Forward-Looking
Statements
Certain
matters discussed in this report may constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), and as such, may involve risks and uncertainties. These
forward-looking statements relate to, among other things, expectations of the
environment in which the Company operates and projections of future performance.
The Company’s actual results, performance, or achievements may differ
significantly from the results, performance, or achievements expected or implied
in such forward-looking statements. For discussion of some of the factors that
might cause such differences, see the Company’s Form 10-K under the heading
“Item 1A. Risk Factors.” The Company does not undertake, and specifically
disclaims any obligation to update any forward looking statements to reflect the
occurrence of events or circumstances after the date of such
statements.
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
EAST WEST
BANCORP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
(Unaudited)
|
March
31, |
|
December
31, |
|
|
2006 |
|
2005 |
|
ASSETS |
|
|
|
|
Cash
and cash equivalents |
$ |
133,726 |
|
$ |
151,192 |
|
Interest-bearing
deposits in other banks |
|
1,059
|
|
|
-
|
|
Securities
purchased under resale agreements |
|
100,000
|
|
|
50,000
|
|
Investment
securities available-for-sale, at fair value (with amortized cost
of |
|
|
|
|
|
|
$857,304
in 2006 and $873,969 in 2005) |
|
850,018
|
|
|
869,837
|
|
Loans
receivable, net of allowance for loan losses of $75,493 in
2006 |
|
|
|
|
|
|
and
$68,635 in 2005 |
|
7,576,528
|
|
|
6,724,320
|
|
Investment
in Federal Home Loan Bank stock, at cost |
|
55,403
|
|
|
45,707
|
|
Investment
in Federal Reserve Bank stock, at cost |
|
12,285
|
|
|
12,285
|
|
Other
real estate owned, net |
|
2,786
|
|
|
299
|
|
Investment
in affordable housing partnerships |
|
29,741
|
|
|
31,006
|
|
Premises
and equipment, net |
|
43,717
|
|
|
38,579
|
|
Due
from customers on acceptances |
|
8,981
|
|
|
6,074
|
|
Premiums
on deposits acquired, net |
|
25,737
|
|
|
18,853
|
|
Goodwill |
|
244,145
|
|
|
143,254
|
|
Cash
surrender value of life insurance policies |
|
82,973
|
|
|
82,191
|
|
Accrued
interest receivable and other assets |
|
86,897
|
|
|
82,073
|
|
Deferred
tax assets |
|
26,539
|
|
|
22,586
|
|
TOTAL |
$ |
9,280,535 |
|
$ |
8,278,256 |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
Customer
deposit accounts: |
|
|
|
|
|
|
Noninterest-bearing |
$ |
1,389,675 |
|
$ |
1,331,992 |
|
Interest-bearing |
|
5,634,001
|
|
|
4,926,595
|
|
Total
deposits |
|
7,023,676
|
|
|
6,258,587
|
|
|
|
|
|
|
|
|
Federal
funds purchased |
|
5,500
|
|
|
91,500
|
|
Federal
Home Loan Bank advances |
|
738,958
|
|
|
617,682
|
|
Securities
sold under repurchase agreements |
|
325,000
|
|
|
325,000
|
|
Notes
payable |
|
8,833
|
|
|
8,833
|
|
Bank
acceptances outstanding |
|
8,981
|
|
|
6,074
|
|
Accrued
interest payable, accrued expenses and other liabilities |
|
82,041
|
|
|
83,347
|
|
Long-term
debt |
|
184,023
|
|
|
153,095
|
|
Total
liabilities |
|
8,377,012
|
|
|
7,544,118
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY |
|
|
|
|
|
|
Common
stock (par value of $0.001 per share) |
|
|
|
|
|
|
Authorized
-- 200,000,000 shares |
|
|
|
|
|
|
Issued
-- 65,515,220 shares in 2006 and 61,419,622 shares in 2005 |
|
|
|
|
|
|
Outstanding
-- 60,602,388 shares in 2006 and 56,519,438 shares in 2005 |
|
65
|
|
|
61
|
|
Additional
paid in capital |
|
523,541
|
|
|
389,004
|
|
Retained
earnings |
|
423,067
|
|
|
393,846
|
|
Deferred
compensation |
|
-
|
|
|
(8,242 |
) |
Treasury
stock, at cost -- 4,912,832 shares in 2006 and 4,900,184 shares in
2005 |
|
(38,345 |
) |
|
(37,905 |
) |
Accumulated
other comprehensive loss, net of tax |
|
(4,805 |
) |
|
(2,626 |
) |
Total
stockholders' equity |
|
903,523
|
|
|
734,138
|
|
TOTAL |
$ |
9,280,535 |
|
$ |
8,278,256 |
|
See
accompanying notes to condensed consolidated financial statements.
