuant to Section 5.6. Each party agrees that such
service (i) shall be deemed in every respect effective service of process upon
such party in any such suit, action or proceeding and (ii) shall, to the fullest
extent permitted by law, be taken and held to be valid personal service upon and
personal delivery to such party.
5.12 Legal Counsel. EACH PARTY HEREBY ACKNOWLEDGES THAT IN CONNECTION
-------------
WITH THIS AGREEMENT IT HAS SOUGHT THE ADVICE OF SUCH INDEPENDENT LEGAL COUNSEL
AS IT SHALL HAVE DETERMINED TO BE NECESSARY OR ADVISABLE IN ITS SOLE AND
ABSOLUTE DISCRETION.
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be
executed as of the date and year first set forth above.
EAST-WEST FEDERAL BANK
By: _______________________________
Authorized Representative
Huntington Drive
San Marino, California 91108
Telecopier Number: (626) 799-2799
___________________________________
DONALD SANG CHOW
11
<PAGE>
EXHIBIT 10.10.1
ANNUAL AMENDMENT TO EMPLOYMENT AGREEMENT
This Annual Amendment to the Employment Agreement (the "Employment
Agreement") by and between EAST-WEST BANK ("Bank"), and Donald Sang Chow
("Executive") is entered into on this 1st day of February, 2000.
Pursuant to Section 9.3 of the Employment Agreement between the Bank and
Executive, the following terms and conditions of the Employment agreement are
hereby modified and agreed to, as approved and authorized for and on behalf of
the Bank by action of its Board of Directors at a meeting held on January 19,
2000, at which meeting a quorum was present and voted, exclusive of Executive:
1. TERM
----
The term of the Employment Agreement shall be extended from February 1,
2000 for a period of one year and during such term the Executive shall serve as
Executive Vice President.
2. COMPENSATION
------------
During the Term, Executive shall receive an annual base salary in the
amount of One Hundred forty-five Thousand Three Hundred Fifty-One Dollars
($145,351.00) payable in accordance with the normal payroll practices of the
Bank. Annual salary increases shall be according to Bank policy which are based
on merit and the bank's financial performance for the previous year. Annual
increases are in the sole discretion of the Bank.
3. CHANGE OF CONTROL
-----------------
A new Section 7.6 shall be added to the Agreement to read as follows:
7.6 Change of Control. If a Change of Control (as defined below) occurs
-----------------
during the term of this Agreement, and if Executive is terminated without cause
within twelve (12) months of such Change of Control, Executive shall receive a
severance payment equal to two times the annual base salary; this severance
payment shall be in lieu of the severance payment provided in Section 7.1 and
7.4 of this Agreement or under any severance payment to which Executive would
otherwise be entitled to under this Agreement or under any severance program of
general application of the Bank or any entity which might acquire control of
Bank. Change of Control means:
(I) any date upon which the directors of the Company who were last
nominated by the Board of Directors (the "Board") for election as directors
cease to constitute a majority of the directors of the Company;
(II) the date of the first public announcement that any person or entity,
together with all Affiliates and Associates (as such capitalized terms are
defined in Rule 12b-2) promulgated under the Securities and Exchange Act of
1934, as amended (the "Exchange Act")) of such person or entity, shall have
become the Beneficial Owner (as defined in Rule 13d-3 promulgated under the
Exchange Act) of voting securities of the Company representing 51% or more of
the voting power of the Company (a "51% Stockholder"); provided,
--------
however, that the terms "person" and "entity," as used in this clause (B),
- -------
shall not include (1) the Company or nay of its subsidiaries, (2) any employee
benefit plan of the Company or any of its subsidiaries, (3) any entity holding
voting securities of the Company for or pursuant to the terms of any such plan
or (4) any person or entity who was a 51% Stockholder on the date of adoption of
the Plan by the Board; or (5) the formation of a holding in which the
shareholders of the holding company after its formation are substantially the
same as for the Company prior to the holding company formation.
Except as expressly agreed to herein, the Employment Agreement between
the parties shall remain in force and effect.
EAST WEST BANK
By:
_______________________________________________
___________________________________________________
Executive
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF DECEMBER 31, 1999, AND STATEMENT OF EARNINGS FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 33,497
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 496,426
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,486,641
<ALLOWANCE> 20,844
<TOTAL-ASSETS> 2,152,630
<DEPOSITS> 1,500,529
<SHORT-TERM> 600
<LIABILITIES-OTHER> 19,421
<LONG-TERM> 482,000
0
0
<COMMON> 24
<OTHER-SE> 150,056
<TOTAL-LIABILITIES-AND-EQUITY> 2,152,630
<INTEREST-LOAN> 108,547
<INTEREST-INVEST> 35,451
<INTEREST-OTHER> 3,920
<INTEREST-TOTAL> 148,027
<INTEREST-DEPOSIT> 49,567
<INTEREST-EXPENSE> 76,142
<INTEREST-INCOME-NET> 71,885
<LOAN-LOSSES> 5,439
<SECURITIES-GAINS> 685
<EXPENSE-OTHER> 39,509
<INCOME-PRETAX> 41,630
<INCOME-PRE-EXTRAORDINARY> 28,027
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,027
<EPS-BASIC> 1.23
<EPS-DILUTED> 1.22
<YIELD-ACTUAL> 3.62
<LOANS-NON> 10,933
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,700
<LOANS-PROBLEM> 5,218
<ALLOWANCE-OPEN> 16,506
<CHARGE-OFFS> 2,877
<RECOVERIES> 626
<ALLOWANCE-CLOSE> 20,844
<ALLOWANCE-DOMESTIC> 20,844
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,774
</TABLE>
<PAGE>
East West Bancorp, Inc.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 10, 2000
Notice is hereby given that the annual meeting (the "Meeting") of the
stockholders of East West Bancorp, Inc. (the "Company") will be held at the
Pasadena Convention Center, 300 East Green Street, Pasadena, California 91101
on Wednesday, May 10, 2000, beginning at 1:00 p.m. for the following purposes:
1. Election of Directors. To elect three persons as directors for terms
expiring in 2003 and to serve until his or her successors are elected
and qualified, as more fully described in the accompanying Proxy
Statement.
2. Amendment to Stock Incentive Plan. To approve an amendment to the East
West Bancorp, Inc. Stock Incentive Plan of 1998 (the " Plan") to
increase the number of shares of common stock available for grant under
the Plan.
Properly signed proxy cards permit the proxy holder named therein to vote on
such other business as may properly come before the Meeting and at any and all
adjournments thereof, in their discretion. As of the date of mailing, the
Board of Directors is not aware of any other matters that may come before the
Meeting.
Only those stockholders of record at the close of business on March 27, 2000
shall be entitled to notice of and to vote at the Meeting.
YOUR VOTE IS VERY IMPORTANT. STOCKHOLDERS ARE URGED TO SIGN AND RETURN THE
ENCLOSED PROXY IN THE POSTAGE PREPAID ENVELOPE AS PROMPTLY AS POSSIBLE,
WHETHER OR NOT THEY PLAN TO ATTEND THE MEETING IN PERSON. STOCKHOLDERS WHO
ATTEND THE MEETING MAY WITHDRAW THEIR PROXY AND VOTE IN PERSON IF THEY WISH TO
DO SO.