EAST WEST
BANCORP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except per share data)
(Unaudited)
|
Three
Months Ended March 31, |
|
2006 |
|
2005 |
INTEREST
AND DIVIDEND INCOME |
|
|
|
Loans
receivable, including fees |
$ |
125,871 |
|
$ |
78,896 |
Investment
securities available-for-sale |
|
9,214
|
|
|
5,257
|
Securities
purchased under resale agreements |
|
1,347
|
|
|
-
|
Investment
in Federal Home Loan Bank stock |
|
563
|
|
|
457
|
Investment
in Federal Reserve Bank stock |
|
184
|
|
|
104
|
Short-term
investments |
|
123
|
|
|
42
|
Total
interest and dividend income |
|
137,302
|
|
|
84,756
|
|
|
|
|
|
|
INTEREST
EXPENSE |
|
|
|
|
|
Customer
deposit accounts |
|
38,889
|
|
|
16,291
|
Federal
Home Loan Bank advances |
|
8,708
|
|
|
5,181
|
Securities
sold under repurchase agreements |
|
2,877
|
|
|
-
|
Long-term
debt |
|
2,661
|
|
|
1,020
|
Federal
funds purchased |
|
1,119
|
|
|
42
|
Total
interest expense |
|
54,254
|
|
|
22,534
|
|
|
|
|
|
|
NET
INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES |
|
83,048
|
|
|
62,222
|
PROVISION
FOR LOAN LOSSES |
|
3,333
|
|
|
4,370
|
NET
INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
|
79,715
|
|
|
57,852
|
|
|
|
|
|
|
NONINTEREST
INCOME |
|
|
|
|
|
Branch
fees |
|
2,539
|
|
|
1,593
|
Letters
of credit fees and commissions |
|
2,172
|
|
|
2,537
|
Net
gain on investment securities available-for-sale |
|
1,716
|
|
|
448
|
Income
from life insurance policies |
|
896
|
|
|
744
|
Ancillary
loan fees |
|
779
|
|
|
517
|
Income
from secondary market activities |
|
139 |
|
|
192
|
Net
gain on sale of other real estate owned |
|
88
|
|
|
-
|
Other
operating income |
|
561
|
|
|
469
|
Total
noninterest income |
|
8,890
|
|
|
6,500
|
|
|
|
|
|
|
NONINTEREST
EXPENSE |
|
|
|
|
|
Compensation
and employee benefits |
|
16,169
|
|
|
12,854
|
Occupancy
and equipment expense |
|
4,777
|
|
|
3,258
|
Deposit-related
expenses |
|
2,013
|
|
|
1,640
|
Amortization
of premiums on deposits acquired |
|
1,765
|
|
|
603
|
Amortization
of investments in affordable housing partnerships |
|
1,265
|
|
|
1,681
|
Data
processing |
|
760
|
|
|
569
|
Deposit
insurance premiums and regulatory assessments |
|
316
|
|
|
223
|
Other
operating expenses |
|
9,758
|
|
|
6,890
|
Total
noninterest expense |
|
36,823
|
|
|
27,718
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES |
|
51,782
|
|
|
36,634
|
PROVISION
FOR INCOME TAXES |
|
19,731
|
|
|
13,115
|
NET
INCOME |
$ |
32,051 |
|
$ |
23,519 |
|
|
|
|
|
|
EARNINGS
PER SHARE |
|
|
|
|
|
BASIC |
$ |
0.56 |
|
$ |
0.45 |
DILUTED |
$ |
0.55 |
|
$ |
0.44 |
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING |
|
|
|
|
|
BASIC |
|
56,807
|
|
|
52,245
|
DILUTED |
|
58,293
|
|
|
53,963
|
See
accompanying notes to condensed consolidated financial
statements.
EAST WEST
BANCORP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In
thousands, except share data)
(Unaudited)
|
Common
Stock |
|
Additional Paid
InPaCapital |
|
|
|
|
|
|
|
Comprehensive
Loss, Net of Tax |
|
|
|
Total Stockholders'
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
DECEMBER 31, 2004 |
$ |
57 |
|
$ |
260,152 |
|
$ |
296,175 |
|
$ |
(5,422 |
) |
$ |
(36,649 |
) |
$ |
(4 |
) |
|
|
|
$ |
514,309 |
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period |
|
|
|
|
|
|
|
23,519
|
|
|
|
|
|
|
|
|
|
|
$ |
23,519 |
|
|
23,519
|
|
Net
unrealized loss on investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,616 |
) |
|
(2,616 |
) |
|
(2,616 |
) |
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,903 |
|
|
|
|
Stock
compensation costs |
|
|
|
|
|
|
|
|
|
|
658
|
|
|
|
|
|
|
|
|
|
|
|
658
|
|
Tax
benefit from option exercises |
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401
|
|
Issuance
of 36,143 shares pursuant to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
various
stock plans and agreements |
|
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
383
|
|
Issuance
of 92,651 shares under |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Plan |
|
|
|
|
3,486
|
|
|
|
|
|
(3,486 |
) |
|
|
|
|
|
|
|
|
|
|
-
|
|
Cancellation
of 9,359 shares due to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
forfeitures
of issued restricted stock |
|
|
|
|
|
|
|
|
|
|
198
|
|
|
(198 |
) |
|
|
|
|
|
|
|
-
|
|
Dividends
paid on common stock |
|
|
|
|
|
|
|
(2,625 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,625 |
) |
BALANCE,
MARCH 31, 2005 |
$ |
57 |
|
$ |
264,422 |
|
$ |
317,069 |
|
$ |
(8,052 |
) |
$ |
(36,847 |
) |
$ |
(2,620 |
) |
|
|
|
$ |
534,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
DECEMBER 31, 2005 |
$ |
61 |
|
$ |
389,004 |
|
$ |
393,846 |
|
$ |
(8,242 |
) |
$ |
(37,905 |
) |
$ |
(2,626 |
) |
|
|
|
$ |
734,138 |
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period |
|
|
|
|
|
|
|
32,051
|
|
|
|
|
|
|
|
|
|
|
$ |
32,051 |
|
|
32,051
|
|
Net
unrealized loss on investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,179 |