By order of the Board of Directors
DOUGLAS P. KRAUSE
Executive Vice President, General
Counsel
and Corporate Secretary
San Marino, California
March 27, 2000
<PAGE>
[East Wesy Bancorp Logo]
East West Bancorp, Inc.
415 Huntington Drive
San Marino, California 91108
(626) 583-3500
----------------
PROXY STATEMENT
For
ANNUAL MEETING OF STOCKHOLDERS
To be held May 10, 2000
----------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors ("Board of Directors") of East West Bancorp,
Inc. (the "Company") for use at the annual meeting ("Meeting") of the
stockholders ("Stockholders") of the Company to be held on May 10, 2000 at the
Pasadena Convention Center, 300 East Green Street, Pasadena, California 91101,
at 1:00 p.m. and at any adjournment thereof. This Proxy Statement and the
enclosed proxy card ("Proxy") and other enclosures are first being mailed to
Stockholders on or about April 5, 2000. Only Stockholders of record on March
27, 2000 ("Record Date") are entitled to vote in person or by proxy at the
Meeting or any adjournment thereof.
Matters to be Considered
The matters to be considered and voted upon at the Meeting will be:
1. Election of Directors. To elect three persons as directors for terms
expiring in 2003 and to serve until his or her successors are elected
and qualified. The Board of Directors' nominees are:
Jack Liu
James Miscoll
Keith Renken
2. Amendment to Stock Incentive Plan. To approve an amendment to the East
West Bancorp, Inc. Stock Incentive Plan of 1998 (the "Plan") to increase
the number of shares of common stock available for grant under the Plan.
Costs of Solicitation of Proxies
This solicitation of Proxies is made on behalf of the Board of Directors of
the Company and the Company will bear the costs of solicitation. The expense
of preparing, assembling, printing and mailing this Proxy Statement and the
materials used in this solicitation of Proxies also will be borne by the
Company. It is contemplated that Proxies will be solicited principally through
the mail, but directors, officers and regular employees of the Company or its
subsidiary, East West Bank ("East West Bank"), may solicit Proxies personally
or by telephone. Although there is no formal agreement to do so, the Company
may reimburse banks, brokerage houses and other custodians, nominees and
fiduciaries for their reasonable expenses in forwarding these proxy materials
to their principals. The Company does not intend to utilize the services of
other individuals or entities not employed by or affiliated with the Company
in connection with the solicitation of Proxies.
1
<PAGE>
Outstanding Securities and Voting Rights; Revocability of Proxies
The authorized capital of the Company consists of 50,000,000 shares of
common stock, par value $.001 per share ("Common Stock"), of which 22,421,618
shares were issued and outstanding on the Record Date, and 5,000,000 shares of
serial preferred stock, par value $.001 per share, of which no shares were
issued and outstanding on the Record Date. A majority of the outstanding
shares of Common Stock constitutes a quorum for the conduct of business at the
Meeting. Abstentions will be treated as shares present and entitled to vote
for purposes of determining the presence of a quorum. Each Stockholder is
entitled to one vote, in person or by proxy, for each share of Common Stock
standing in his or her name on the books of the Company as of the Record Date
on any matter submitted to the Stockholders.
The Company's Certificate of Incorporation does not authorize cumulative
voting. For Proposal No. 1, the election of directors, the person receiving
the highest number of votes "FOR" will be elected. Accordingly, abstentions
from voting and votes "WITHHELD" in the election of directors have no legal
effect.
Proposal No. 2, the amendment of the Plan, requires the affirmative vote of
the majority of the shares present in person or by proxy at the meeting and
entitled to vote. For these purposes, any broker non-votes on a proposal will
be treated as not entitled to vote and therefore will not affect the outcome.
Abstentions will have the effect of negative votes. Unless otherwise required
by law, the Certificate of Incorporation, or Bylaws, other proposals that may
properly come before the meeting require the affirmative vote of the majority
of shares present in person or by proxy at the meeting and entitled to vote.
A Proxy for use at the Meeting is enclosed. The Proxy must be signed and
dated by you or your authorized representative or agent. You may revoke a
Proxy at any time before it is exercised at the Meeting by submitting a
written revocation to the Secretary of the Company or a duly executed proxy
bearing a later date or by voting in person at the Meeting.
If you hold your Common Stock in "street name" and you fail to instruct your
broker or nominee as to how to vote your Common Stock, your broker or nominee
may, in its discretion, vote your Common Stock "FOR" the election of the Board
of Director's nominee and "FOR" the amendment of the Plan.
Unless revoked, the shares of Common Stock represented by properly executed
Proxies will be voted in accordance with the instructions given thereon. In
the absence of any instruction in the Proxy, your shares of Common Stock will
be voted "FOR" the election of the nominee for director set forth herein and
"FOR" the amendment of the Plan.
The enclosed Proxy confers discretionary authority with respect to matters
incident to the Meeting and any other proposals which management did not have
notice of at least 45 days prior to the date on which the Company mailed its
proxy material for last year's annual meeting of Stockholders. As of the date
hereof, management is not aware of any other matters to be presented for
action at the Meeting. However, if any other matters properly come before the
Meeting, the Proxies solicited hereby will be voted by the Proxyholders in
accordance with the recommendations of the Board of Directors.
2
<PAGE>
Beneficial Ownership of Principal Stockholders and Management
The following table sets forth the beneficial ownership of Common Stock as
of the Record Date by (i) each person known to the Company to own more than 5%
of the outstanding Common Stock, (ii) the directors and nominees for director
of the Company, (iii) the Chief Executive Officer and the four other executive
officers of the Company whose total annual compensation in 1999 exceeded
$100,000 (the "Named Executives"), and (iv) all executive officers and
directors of the Company, as a group:
<TABLE>
<CAPTION>
Common Stock
----------------------------
Number of Shares
Name and Address Beneficially Percent Of
Of Beneficial Owner Owned (1) Class (2)
------------------- ---------------- ----------
<S> <C> <C>
CNA Casualty Corporation ..................... 2,000,000(3) 8.92%
CNA Plaza 23 South
Chicago, IL 60685
Wellington Management Company, LLP............ 1,458,800(4) 6.51%
75 State Street
Boston, MA 02109
Boston Partners Asset Management, L.P. ....... 1,211,300(5) 5.40%
28 State Street, 20th Floor
Boston, MA 02109
First Financial Fund, Inc. ................... 1,163,200(6) 5.19%
Gateway Center Three
100 Mulberry Street, 9th Floor
Newark, New Jersey 07102-7503
Dominic Ng.................................... 128,196(7) 1.76%
Julia Gouw.................................... 193,474(8) 1.26%
Herman Li..................................... 10,000(9) *
Jack Liu...................................... 5,000(10) *
James Miscoll................................. 10,000 *
Keith Renken.................................. 5,000 *
Edward Zapanta................................ 10,000(11) *
Sandra Wong................................... 10,449(12) *
Douglas Krause................................ 42,675(13) *
Donald Chow................................... 14,306(14) *
All Directors and Executive Officers, as a
group (14 persons)........................... 447,808(15) 3.69%
</TABLE>
- --------
* Less than 1%.
(1) Except as otherwise noted and except as required by applicable community
property laws, each person has sole voting and disposition powers with
respect to the shares.