) |
|
(2,179 |
) |
|
(2,179 |
) |
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29,872 |
|
|
-
|
|
Elimination
of deferred compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pursuant
to adoption of SFAS No. 123(R) |
|
|
|
|
(8,242 |
) |
|
|
|
|
8,242
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Stock
compensation costs |
|
|
|
|
1,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,456
|
|
Tax
benefit from stock option exercises |
|
|
|
|
3,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,756
|
|
Tax
benefit from vested restricted stock |
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
543
|
|
Issuance
of 310,426 shares pursuant to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
various
stock plans and agreements |
|
|
|
|
2,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,634
|
|
Cancellation
of 12,648 shares due to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
forfeitures
of issued restricted stock |
|
|
|
|
440
|
|
|
|
|
|
|
|
|
(440 |
) |
|
|
|
|
|
|
|
-
|
|
Issuance
of 3,647,441 shares pursuant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
to
Standard Bank acquisition |
|
4
|
|
|
133,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,849
|
|
Issuance
of 2,670 shares to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard
Bank employees |
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
Dividends
paid on common stock |
|
|
|
|
|
|
|
(2,830 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,830 |
) |
BALANCE,
MARCH 31, 2006 |
$ |
65 |
|
$ |
523,541 |
|
$ |
423,067 |
|
$ |
- |
|
$ |
(38,345 |
) |
$ |
(4,805 |
) |
|
|
|
$ |
903,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
March
31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Disclosure
of reclassification amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands) |
Unrealized
holding loss on securities arising during the period, net of tax benefit
of $857
in 2006 and $1,706 in 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,184 |
) |
$ |
(2,356 |
) |
Less:
Reclassification adjustment for gain included in net income, net of tax
expense of $721
in 2006 and $188 in 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(995 |
) |
|
(260 |
) |
Net
unrealized loss on securities, net of tax benefit of $1,578 in 2006 and
$1,894 in 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,179 |
) |
$ |
(2,616 |
) |
See
accompanying notes to condensed consolidated financial statements.
EAST WEST
BANCORP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
Three
Months Ended March 31, |
|
|
2006 |
|
2005 |
|
CASH
FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
Net
income |
$ |
32,051 |
|
$ |
23,519 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
Depreciation
and amortization |
|
2,804
|
|
|
2,405
|
|
Stock
compensation costs |
|
1,456
|
|
|
658
|
|
Deferred
taxes |
|
(2,288 |
) |
|
544
|
|
Provision
for loan losses |
|
3,333
|
|
|
4,370
|
|
Net
gain on sales of investment securities, loans and other
assets |
|
(1,974 |
) |
|
(541 |
) |
Federal
Home Loan Bank stock dividends |
|
(547 |
) |
|
(425 |
) |
Originations
of loans held for sale |
|
(4,974 |
) |
|
(12,843 |
) |
Proceeds
from sale of loans held for sale |
|
4,983
|
|
|
12,934
|
|
Tax
benefit from stock option exercises |
|
(3,756 |
) |
|
401
|
|
Tax
benefit from vested restricted stock |
|
(543 |
) |
|
-
|
|
Net
change in accrued interest receivable and other assets |
|
(12,112 |
) |
|
(12,389 |
) |
Net
change in accrued interest payable, accrued expenses, and other
liabilities |
|
10,398
|
|
|
14,343
|
|
Total
adjustments |
|
(3,220 |
) |
|
9,457
|
|
Net
cash provided by operating activities |
|
28,831
|
|
|
32,976
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
Net
loan originations |
|
(372,642 |
) |
|
(309,630 |
) |
Purchases
of: |
|
|
|
|
|
|
Interest-bearing
deposits in other banks |
|
(1,059 |
) |
|
-
|
|
Securities
purchased under resale agreement |
|
(50,000 |
) |
|
-
|
|
Investment
securities available-for-sale |
|
(282,251 |
) |
|
(59,868 |
) |
Federal
Home Loan Bank stock |
|
(4,277 |
) |
|
-
|
|
Investments
in affordable housing partnerships |
|
-
|
|
|
(18 |
) |
Premises
and equipment |
|
(3,170 |
) |
|
(1,120 |
) |
Proceeds
from unsettled securities acquired |
|
224,160
|
|
|
-
|
|
Proceeds
from sale of: |
|
|
|
|
|
|
Investment
securities available-for-sale |
|
105,365
|
|
|
17,359
|
|
Loans
receivable |
|
2,863
|
|
|
-
|
|
Premises
and equipment |
|
41
|
|
|
1
|
|
Other
real estate owned |
|
387
|
|
|
-
|
|
Maturity
of interest-bearing deposits in other banks |
|
-
|
|
|
100
|
|
Repayments,
maturity and redemption of investment securities
available-for-sale |
|
195,192
|
|
|
18,649
|
|
Redemption
of Federal Home Loan Bank stock |
|
2,350
|
|
|
-
|
|
Cash
obtained from acquisitions, net of cash paid |
|
99,150
|
|
|
-
|
|
Net
cash used in investing activities |
|
(83,891 |