(2) Shares which the person (or group) has the right to acquire within 60
days after the Record Date are deemed to be outstanding in calculating
the percentage ownership of the person (or group), but are not deemed to
be outstanding as to any other person (or group).
(3) CNA Financial Corporation and Loews Corporation have filed a Schedule
13(G) dated February 19, 1999 indicating shared dispositive power under
SEC interpretations regarding subsidiary control. CNA Financial
Corporation and Loews Corporation have each disclaimed beneficial
ownership of these securities.
(4) Wellington Management Company, LLP has filed a Schedule 13(G) dated
February 9, 2000 indicating it has shared voting power for 261,100 shares
and shared dispositive power for 1,458,800 shares, including shares held
by First Financial Fund, Inc.
3
<PAGE>
(5) Boston Partners Inc. has filed a Schedule 13(G) dated February 7, 2000
indicating that it is the general partner of Boston Partners Asset
Management, L.P. and as such may be deemed to be the beneficial owner of
shares held by Boston Partners Asset Management, L.P. Mr. Desmond John
Heathwood have filed a Schedule 13(G) dated February 7, 2000 indicating
that he is the principal shareholder of Boston Partners, Inc. and as such
may be deemed to be the beneficial owner of shares held by Boston
Partners, Inc. Boston Partners, Inc. and Mr. Desmond John Heathwood have
each disclaimed beneficial ownership of these securities.
(6) First Financial Fund, Inc. has filed a Schedule 13(G) dated February 14,
2000 indicating it has sole voting power and shared dispositive power for
these shares.
(7) Mr. Ng also holds unexercised exercisable options to purchase 267,468
shares.
(8) 4,000 of such shares are owned by the Gouw Family Foundation of which Ms.
Gouw is trustee; 300 shares are owned by family members for whom Ms. Gouw
has voting power; Ms. Gouw disclaims any beneficial interest in such
shares. Ms. Gouw also holds unexercised exercisable options to purchase
89,156 shares.
(9) Mr. Li also holds unexercised exercisable options to purchase 2,500
shares.
(10) These shares are owned by Yuan Yi Tsui, the wife of Mr. Liu; Mr. Liu
disclaims any beneficial ownership in such shares. Mr. Liu also holds
unexercised exercisable options to purchase 2,500 shares.
(11) Dr. Zapanta also holds unexercised exercisable options to purchase 2,500
shares.
(12) Ms. Wong has voting and dispositive power over 5,000 of these shares by a
power of attorney from a relative but disclaims any beneficial interest
in such shares. Ms. Wong also holds unexercised exercisable options to
purchase 2,500 shares.
(13) Mr. Krause also holds unexercised exercisable options to purchase 6,250
shares.
(14) Mr. Chow also holds unexercised exercisable options to purchase 2,500
shares.
(15) Excluded from this amount are 379,158 unexercised exercisable stock
options for all directors and executive officers as a group.
PROPOSAL 1: ELECTION OF DIRECTORS
Board of Directors and Nominees
The Company's Certificate of Incorporation and Bylaws provide that the
number of directors shall be determined from time to time by the Board of
Directors but may not be less than five. The Board of Directors is currently
composed of seven members. The Bylaws further provide for the division of the
initial directors of the Company into three classes of approximately equal
size. Three members shall be elected to a three year term at the annual
meeting of Stockholders in 2000, two members shall be elected to a three year
term at the annual meeting of Stockholders in 2001, and two members shall be
elected to a three year term at the annual meeting of Stockholders in 2002.
The directors proposed for re-election, Jack Liu, James Miscoll, and Keith
Renken, were appointed to the Board of Directors in 1998, 2000 and 2000,
respectively. Messrs. Liu, Miscoll, and Renken have indicated their
willingness to serve and unless otherwise instructed, Proxies will be voted in
such a way as to effect, if possible, the election of Messrs. Liu, Miscoll,
and Renken. In the event that Messrs. Liu, Miscoll or Renken should be unable
to serve as a director, it is intended that the Proxies will be voted for the
election of such substitute nominee, if any, as shall be designated by the
Board of Directors. Management has no reason to believe that Messrs. Liu,
Miscoll, and Renken will be unavailable.
None of the directors, nominees for director or executive officers were
selected pursuant to any arrangement or understanding, other than with the
directors and executive officers of the Company acting within their capacity
as such. There are no family relationships among directors or executive
officers of the Company. As of the date hereof, no directorships are held by
any director with a company which has a class of securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or subject to
4
<PAGE>
the requirements of Section 15(d) of the Exchange Act or any company
registered as an investment company under the Investment Company Act of 1940
except that Mr. Ng is a director of ESS Technology, Inc.; Dr. Zapanta is a
director of Times Mirror Company and Edison International; Mr. Renken is a
director of Pacific Gulf Properties; and Mr. Miscoll is a director of American
International Group, MK Gold Company, 21st Century Industries, U.S.
Foodservice and Westinghouse Air Brake Company.
The following table sets forth certain information with respect to the
Board's nominees for director and the current directors of the Company. All
directors of the Company are also directors of East West Bank. Officers will
serve at the pleasure of the Board of Directors, subject to restrictions set
forth in their employment agreements. See "ELECTION OF DIRECTORS--Executive
Compensation--Employment Agreements and Change of Control Agreements".
<TABLE>
<CAPTION>
Year First
Elected or Current Term
Name of Director Age(1) Appointed(2) to Expire
---------------- ------ ------------ ------------
<S> <C> <C> <C>
Nominees for term expiring 2003:
--------------------------------
Jack Liu.................................... 42 1998 2000
James Miscoll............................... 65 2000 2000
Keith Renken................................ 65 2000 2000
Continuing Directors:
---------------------
Edward Zapanta.............................. 61 1998 2001
Julia Gouw.................................. 40 1997 2001
Dominic Ng.................................. 41 1991 2002
Herman Li................................... 47 1998 2002
</TABLE>
- --------
(1) As of February 29, 2000.
(2) Refers to the earlier of the year the individual first became a director
of the Company or the Bank.
The principal occupation during the past five years of each director and
nominee is set forth below. All directors have held their present positions
for at least five years, unless otherwise stated.
Dominic Ng has served as a director of the Bank since 1991, as President and
Chief Executive Officer since October 1992, and as Chairman of the Board since
1998. Mr. Ng has held the same positions with the Company since its formation.
Mr. Ng also served as the director in charge of Chinese Business Services for
the international accounting firm of Deloitte & Touche LLP. Mr. Ng currently
serves as a member of the Board of Visitors of The Anderson School at UCLA,
Board of Regents of Loyola Marymount University, and serves as a director of
the Los Angeles Chamber of Commerce and United Way of Greater Los Angeles. Mr.
Ng also serves on the Board of ESS Technology, Inc.
Julia Gouw has served as Executive Vice President and Chief Financial
Officer of the Bank since 1994 and as a director of the Bank since 1997, and
has held these same positions with the Company since its formation. Ms. Gouw
joined the Bank in July 1989 as Vice President and Controller. Prior to
joining the Bank, Ms. Gouw was a Senior Audit Manager with the international
accounting firm of KPMG Peat Marwick LLP. Ms. Gouw is on the Board of Visitors
of UCLA School of Medicine, a member of the Financial Executives' Institute
and the California Society of CPA's and is a past president of the Financial
Managers Society--Los Angeles Chapter.