) |
|
(334,527 |
) |
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
Net
increase in deposits |
|
38,568
|
|
|
219,608
|
|
Net
(decrease) increase in federal funds purchased |
|
(86,000 |
) |
|
31,500
|
|
Repayment
of Federal Home Loan Bank advances |
|
(32,679,000 |
) |
|
(34,332,600 |
) |
Repayment
of notes payable on affordable housing investments |
|
-
|
|
|
(338 |
) |
Payment
of debt issue cost |
|
(77 |
) |
|
-
|
|
Proceeds
from Federal Home Loan Bank advances |
|
32,730,000
|
|
|
34,397,600
|
|
Proceeds
from issuance of long-term debt |
|
30,000
|
|
|
-
|
|
Proceeds
from common stock options exercised |
|
2,634
|
|
|
383
|
|
Tax
benefit from stock option exercises |
|
3,756
|
|
|
-
|
|
Tax
benefit from vested restricted stock |
|
543
|
|
|
-
|
|
Dividends
paid on common stock |
|
(2,830 |
) |
|
(2,625 |
) |
Net
cash provided by financing activities |
|
37,594
|
|
|
313,528
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
(17,466 |
) |
|
11,977
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
151,192
|
|
|
93,075
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD |
$ |
133,726 |
|
$ |
105,052 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION: |
|
|
|
|
|
|
Cash
paid during the period for: |
|
|
|
|
|
|
Interest |
$ |
56,784 |
|
$ |
22,610 |
|
Income
tax payments, net of refunds |
|
505
|
|
|
2,000
|
|
Noncash
investing and financing activities: |
|
|
|
|
|
|
Guaranteed
mortgage loan securitizations |
|
-
|
|
|
50,375
|
|
Real
estate acquired through foreclosure |
|
2,786
|
|
|
-
|
|
Issuance
of common stock pursuant to acquisition |
|
133,853
|
|
|
-
|
|
Issuance
of common stock to employees |
|
105
|
|
|
-
|
|
See
accompanying notes to condensed consolidated financial
statements.
EAST WEST
BANCORP, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the
Three Months Ended March 31,
2006 and 2005
(Unaudited)
1.
BASIS OF PRESENTATION
The
consolidated financial statements include the accounts of East West Bancorp,
Inc. (referred to herein on an unconsolidated basis as “East West” and on a
consolidated basis as the “Company”) and its wholly owned subsidiaries, East
West Bank and subsidiaries (the “Bank”) and East West Insurance Services, Inc.
Intercompany transactions and accounts have been eliminated in consolidation.
East West also has seven wholly-owned subsidiaries that are statutory business
trusts (the “Trusts”). In accordance with Financial Accounting Standards Board
Interpretation No. 46R, Consolidation
of Variable Interest Entities, the
Trusts are not consolidated into the accounts of East West Bancorp, Inc.
The interim
consolidated financial statements, presented in accordance with accounting
principles generally accepted in the United States of America (“GAAP”), are
unaudited and reflect all adjustments which, in the opinion of management, are
necessary for a fair statement of financial condition and results of operations
for the interim periods. All adjustments are of a normal and recurring nature.
Results for the three months ended March 31, 2006 are not necessarily indicative
of results that may be expected for any other interim period or for the year as
a whole. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with GAAP have been condensed or
omitted. The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
included in the Company’s annual report on Form 10-K for the year ended December
31, 2005.
2.
SIGNIFICANT ACCOUNTING POLICIES
Recent
Accounting Standards
In December
2003, the Accounting Standards Executive Committee of the AICPA issued Statement
of Position No. 03-3 (“SOP 03-3”), Accounting
for Certain Loans or Debt Securities Acquired in a Transfer. SOP
03-3 addresses the accounting for differences between contractual cash flows and
the cash flows expected to be collected from purchased loans or debt securities
if those differences are attributable, in part, to credit quality. SOP 03-3
requires purchased loans and debt securities to be recorded initially at fair
value based on the present value of the cash flows expected to be collected with
no carryover of any valuation allowance previously recognized by the seller.
Interest income should be recognized based on the effective yield from the cash
flows expected to be collected. To the extent that the purchased loans or debt
securities experience subsequent deterioration in credit quality, a valuation
allowance would be established for any additional cash flows that are not
expected to be received. However, if more cash flows subsequently are expected
to be received than originally estimated, the effective yield would be adjusted
on a prospective basis. SOP 03-3 is effective for loans and debt securities
acquired by the Company after December 15, 2004. The adoption of this Statement
on January 1, 2005 did not have a material impact on the Company’s financial
position, results of operations, or cash flows.
In December
2004, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 123(R),
Share-Based Payment. This
Statement supersedes Accounting Principles Board (“APB”) Opinion No. 25,
Accounting
for Stock Issued to Employees, and its
related implementation guidance and is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation. This
Statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. This Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions.
This
Statement requires a public entity to measure the cost of employee services
received in exchange for award of equity instruments based on the grant-date
fair value of the award. That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award - the
requisite service period (usually the vesting period). No compensation cost is
recognized for equity instruments for which employees do not render the
requisite service. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
unique characteristics of those instruments (unless observable market prices for
the same or similar instruments are available). If an equity award is modified
after the grant date, incremental compensation cost will be recognized in an
amount equal to the excess of the fair value of the modified award over the fair
value of the original award immediately before the modification.
The Company
adopted the revised accounting standards for stock based compensation effective
January 1, 2006. SFAS No. 123(R) allows for two alternative transition methods.
The Company follows the modified prospective method, which requires application
of the new Statement to new awards and to awards modified, repurchased or
cancelled after the required effective date. Accordingly, prior period amounts
have not been restated. Additionally, compensation cost for the portion of
awards for which the requisite service has not been rendered that are
outstanding as of January 1, 2006 will be recognized as the requisite services
are rendered on or after January 1, 2006. The compensation cost of that portion
of awards is based on the grant-date fair value of those awards as calculated
for pro forma disclosures under the original SFAS No. 123. Under the transition
provisions of SFAS No. 123(R), the Company has reduced additional paid in
capital by $8.2 million, representing the remaining deferred compensation
balance in the consolidated statement of stockholders’ equity as of January 1,
2006.
In May 2005,
the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which
addresses accounting for changes in accounting principle, changes in accounting
estimates, changes required by an accounting pronouncement in the instance that
the pronouncement does not include specific transition provisions and error
correction. SFAS No. 154 requires retrospective application to prior
periods’ financial statements of changes in accounting principle and error
correction unless impracticable to do so. SFAS No. 154 states an exception
to retrospective application when a change in accounting principle, or the
method of applying it, may be inseparable from the effect of a change in
accounting estimate. When a change in principle is inseparable from a
change in estimate, such as depreciation, amortization or depletion, the change
to the financial statements is to be presented in a prospective manner.
SFAS No. 154 and the required disclosures are effective for accounting changes
and error corrections in fiscal years beginning after December 15,
2005.
In November
2005, the FASB issued Staff Position (“FSP”) Nos. FAS 115-1 and 124-1 to address
the determination as to when an investment is considered impaired, whether that
impairment is other than temporary and the measurement of an impairment
loss. This FSP nullified certain requirements of Emerging Issues Task
Force 03-1 The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF
03-1), and references existing other than temporary guidance. Furthermore,
this FSP creates a three step process in determining when an investment is
considered impaired, whether that impairment is other than temporary, and the
measurement of an impairment loss. The FSP is effective for reporting
periods beginning after December 15, 2005. The adoption of this FSP did
not have a material impact on the Company’s financial condition or results of
operations.
During
December 2005, the FASB issued FSP Statement of Position (“SOP”)
94-6-1,
Terms of Loan Products That May Give Rise to a Concentration of Credit
Risk, which
addresses the circumstances under which the terms of loan products give rise to
such risk and the disclosures or other accounting considerations that apply for
entities that originate, hold, guarantee, service, or invest in loan products
with terms that may give rise to a concentration of credit risk. The guidance
under this FSP is effective for interim and annual periods ending after December
19, 2005 and for loan products that are determined to represent a concentration
of credit risk, disclosure requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, should
be provided for all periods presented. The adoption of this FSP did not
have a significant impact on the Company’s consolidated financial
statements.
In March 2006
the FASB issued SFAS No. 156, Accounting
for Servicing of Financial Assets (SFAS No. 156), which provides the
following: 1) revised guidance on when a servicing asset and servicing liability
should be recognized; 2) requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable; 3)
permits an entity to elect to measure servicing assets and servicing liabilities
at fair value each reporting date and report changes in fair value in earnings
in the period in which the changes occur; 4) upon initial adoption, permits a
onetime reclassification of available-for-sale securities to trading securities
for securities which are identified as offsetting the entity's exposure to
changes in the fair value of servicing assets or liabilities that a servicer
elects to subsequently measure at fair value; and 5) requires separate
presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the statement of financial position and additional footnote
disclosures. SFAS No. 156 is effective as of the beginning of an entity's
first fiscal year that begins after September 15, 2006 with the effects of
initial adoption being reported as a cumulative-effect adjustment to retained
earnings. It is not anticipated that adoption will have a material impact on the
Company's consolidated financial statements.
3.
STOCK-BASED COMPENSATION
The Company
issues stock options and restricted stock to employees under share-based
compensation plans. As previously mentioned, the Company adopted SFAS No. 123(R)
on January 1, 2006 using the modified prospective method. Under this method, the
provisions of SFAS No. 123(R) are applied to new awards and to awards modified,
repurchased or canceled after December 31, 2005 and to awards outstanding on
December 31, 2005 for which requisite service has not yet been rendered. SFAS
No. 123(R) requires companies to account for stock options using the fair value
method, which generally results in compensation expense recognition. Prior to
December 31, 2005, the Company accounted for its fixed stock options using the
intrinsic-value method, as prescribed in APB Opinion No. 25. Accordingly, no
stock option expense was recorded in periods prior to December 31,
2005.