Herman Li is Chairman of the C&L Restaurant Group, a franchisee of Burger
King Corporation that owns and operates over 80 outlets throughout the nation.
Mr. Li is an executive committee member of Burger King Corporation's Diversity
Action Council and was honored in 1997 as "Asian Business Owner of the Year"
by the Asian Business Association of Los Angeles.
5
<PAGE>
Jack C. Liu, Esq., is with the law firm of Deacons Graham & James, Taiwan,
which he joined in 1999. Mr. Liu was previously the managing partner of
SilkRoad Capital Corp., an investment firm that focuses on Asia-related
investment projects. Mr. Liu was also formerly of counsel to the international
law firm of Morgan Lewis & Bockius LLP and to the law firm of Sheppard,
Mullin, Richter & Hampton. Mr. Liu specialized in corporate, banking
regulation and real estate investment related legal matters.
James Miscoll is a corporate director and private investor. He is a former
senior management officer of Bank of America, having served as vice chairman
for three years and on the managing committee for ten years; he retired in
1992. Mr. Miscoll currently serves as a director of American International
Group, MK Gold Company, 21st Century Industries, U.S. Foodservice,
Westinghouse Air Brake Company, and several private companies. He is currently
also a trustee of the BankAmerica Giannini Foundation.
Keith Renken is the managing partner of Renken Enterprises, a consulting
company. He is a former senior partner and chairman of the executive committee
of Southern California area of Deloitte & Touche LLP from where he retired in
1992. Mr. Renken currently serves as a director of Pacific Gulf Properties,
Aon, and several private companies. He is currently a professor in the
University of Southern California's Executive in Residence Program.
Edward Zapanta, M.D., has served as Vice-Chairman of the Board of the Bank
since June 1998 and has held the same position with the Company since its
formation. Dr. Zapanta is the Senior Medical Director of HealthCare Partners
Medical Group. Dr. Zapanta currently serves as a director of Times Mirror,
Edison International and the James Irvine Foundation and is a member of the
Board of Trustees of the University of Southern California.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE ELECTION OF THE BOARD OF DIRECTORS' NOMINEES.
Committees of the Board of Directors
The business of East West Bancorp's Board of Directors is conducted through
its meetings, as well as through meetings of its committees. Set forth below
is a description of the committees of the Board.
The Audit Committee of East West Bancorp reviews and reports to the Board on
various auditing and accounting matters, including the annual audit report
from East West Bancorp's independent public accountants. The Audit Committee
currently consists of Herman Li, James Miscoll, Keith Renken, Edward Zapanta,
and Jack Liu as its Chairman. The Audit Committee met eight times in 1999. The
Audit Committee of East West Bank consists of the same directors who comprise
the Audit Committee of East West Bancorp. The Audit Committee of East West
Bank meets on the same schedule as the full Board of Directors of East West
Bank.
East West Bancorp does not have a Compensation Committee. The Compensation
Committee of East West Bank establishes executive compensation policies as
well as the actual compensation of the Chief Executive Officer. The
Compensation Committee of the Bank met three times in 1999. The Compensation
Committee currently consists of Jack Liu, James Miscoll, Keith Renken, Edward
Zapanta, and Herman Li as its Chairman.
The Executive Committee of East West Bancorp is authorized to exercise
certain powers of the Board of Directors during intervals between the meetings
of the Board of Directors. The Executive Committee currently consists of
Dominic Ng and Julia Gouw. The Executive Committee met eight times in 1999.
The Executive Committee of East West Bank consists of the same directors who
comprise the Executive Committee of East West Bancorp.
The Board of Directors met nine times during 1999. All of the persons who
were directors of East West Bancorp during 1999 attended 75% or more of the
aggregate of the total number of meetings of the Board of Directors and the
total number of meetings held by the committees on which he or she served in
1999.
6
<PAGE>
Compliance with Reporting Requirements of Section 16
Under Section 16(a) of the Exchange Act, the Company's directors, executive
officers and any persons holding five percent or more of the Common Stock are
required to report their ownership of Common Stock and any changes in that
ownership to the Securities and Exchange Commission (the "SEC") and to furnish
the Company with copies of such reports. Specific due dates for these reports
have been established and the Company is required to report in this Proxy
Statement any failure to file on a timely basis by such persons. Based solely
upon a review of copies of reports provided to the Company during the fiscal
year ended December 31, 1999, all persons subject to the reporting
requirements of Section 16(a) filed all required reports on a timely basis.
Stock Performance Graph
The following graph shows a comparison of stockholder return on the
Company's Common Stock based on the market price of Common Stock assuming the
reinvestment of dividends, with the cumulative total returns for the companies
in the Standard & Poor's 500 Index and the SNL Western Bank Index for the
period beginning on February 8, 1999, the first day of trading in the
Company's Common Stock, through December 31, 1999. The graph was derived from
a very limited period of time, and, as a result, may not be indicative of
possible future performance of the Company's Common Stock.
Comparison of Cumulative Total Returns
Among the Company, Standard & Poor's 500 Index and Western Bank Index
[STOCK PERFORMANCE GRAPH]
Notes:
A. The lines represent quarterly index levels derived from compounded daily
returns that include all dividends.
B. If the quarterly interval, based on the quarter end, is not a trading day,
the preceding trading day is used.
C. The index level for all series was set to 100.0 on 2/8/99.
7
<PAGE>
Compensation of Board of Directors
Employees of the Company are not compensated for service as directors of the
Company. Nonemployee directors receive an annual retainer of $10,000, plus
$1,000 for each Board meeting attended and $300 for each committee meeting
attended. The committee chair receives an additional $200 for each committee
meeting attended. During the year ended December 31, 1999, pursuant to the
Company's Incentive Plan, Messrs. Li, Liu, Slosser and Zapanta received 5,000
options to purchase Company Common Stock at an exercise price of $10.00 per
share, which options vest at the rate of 25% per year on each anniversary of
the grant.
Executive Officer Compensation
Summary Compensation Table. It is expected that until the officers of the
Company begin to devote significant time to the separate management of the
Company's business, which is not expected to occur until such time as the
Company becomes actively involved in additional businesses, the officers will
only receive compensation for services as officers and employees of the Bank,
and no separate compensation will be paid for their services to the Company.
The following table sets forth the name and compensation of the Named
Executive Officers for the fiscal years ended December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
Long-term
Compensation
--------------------
Restricted Number of
Stock Stock
Name and principal Annual Annual Awards Options All Other
position Year Salary(1) Bonus ($)(2) Granted Compensation(3)
------------------ ---- --------- -------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Dominic Ng.............. 1999 $477,000 $393,000 14,260 -- $59,447
Chairman, President,
and 1998 431,104 225,000 -- 1,069,875 7,500
Chief Executive Officer 1997 297,637 217,000 -- -- 4,750
Julia Gouw.............. 1999 207,333 180,000 1,969 -- $19,038
Executive Vice
President, 1998 187,763 80,000 -- 356,625 7,361
Chief Financial
Officer, and Director 1997 121,267 51,000 -- -- 3,610
Sandra Wong............. 1999 153,349 42,770 1,449 5,000 606
Executive Vice
President 1998 18,750 5,625 -- 10,000 --
and Chief Credit
Officer
Douglas Krause.......... 1999 143,371 90,000 1,363 -- 5,938
Executive Vice
President, 1998 135,864 40,800 -- 25,000 --
General Counsel, and
Corporate Secretary 1997 121,800 36,500 -- -- --
Donald Chow............. 1999 121,768 65,000 1,147 -- 7,500
Executive Vice
President, 1998 116,615 42,500 -- 10,000 5,553
and Director of
Commercial Lending 1997 105,750 40,000 -- -- 3,353
</TABLE>
- --------
(1) Includes compensation deferred at election of executive and the year upon
which such compensation was earned.
(2) Dividends are paid on all restricted shares at the same rate and time as
on common shares. The number and aggregate value of restricted stock
holdings as of December 31, 1999 for the Named Executives are as follow:
Dominic Ng--14,260 shares valued at $163,099; Julia Gouw--1,969 shares
valued at $22,520; Sandra Wong--1,449 shares valued at $16,573; Doug
Krause--1,363 shares valued at $15,589; and Don Chow--1,147 shares valued
at $13,119.
(3) Represents employer contributions to the Company's 401(k) Plan and unused
vacation pay. The Company provides the named executive officers with
certain group life, health, medical and other non-cash benefits generally
available to all salaried employees and not included in this column
pursuant to SEC rules.
8
<PAGE>
Option Grants
The following stock options were granted during 1999 to the Named Executive
pursuant to the Company's Incentive Plan. No other Named Executives were
granted stock options during 1999.
Option/SAR Grants in the Last Fiscal Year
<TABLE>
<CAPTION>
Percent of
Total Options Hypothetical
Number of Granted to Exercise Value at
Options Employees in Price Expiration Grant
Name Granted(1) FY 1999 ($/Share) Date Date(2)
---- --------- ------------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Sandra Wong......... 5,000 6.93% $10.00 11/15/09 $25,900
</TABLE>
- --------
(1) The options were granted pursuant to the Incentive Plan. The options
become exercisable in annual installments of 25% on each of the first,
second, third and fourth anniversary dates of the grant. The options may
be exercised at any time prior to their expiration by tendering the
exercise price in cash, check or in shares of stock valued at fair market
value on the date of exercise. In the event of a change in control (as
defined) involving the Company, the options will become exercisable in
full. The options may be amended by mutual agreement of the optionee and
the Company.
(2) The estimated present value at grant date of options granted during fiscal
year 1999 has been calculated using the Black-Scholes option pricing
model, based upon the following assumptions: estimated time until exercise
of 6.0 years; a risk-free interest rate of 6.7%, representing the interest
rate on a U.S. government zero-coupon bond with a maturity corresponding
to the estimated time until exercise; a volatility rate of 43.5%; and a
dividend yield of 1.2%, representing the current $0.03 per share
annualized dividends divided by the fair market value of the common stock
on the date of grant. The approach used in developing the assumptions upon
which the Black-Scholes valuation was done is consistent with the
requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation."
Option Exercises and Holdings
Following the Reorganization, options to purchase shares of Common Stock, no
par value, of the Bank were converted into options to purchase shares of
Common Stock of the Company. The following table sets forth certain
information concerning options held by the Named Executives under the Bank's
Incentive Plan:
Aggregated Option Exercises During Fiscal Year 1999
Option Values on December 31, 1999
<TABLE>
<CAPTION>
Number of Value of Unexercised In-
Unexercised Options the-Money Options
Shares at December 31, 1999 at December 31, 1999
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dominic Ng.............. -- -- 267,468 802,407 $384,485 $1,153,460
Julia Gouw.............. -- -- 89,156 267,469 $128,162 $ 384,487
Douglas Krause.......... -- -- 6,250 18,750 $ 8,984 $ 26,953
Sandra Wong............. -- -- 2,500 12,500 $ 3,594 $ 17,969
Donald Chow............. -- -- 2,500 7,500 $ 3,594 $ 10,781
</TABLE>
Employment and Change of Control Agreements
The Bank has entered into employment agreements with each of its executive
officers intended to ensure that the Bank will be able to maintain a stable
and competent management base. The agreements provide that should any of the
executives be terminated without cause or, for certain executives, should they
resign for good reason, including a detrimental change in responsibilities or
a reduction in salary or benefits, the Bank shall pay such executive a
designated lump sum. The payments range from six months to three years of base
salary plus certain benefits. For certain executives, the normal six months
severance increases to twenty-four months if the
9
<PAGE>
executive is terminated following a change of control. If all agreements were
terminated without cause following a change in control, such executive
officers would be entitled to receive payments, which are estimated to have an
aggregate value of approximately $5.8 million at February 29, 2000.
Although the above-described employment agreements could increase the cost
of any acquisition of control of the Company or the Bank, management of the
Company and the Bank do not believe that the terms thereof would have a
significant anti-takeover effect.
Report of Compensation Committee on Executive Compensation
The Bank's Compensation Committee (the "Compensation Committee") establishes
the general policies regarding compensation of the Chief Executive Officer and
approves the specific compensation levels for the Chief Executive Officer.
During 1999, the members of the Compensation Committee were Jack Liu, Edward
Zapanta and Herman Li as its Chairman. Each member of the Compensation
Committee is a non-employee director of the Company and the Bank. The Company
has also retained the services of a compensation consultant to provide input
and data to the Compensation Committee.
Set forth below is a report of the Compensation Committee of the Bank
addressing the compensation policies for 1999 applicable to the Bank's Chief
Executive Officer.
The Report of the Compensation Committee on Executive Compensation shall not
be deemed incorporated by reference by any general statement incorporating by
reference this Proxy Statement into any filing under the Securities Act of
1933 (the "Securities Act") or under the Exchange Act, except to the extent
that the Company specifically incorporates this information by reference, and
shall not otherwise be deemed filed under such Acts.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The goals of the executive compensation and benefits programs are to enable
the Bank to attract and retain high caliber executives, provide a total
compensation package in a cost effective manner, encourage management
ownership of East West Bancorp, Inc. common stock and to maximize return to
its shareholders.
The philosophy of the Bank is to provide a compensation program that is
designed to reward achievement of the Bank's goals and objectives and to
provide total compensation opportunities that are competitive when compared
with those of comparable financial institutions.
To achieve the compensation and benefits program objectives:
. The principal objective of the salary program is to maintain salaries
that are targeted at the median for comparable positions in similarly
sized financial institutions,
. Annual incentives are designed to reward for overall Bank success and
individual performance and provide total cash compensation opportunities
above competitive levels when warranted by performance,
. The principal objective of the long-term stock-based incentive plan is to
align management's financial interests with those of East West Bancorp's
shareholders, provide incentive for management ownership of East West
Bancorp common stock, support the achievement of long-term financial
objectives, and provide for long term incentive reward opportunities.
Employee benefits are offered to provide a competitive total compensation
program and to encourage retention of key employees.
10
<PAGE>
ROLE OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors of East West Bank
establishes executive compensation policies as well as the actual salary,
bonus and discretionary benefits of the Chief Executive Officer. Decisions of
the Compensation Committee of East West Bank are subject to review and
approval by the Board of Directors of the Company. The Compensation Committee
is comprised of three non-employee directors of East West Bank.