In the first
quarter of 2006, the adoption of SFAS No. 123(R) resulted in incremental
stock-based compensation expense of $520 thousand. Since we have previously
recognized compensation expense on restricted stock awards, the incremental
stock-based compensation expense recognized pursuant to SFAS No. 123(R) relates
only to issued and unvested stock option grants. The incremental stock-based
compensation expense caused income before income taxes to decrease by $520
thousand, net income to decrease by $301 thousand, and basic and diluted
earnings per share to decrease by $0.01. Cash provided by operating activities
decreased by $3.8 million and cash provided by financing activities increased by
an identical amount related to excess tax benefits from stock-based payment
arrangements.
As required
under SFAS No. 123(R), the reported net income and earnings per share for the
three months ended March 31, 2005 have been presented below to reflect the
impact had the Company been required to recognize compensation cost based on the
fair value at the grant date for stock options. The pro forma amounts are as
follows (amounts are reflected in thousands, except per share
data):
|
Three Months Ended March 31,
2005 |
|
Net
income, as reported |
$ |
23,519 |
|
|
|
|
|
Add:
Stock-based employee compensation expense included |
|
|
|
in
reported net income, net of related tax effects |
|
382
|
|
|
|
|
|
Deduct:
Total stock-based employee compensation expense |
|
|
|
determined
using fair value method, net of related tax effects |
|
(668 |
) |
Net
income, pro forma |
$ |
23,233 |
|
|
|
|
|
Basic
earnings per share |
|
|
|
As
reported |
$ |
0.45 |
|
Pro
forma |
$ |
0.44 |
|
|
|
|
|
Diluted
earnings per share |
|
|
|
As
reported |
$ |
0.44 |
|
Pro
forma |
$ |
0.43 |
|
For the
three months ended March 31, 2006, the total combined compensation cost
recognized in income related to stock options and restricted stock awards
totaled $1.5 million. The related tax benefit of this compensation cost amounted
to $611 thousand for the three months ended March 31, 2006. For the three months
ended March 31, 2005 the total compensation recognized in income related to
restricted stock awards and the related tax benefit amounted to $658 thousand
and $276 thousand, respectively.
As of
March 31, 2006, total unrecognized compensation cost related to stock
options and restricted stock awards amounted to $4.1 million and $11.7 million,
respectively. This cost is expected to be recognized over a weighted average
period of 3.1 years and 3.3 years for stock options and restricted stock awards,
respectively.
Stock
Options
The
Company issues fixed stock options to certain employees, officers, and
directors. Stock options are issued at the current market price on the date of
grant with a three-year or four-year vesting period and contractual terms of 7
or 10 years.
A summary
of activity for the Company’s stock options as of and for the three months ended
March 31, 2006 is presented below:
|
Shares |
|
Weighted Average
Exercise
Price |
|
Outstanding
at beginning of period |
|
3,209,183
|
|
$ |
13.51 |
|
Granted |
|
193,630
|
|
|
36.90
|
|
Exercised |
|
(310,426 |
) |
|
8.49
|
|
Forfeited |
|
(5,988 |
) |
|
24.59
|
|
Outstanding
at end of period |
|
3,086,399
|
|
$ |
15.46 |
|
|
|
|
|
|
|
|
Options
exercisable at March 31, 2006 |
|
2,378,467
|
|
|
|
|
Weighted
average fair value of options granted during the
period |
$ |
9.90 |
|
|
|
|
The
weighted average grant-date fair value of options granted during the three
months ended March 31, 2006 and 2005 was $9.90 and $9.49, respectively. 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:
|
Three
Months Ended March 31, |
|
2006 |
|
2005 |
Expected
life (1) |
4
years |
|
3.5
years |
Expected
volatility (2) |
27.8% |
|
28.1% |
Expected
dividend yield |
0.6% |
|
0.5% |
Risk-free
interest rate (3) |
4.7% |
|
3.9% |
_________ |
|
|
|
(1)
The expected life (estimated period of time outstanding) of stock options
granted
was estimated using the historical exercise behavior of
employees. |
(2)
The expected volatility was based on historical volatility for a period
equal to the
stock option's expected life. |
(3)
The risk-free rate is based on the U.S. Treasury yield curve in effect at
the time
of grant. |
The total
intrinsic value of options exercised during the three months ended March 31,
2006 and 2005 was $8.9 million and $956 thousand, respectively. The total fair
value of shares vested during the three months ended March 31, 2006 and 2005
amounted to $2.5 million and $2.9 million, respectively.
The following
table summarizes information about stock options outstanding as of March 31,
2006:
|
|
Options
Outstanding |
|
Options
Exercisable |
Range
of Exercise Prices |
|
|
|
|
|
|
|
|
|
|
$5.00
to $9.99 |
|
|
869,911 |
|
|
2.6
years |
|
$ |
5.43 |
|
|
869,911 |
|
$ |
5.43 |
$10.00
to $14.99 |
|
|
707,225 |
|
|
5.5
years |
|
|
12.59 |
|
|
707,225 |
|
|
12.59 |
$15.00
to $19.99 |
|
|
1,012,331 |
|
|
3.5
years |
|
|
16.88 |
|
|
746,431 |
|
|
16.88 |
$25.00
to $29.99 |
|
|
123,775 |
|
|
4.9
years |
|
|
26.59 |
|
|
53,275
|
|
|
26.50
|
$30.00
to $34.99 |
|
|
51,228 |
|
|
6.4
years |
|
|
33.94 |
|
|
750
|
|
|
32.92
|
$35.00
to $39.99 |
|
|
320,929 |
|
|
6.5
years |
|
|
37.18 |
|
|
625
|
|
|
35.14
|
$40.00
to $44.99 |
|
|
1,000 |
|
|
5.6
years |
|
|
42.97 |
|
|
250
|
|
|
42.97
|
$5.00
to $44.99 |
|
|
3,086,399 |
|
|
4.1
years |
|
$ |
15.46 |
|
|
2,378,467 |
|
$ |
11.64 |
Restricted
Stock
In
addition to stock options, the Company also grants restricted stock awards to
directors, certain officers and employees. The restricted shares awarded become
fully vested after three to five 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. 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.
A summary of
the activity for restricted stock as of March 31, 2006, including changes during
the three months then ended, is presented below:
|
Shares |
|
|
Outstanding
at beginning of period |
|
431,392
|
|
$ |
30.60 |
Granted |
|
135,061
|
|
|
36.14
|
Vested |
|
(66,300) |
|
|
18.21
|
Forfeited |
|
(12,648) |
|
|
33.98
|
Outstanding
at end of period |
|
487,505
|
|
$ |
33.73 |
In March
2006, the Company also granted performance restricted stock with two-year cliff
vesting to an executive officer. The number of shares that the executive will
receive under this stock award will ultimately depend on the Company’s
achievement of specified performance targets. The performance period is January
1, 2006 through December 31, 2007. At the end of the performance period, the
number of stock awards issued will be determined by adjusting upward or downward
from the target amount of shares in a range between 24% and 124%. The final
performance percentage on which the payout will be based, considering
performance metrics established for the performance period, will be determined
by the Board of Directors or a committee of the Board. If the Company performs
below its performance targets, the Board or the committee may, at its
discretion, choose not to award any shares. Shares of stock, if any, will be
issued following the end of the performance period two years from the date of
grant. Compensation costs are accrued over the service period and are based on
the probable outcome of the performance condition. The maximum number of shares
subject to this grant cannot exceed 41,000 shares.
4.
ACQUISITION
OF STANDARD BANK
At the
close of business on March 17, 2006, the Company completed the acquisition of
Standard Bank (“SB”), a commercial bank headquartered in Monterey Park,
California. The purchase price was $200.3 million with sixty-seven percent paid
in stock and the remainder in cash. The results of SB’s operations have been
included in the Company’s consolidated financial statements since that date. The
acquisition was accounted for under the purchase method of accounting and
accordingly, all assets and liabilities of SB 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 $101.0 million and
core deposit premium of $8.6 million. The core deposit premium will be amortized
on an accelerated basis over its useful life, which is estimated to be 11 years.
The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition:
|
Fair
Value of Assets Acquired and Liabilities Assumed |
|
|
(In
thousands) |
|
Cash
and cash equivalents |
$ |
165,660 |
|
Loans
receivable |
|
487,110
|
|
Premises
and equipment, net |
|
3,220
|
|
Core
deposit premium |
|
8,648
|
|
Goodwill |
|
100,986
|
|
Other
assets |
|
239,285 |
|
Total
assets acquired |
|
1,004,909
|
|
Deposits |
|
728,514
|
|
Other
liabilities |
|
76,123
|
|
Total
liabilities assumed |
|
804,637
|
|
Net
assets acquired |
$ |
200,272 |
|
5.
DEBT ISSUANCE
On
March 15, 2006, the Company issued $30.0 million in junior subordinated debt
securities through a pooled trust preferred offering. Similar to previous
offerings, these securities were issued through a newly formed statutory
business trust, East West Capital Trust VII (“Trust VII”), a wholly-owned
subsidiary of the Company. The proceeds from the debt securities are loaned by
Trust VII to the Company and are included in long-term debt in the accompanying
Condensed Consolidated Balance Sheet. The securities issued by Trust VII have a
scheduled maturity of June 15, 2036 and bear interest at a per annum rate based
on the three-month Libor plus 135 basis points, payable on a quarterly basis. At
March 31, 2006, the interest rate on the junior subordinated debt was 6.28%. The
junior subordinated debt issued qualifies as Tier I capital for regulatory
reporting purposes.
6.
COMMITMENTS AND CONTINGENCIES
Credit
Extensions - In the
normal course of business, the Company has various outstanding commitments to
extend credit that are not reflected in the accompanying interim consolidated
financial statements. As of March 31, 2006, undisbursed loan commitments and
commercial and standby letters of credit amounted to $1.95 billion and $387.6
million, respectively.