ELEMENTS OF THE COMPENSATION PROGRAM
There are three principal elements of the executive compensation program--
base salary, bonus compensation (annual incentive) and long-term stock-based
incentive compensation (stock options). In determining each component of
compensation, the total compensation package of each executive is considered.
Base Salaries
The salary of each executive officer is determined initially according to
competitive pay practices, level of responsibility, prior experience, and
breadth of knowledge, as well as internal equity issues. The Company uses its
discretion rather than a formal weighting system to evaluate these factors and
to determine individual base salary levels. Thereafter, base salaries are
reviewed on an annual basis, and increases are made based on a subjective
assessment of each executive's performance, as well as the factors described
above.
Annual Incentives
The Bank provides annual incentives to all employees, including executives.
Annual incentives are intended to reward for overall Bank success and
individual performance and provide total cash compensation opportunities above
competitive levels when warranted by performance. The Bank considers
individual contributions, business unit performance, overall corporate
performance, and performance compared to peer banks. Actual awards, if any,
are also based on a subjective assessment of each executive's individual
performance. No formal weightings are assigned to these levels of performance.
Each executive is assigned a bonus range as a percentage of salary, with a
maximum bonus achievable at above average performance from the executive.
Long-Term Stock-Based Incentives
The Bank believes that long-term incentive compensation opportunities should
be dependent on stock-based measures to strengthen the alignment between
management's interests and those of the Company's shareholders. Under its 1998
Stock Incentive Plan, the Company generally grants stock options to all
executives of the Company and the Bank. All options have been granted at an
option price not less than the fair market value of the common stock on the
date of grant. Thus, stock options have value only if the stock price
appreciates from the date the options are granted. The result is a focus by
all executives on the creation of shareholder value over the long term.
In determining the number of options granted to individual executives, the
Company considers individual contributions, business unit performance,
competitive practices, the number of options previously granted, and value of
the stock on the date of the grant. Formal weightings have not been assigned
to these factors.
CEO COMPENSATION
The determination of the Chief Executive Officer's salary, bonus and grants
of stock options followed the policies described above for the determination
of all executives' compensation subject to the additional considerations
described below.
11
<PAGE>
Compensation for the Chief Executive Officer, Mr. Ng, was made in accordance
with a three-year employment agreement entered into in June 1998 in connection
with the sale of the Bank by its prior shareholders. The terms of the
employment agreement are described in "Employment and Change of Control
Agreements." The base salary of the Chief Executive Officer is described in
the Summary Compensation Table.
The bonus of the Chief Executive Officer is described in the Summary
Compensation Table. This indicated bonus was determined pursuant to the terms
of Mr. Ng's employment contract and is based primarily on the satisfaction of
performance criteria determined by the Board. The performance criteria include
the satisfaction by the Bank of goals relating to improvements in Return on
Equity and Return on Asset.
The Chief Executive Officer received stock options in 1998 as set forth in
the Summary Compensation Table. In 1999, Mr. Ng received a grant of 14,260
shares of restricted stock as of July 21, 1999 at a grant price of $10.56, the
price of the stock at the time of the grant; the restricted stock vest at the
end of three years, with accelerated vesting in the event of a change of
control of the Company. No new options were granted in 1999. All of the
options granted have an exercise price equal to the fair market value of the
stock on the date of grant. The number of restricted shares granted to Mr. Ng
are also consistent with the factors described in the prior paragraph for all
executives, with an additional emphasis on placing a material portion of the
Chief Executive Officer's compensation at risk based on the long term stock
price performance of the Company.
POLICY WITH RESPECT TO SECTION 162(m)
Section 162(m) of the Internal Revenue Code of 1987, as amended (the
"Code"), generally limits the corporate deduction for compensation paid to
executive officers named in the Proxy Statement to $1,000,000, unless the
compensation qualifies as "performance based" and has been approved in advance
by a vote of its shareholders. Section 162(m) excludes from its deduction
limits any compensation received pursuant to the exercise of a stock option
granted prior to the first shareholder meeting at which directors are to be
elected that occurs after the close of the first calendar year following the
calendar year in which the Company became publicly held; all stock options
currently granted to executive officers named in the Proxy Statement comply
with this grandfather clause.
Neither the Company nor the Bank is currently compensating any named
executive officers at levels that would cause this limitation on corporate tax
deductions to apply and has no current plans to do so, except that the
compensation of Mr. Ng and Ms. Gouw would, in the event of a termination
without cause or a resignation for good cause, as specified in his or her
employment agreement, would result in compensation in excess of $1,000,000
being paid in that year. The Compensation Committee has accordingly not
adopted a formal policy concerning the application of the Section 162(m)
limitation on tax deductions. The Compensation Committee will continue to
monitor the applicability of Section 162(m). The Compensation Committee will,
if it appears that any named executive officer will likely be approaching the
$1,000,000 compensation limitation in the near future, review whether such
payments should be structured so as to qualify as deductible performance-based
compensation.
<TABLE>
<S> <C> <C> <C>
Dated: March 27, 2000 THE 1999 COMPENSATION COMMITTEE
Herman Li Jack Liu Edward Zapanta
</TABLE>
Compensation Committee Interlocks and Insider Participation
No person who served as a member of the Compensation Committee during the
1999 fiscal year is, or ever has been, an officer or employee of the Company
or any of its subsidiaries.
Except as provided herein, there are no existing or proposed material
transactions between the Bank or the Company and any of its executive
officers, directors, or the immediate family or associates of any of the
foregoing persons. Mr. Slosser, a director of the Company and the Bank, whose
term will expire on May 10, 2000 and who is not standing for re-election, is a
senior vice president of Friedman, Billings, Ramsey & Co.,
12
<PAGE>
Inc. ("Placement Agent."). The Bank has entered into an agreement whereby the
Placement Agent will provide the Bank financial advisory services through
December 12, 1999. In addition, in connection with the private placement of
the Bank's securities held by the Bank's two former shareholders to certain
investors, the Placement Agent acquired warrants to purchase up to 475,000
shares of Company Common Stock at a per share purchase price of $10.00 which
expires June 12, 2003.
CERTAIN TRANSACTIONS
One of the directors of the Company and the Bank is a guarantor of an
extension credit to two corporations in each of which the director is a
director, executive officer and a beneficial owner of over 10% of a class of
equity securities. The extensions of credit were made in the ordinary course
of business and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and did not involve more than the normal risk of collectibility
or present other unfavorable features. As of December 31, 1999, the loans were
performing in accordance with their terms. Except for the stock plans
described above and the Agreement between East-West Bank and the Placement
Agent described under the caption "ELECTION OF DIRECTORS--Executive
Compensation--Compensation Committee Interlocks and Insider Participation,"
none of the directors or executive officers of the Company, or any associate
or affiliate of such person, had any other material interest, direct or
indirect, in any transaction during the past year or any proposed transaction
with the Company.
PROPOSAL 2: AMENDMENT OF THE EAST WEST BANCORP, INC. 1998 STOCK INCENTIVE PLAN
TO INCREASE AVAILABLE SHARES
The Company's Board of Directors has adopted, subject to shareholder
approval, an amendment increasing the total number of shares that may be
granted under the Plan. The amendment to the Plan increases the maximum shares
of common stock that may be issued under the Plan by 1,000,000 to 2,902,000.
The Plan was originally adopted on June 25, 1998 and the number of shares
reserved for issuance was 1,902,000. As of February 29, 2000, there were
38,937 shares available for issuance under the Plan. Options to purchase
1,756,059 shares of stock were outstanding and 91,456 shares of restricted
stock were outstanding on that date. Options to purchase 1,801 shares have
been exercised at an average price of $11.78 per share; 13,747 shares of
restricted stock were issued and forfeited but are not re-issuable because
dividends had been paid on these shares.
The purpose of the Plan is to attract, retain and motivate high quality
personnel and to provide incentives for the promotion of business and
financial success of the Company by providing them with equity participation.
The Board of Directors believes that the remaining shares under the Plan are
insufficient and that additional shares are desirable in order to service the
needs of the Plan and to promote and closely align the interests of new and
current employees of the Company with its shareholders by providing stock-
based compensation. In particular, the Company does not have sufficient
incentive shares available to make incentive shares available for newly hired
employees of the Company, for employees of the recently acquired First Central
Bank and American International Bank, and for employees of banks that may be
acquired in the future. As of the date of the Proxy Statement, there has been
no determination by the Board with respect to future awards under the Plan
other than (i) options for 5,000 shares reserved to be awarded in November
2000 to a senior executive officer under an employment contract and (ii)
options for 18,000 shares reserved under the Spirit of Ownership Program to be
issued to qualifying employees in 2000, with each eligible employee receiving
options to purchase 50 shares. Accordingly, except as set forth above, future
awards are not determinable.
13
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENT
OF THE 1998 STOCK INCENTIVE PLAN TO INCREASE AVAILABLE SHARES.
Summary of the Plan. The following is a brief description of the material
features of the Plan. The proposed amendment will not affect any existing
provisions of the Plan except the number of shares that may be granted.
Reference should be made to the full text of the Plan for a complete
description of its terms and conditions. A complete copy of the Plan can be
obtained from the Corporate Secretary's office at the address listed on page
one. The Plan has not been previously amended.
Term; Shares Available. The Plan will expire on June 25, 2008 and (unless
that date is extended) no Plan awards will be granted thereafter. As described
above, the Plan establishes a maximum number of shares available for awards.
The Plan includes rules to calculate the number of shares in the authorized
pool that remain available for grant. Among other things, these rules provide
that awards are counted against the authorized pool whether or not vested;
that when awards are cancelled or expire, shares subject to the awards are
again available for grant; and that if awards are settled in cash, the
authorized pool of shares is increased by the appropriate number of shares.
The number of shares of common stock subject to grant (as well as outstanding
awards and applicable exercise prices) is subject to equitable adjustment by
the Committee in connection with any merger, reorganization, consolidation,
recapitalization, stock dividend or similar changes, which may be required in
order to prevent dilution or enlargement of rights.
Administration. The Plan is administered by the Compensation Committee,
which consists of two or more directors who qualify as "outside directors" for
purposes of Section 162(m) of the Code. The Plan generally confers on the
Committee complete authority as to the grant of awards and their terms. The
Committee, in connection with actions involving awards to or transactions by
persons subject to Section 16, adopt procedures to assure the availability of
exemptions from Section 16 (which may involve, for example, referring such
approval to a subcommittee or to the full board of directors).
Eligibility. Persons eligible to participate in the Plan include all
directors, officers, employees and consultants of the Company and its
subsidiaries, including employees who are directors. The Committee is
permitted to select from all persons to whom awards will be granted, and the
nature and amount of such awards. As of December 31, 1999, over 300 persons
held awards under the Plan.
Awards. The Plan authorizes issuance of awards in several forms, including
sales or bonuses of stock, restricted stock, stock options, reload stock
options, stock purchase warrants, other rights to acquire stock, securities
convertible into or redeemable for stock, stock appreciation rights, phantom
stock, dividend equivalents, performance units or performance shares, and an
award may consist of one such security or benefit, or two or more of them in
tandem or in the alternative. Options may be either incentive stock options
("ISOs") or non-incentive stock options ("NISOs"). The terms of all options
and other awards, as well as vesting schedules, are determined by the
Committee. Awards may require, for example, the completion of a specified
period of employment to avoid forfeiture. The Committee may also permit
certain forms of "cashless exercise." Options, restricted stock and other
awards may not be sold, pledged or transferred other than by will or through
the laws of descent and distribution. Prior to the lapse of restrictions,
restricted stock may carry voting rights and participate in cash dividends.
The Committee has discretion to allow participants to defer receipt of cash or
stock due to them on exercise of an option or SAR, or upon lapse or waiver of
restrictions affecting restricted stock.
Change in Control. All awards previously granted by the Company provide
that, if there is a change in control of the Company, all options will become
immediately exercisable and any period of restriction for restricted stock
will end and such awards will become fully vested.
Tax Withholding. Participants generally have the right to satisfy tax
withholding requirements arising from exercise of options, from the lapse of
restrictions on restricted stock, or from other taxable events under the Plan,
by having the Company withhold shares that otherwise would be deliverable.
14
<PAGE>
Certain Federal Income Tax Considerations. The tax consequences of the Plan
are complex, and the following discussion deals only with general tax
principles applicable to the Plan under federal law. ISOs are options which
under certain circumstances and subject to certain tax restrictions have
special tax benefits for employees under the Code. NISOs are options which do
not receive such special tax treatment. When the Committee grants an ISO and
when the holder exercises an ISO and acquires common stock, the holder
realizes no income and the Company can claim no deduction. (However, the
difference between the fair market value of the shares upon exercise and the
exercise price is an item of tax preference subject to the possible
application of the alternative minimum tax.) If the holder disposes of the
stock before two years from grant or one year from exercise of the ISO (a
disqualifying disposition), any gain will be deemed compensation and taxed as
ordinary income to the 32 extent of the lessor of (i) the spread between the
option price and the fair market value of the stock at exercise (the spread)
or (ii) the difference between the sale price and the exercise price. If a
disqualifying disposition occurs, the Company can claim a deduction equal to
the amount treated as a compensation. If the one-and two-year holding periods
are satisfied, any gain realized when the shares are sold will be treated as
capital gain, and the Company will receive no corresponding tax deduction.
When the Compensation Committee grants an NISO, the holder realizes no income
and the Company can claim no deduction. On exercise of an NISO, the holder
realizes ordinary income to the extent of the spread and the Company can claim
a deduction for the same amount. When the Compensation Committee grants an
SAR, the holder realizes no income and the Company can claim no deduction. The
cash or the fair market value of stock received on an SAR exercise is taxed to
the holder at ordinary income rates. The Company can claim a deduction in the
same amount at such time. Grants of restricted stock are generally not taxable
to recipients at the time of grant and the Company generally claims no
deduction at that time. The Company will receive a deduction and the holder
will recognize taxable income equal to the fair market value of the stock at
the time the restrictions lapse, unless the holder elects, within thirty days
of notification of the award, to recognize the income on the award date, in
accordance with Section 83 of the Code. If the holder makes an election under
Section 83, the Company receives a corresponding deduction. Any dividends
received on restricted stock prior to the date the recipient recognizes income
on that stock will be taxable compensation income when received and the
Company will be entitled to a corresponding deduction. The grant of restricted
stock does not result in taxable income to the recipient. When the award is
paid or distributed, the full value paid or distributed will be treated as
ordinary income, and the Company will receive a corresponding tax deduction.
Successors. All obligations of the Company with respect to awards will be
binding on any successor to the Company, whether such succession results from
merger, purchase, or other direct or indirect acquisition of all or
substantially all of the Company's business or assets.
Amendments. The Plan permits the Board of Directors to amend, alter or
terminate the Plan in whole or in part at any time. Amendments, suspensions or
terminations of the Plan will not affect any award previously granted without
the written consent of affected participants.
Future Awards. The amount and nature of awards that will be issued under the
Plan for 2000 and subsequent years are not presently determinable. Certain
information concerning 1999 awards under the Plan is presented under the
captions "EXECUTIVE OFFICER COMPENSATION: SUMMARY COMPENSATION TABLE--LONG-
TERM COMPENSATION" on page 8 and "OPTION GRANTS: OPTION/SAR GRANTS IN THE LAST
FISCAL YEAR" on page 9.
INDEPENDENT AUDITORS
The auditors of the Company are Deloitte & Touche LLP, Certified Public
Accountants. Deloitte & Touche LLP performed audit services for the Company's
subsidiary, East West Bank, during 1999, which consisted of the examination of
the financial statements of East West Bank and its affiliates and predecessors
and limited assistance and consultation in connection with filings with the
Securities and Exchange Commission. All professional services rendered by
Deloitte & Touche LLP during 1999 were furnished at customary rates and terms.
15
<PAGE>
Representatives of Deloitte & Touche LLP will be present at the Meeting to
respond to appropriate questions.
PROPOSALS OF STOCKHOLDERS
Proposals of Stockholders intended to be included in the proxy materials for
the 2001 Annual Meeting of Stockholders must be received by the Secretary of
the Company, 415 Huntington Drive, San Marino, California 91108, by November
12, 2000.
Under Rule 14a-8 adopted by the Securities and Exchange Commission under the
Exchange Act, proposals of stockholders must conform to certain requirements
as to form and may be omitted from the proxy statement and proxy under certain
circumstances. In order to avoid unnecessary expenditures of time and money by
stockholders and the Company, stockholders are urged to review this rule and,
if questions arise, to consult legal counsel prior to submitting a proposal to
the Company.
SEC rules also establish a different deadline for submission of shareholder
proposals that are not intended to be included in the Company's proxy
statement with respect to discretionary voting (the "Discretionary Vote
Deadline"). The Discretionary Vote Deadline for the year 2001 annual meeting
is February 20, 2001 (45 calendar days prior to the anniversary of the mailing
date of this proxy statement). If a shareholder gives notice of such a
proposal after the Discretionary Vote Deadline, the Company's proxy holders
will be allowed to use their discretionary voting authority to vote against
the shareholder proposal without discussion when and if the proposal is raised
at the Company's year 2001 annual meeting.
The Company has not been notified by any shareholder of his or her intent to
present a shareholder proposal from the floor at this year's Annual Meeting.
The enclosed proxy card grants the proxy holders discretionary authority to
vote on any matter properly brought before the Annual Meeting.
ANNUAL REPORT
The Company's Annual Report for the fiscal year ended December 31, 1999
accompanies this Proxy Statement. The Annual Report contains consolidated
financial statements of the Company and its subsidiaries and the report
thereon of Deloitte & Touche LLP, the Company's independent auditors.
Stockholders may obtain without charge a copy of the company's annual report
on Form 10-K including financial statements required to be filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1999 by writing to the Company at
415 Huntington Drive, San Marino, California 91108.
OTHER BUSINESS
Management knows of no business, which will be presented for consideration
at the Meeting other than as stated in the Notice of Meeting. If, however,
other matters are properly brought before the Meeting, it is the intention of
the Proxyholders to vote the shares represented thereby on such matters in
accordance with the recommendation of the Board of Directors and authority to
do so is included in the Proxy.
East West Bancorp, Inc.
Douglas P. Krause
Executive Vice President,
General Counsel, and Corporate
Secretary
San Marino, California
March 27, 2000
16
<PAGE>
- -------------------------------------------------------------------------------
REVOCABLE PROXY
East West Bancorp, Inc.
Annual Meeting of Stockholders -- May 10, 2000
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned stockholder(s) of East West Bancorp, Inc. (the "Company")
hereby nominates, constitutes and appoints Julia Gouw and Douglas P. Krause,
and each of them, the attorney, agent and proxy of the undersigned, with full
power of substitution, to vote all stock of the Company which the undersigned
is entitled to vote at the Annual Meeting of Stockholders of the Company (the
"Meeting") to be held at the Pasadena Convention Center, 300 East Green Street,
Pasadena, California 91101 at 1:00 p.m., on Wednesday, May 10, 2000, and any
adjournments thereof, as fully and with the same force and effect as the
undersigned might or could do if personally present thereat, as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE OF "FOR" THE ELECTION OF THE BOARD
OF DIRECTORS' NOMINEES LISTED AND FOR APPROVAL OF THE AMENDMENT TO THE EAST
WEST BANCORP, INC. STOCK INCENTIVE PLAN OF 1998. IF ANY OTHER BUSINESS IS
PRESENTED AT THE MEETING, THIS PROXY SHALL BE VOTED BY THE PROXYHOLDERS IN
ACCORDANCE WITH THE RECOMMENDATIONS OF A MAJORITY OF THE BOARD OF DIRECTORS.
East West Bancorp, Inc.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY
This Proxy will be voted "FOR" the election of the Board of Directors'
nominees unless authority to do so is withheld.
1. ELECTION OF DIRECTORS --
<TABLE>
<S> <C> <C>
Nominee: Jack Liu For [_] Withhold Authority [_]
Term Expires 2003
Nominee: James Miscoll For [_] Withhold Authority [_]
Term Expires 2003
Nominee: Keith Renken For [_] Withhold Authority [_]
Term Expires 2003
</TABLE>
PLEASE SIGN AND DATE ON REVERSE SIDE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2. RESOLVED, that the Amendment to the East West Bancorp, Inc. Stock
Incentive Plan of 1998 be adopted, ratified and confirmed.
<TABLE>
<S> <C> <C>
FOR [_] AGAINST [_] ABSTAIN [_]
</TABLE>
3. OTHER BUSINESS. In their discretion, the proxyholders are authorized to
transact such other business as may properly come before
the Meeting and any adjournment or adjournments thereof.
The undersigned hereby ratifies and confirms all that said attorneys and
proxyholders, or either of them, or their substitutes, shall lawfully do or
cause to be done by virtue hereof, and hereby revokes any and all proxies
heretofore given by the undersigned to vote at the Meeting. The undersigned
hereby acknowledges receipt of the Notice of Annual Meeting and the Proxy
Statement accompanying said notice.
(Please date this Proxy and
sign your name as it appears
on your stock certificates.
Executors, administrators,
trustees, etc., should give
their full titles. All joint
owners should sign.)
I (We) [ ] do [ ] do not
expect to attend the Meeting.
Dated: ________________ , 2000.
-------------------------------
Signature
----------------------
Signature
PLEASE SIGN, DATE AND RETURN THIS PROXY AS PROMPTLY AS POSSIBLE IN THE POSTAGE
PREPAID ENVELOPE PROVIDED.
- -------------------------------------------------------------------------------