Guarantees
- From
time to time, the Company sells loans with recourse in the ordinary course of
business. For loans that have been sold with recourse, the recourse component is
considered a guarantee. When the Company sells a loan with recourse, it commits
to stand ready to perform if the loan defaults, and to make payments to remedy
the default. As of March 31, 2006 and December 31, 2005, loans sold with
recourse, comprised entirely of residential single family mortgage loans,
totaled $30.5 million and $31.6 million, respectively. The Company’s recourse
reserve related to these loans totaled $70 thousand and $76 thousand as of March
31, 2006 and December 31, 2005, respectively, and is included in accrued
expenses and other liabilities in the accompanying consolidated balance
sheets.
The Company
also sells loans without recourse that may have to be subsequently repurchased
if a defect that occurred during the loan origination process results in a
violation of a representation or warranty made in connection with the sale of
the loan. When a loan sold to an investor without recourse fails to perform
according to its contractual terms, the investor will typically review the loan
file to determine whether defects in the origination process occurred and if
such defects give rise to a violation of a representation or warranty made to
the investor in connection with the sale. If such a defect is identified, the
Company may be required to either repurchase the loan or indemnify the investor
for losses sustained. If there are no such defects, the Company has no
commitment to repurchase the loan. As of March 31, 2006 and December 31, 2005,
the amount of loans sold without recourse totaled $768.6 million and $777.6
million, which substantially represents the unpaid principal balance of the
Company’s loans serviced for others portfolio.
Litigation
- Neither
the Company nor the Bank is involved in any material legal proceedings at March
31, 2006. The Bank, from time to time, is a 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. After taking into consideration information furnished
by counsel to the Company and the Bank, management believes that the resolution
of such issues will not have a material adverse impact on the financial
position, results of operations, or liquidity of the Company or the
Bank.
Regulated
Investment Company - On
December 31, 2003, the
California Franchise Tax Board (“FTB”) announced that it is taking the position
that certain tax deductions relating to regulated investment companies will be
disallowed pursuant to California Senate Bill 614 and California Assembly Bill
1601, which were signed into law in the fourth quarter of 2003. East West
Securities Company, Inc. (the “Fund”), a regulated investment company (“RIC”)
formed and funded in July 2000 to raise capital in an efficient and economical
manner was dissolved on December 30, 2002 as a result of, among other reasons,
proposed legislation to change the tax treatments of RICs. The Fund provided
state tax benefits beginning in 2000 until the end of 2002, when the RIC was
officially dissolved. While the Company’s management continues to believe that
the tax benefits realized in previous years were appropriate and fully
defensible under the existing tax codes at that time, the Company has deemed it
prudent to participate in the voluntary compliance initiative, or “VCI” offered
by the State of California to avoid certain potential penalties should the FTB
choose to litigate its announced position about the tax treatment of RICs for
periods prior to enactment of the legislation described above and should the FTB
be successful in that litigation.
Pursuant to the VCI
program, the Company filed amended California income tax returns on April 15,
2004 for all affected years and paid the resulting taxes and interest due to the
FTB. This amounted to an aggregate payment of $14.2 million for tax years 2000,
2001, and 2002. The Company’s management continues to believe that the tax
deductions are appropriate and, as such, refund claims have also been filed for
the amounts paid with the amended returns. These refund claims are reflected as
assets in the Company’s consolidated financial statements. As a result of these
actions—amending the Company’s California income tax returns and subsequent
related filing of refund claims—the Company retains its potential exposure for
assertion of an accuracy-related penalty should the FTB prevail in its position,
in addition to our risk of not being successful in our refund claim for taxes
and interest. The Company’s potential exposure to all other penalties, however,
has been eliminated through this course of action.
The Franchise
Tax Board is currently in the process of reviewing and assessing our refund
claims for taxes and interest for tax years 2000 through 2002. Management is
continuing to pursue these claims, to monitor developments in the law in this
area, and to monitor the status of tax claims with respect to other registered
investment companies.
7.
STOCKHOLDERS’ EQUITY
Authorized
Shares - On May
25, 2005, the Company’s shareholders approved an amendment to the Company’s
Certificate of Incorporation to increase the number of authorized shares of
common stock from 100,000,000 to 200,000,000. The additional authorized shares
provide the Company greater flexibility for stock splits and stock dividends,
issuances under employee benefit plans, financings, corporate mergers and
acquisitions, and other general corporate purposes.
Earnings Per
Share - The
actual number of shares outstanding at March 31, 2006 was 60,602,388. Basic
earnings per share are calculated on the basis of the weighted average number of
shares outstanding during the period. Diluted earnings per share are calculated
on the basis of the weighted average number of shares outstanding during the
period plus restricted stock and shares issuable upon the assumed exercise of
outstanding common stock options and warrants.
The following table sets forth
earnings per share calculations for the three months ended March 31, 2006 and
2005:
|
Three
Months Ended March 31, |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except per share data) |
Basic
earnings per share |
$ |
32,051 |
|
56,807
|
|
$ |
0.56 |
|
$ |
23,519 |
|
|
52,245
|
|
$ |
0.45 |
|
Effect
of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
-
|
|
1,208
|
|
|
(0.01 |
) |
|
-
|
|
|
1,415
|
|
|
(0.01 |
) |
Restricted stock |
|
-
|
|
189
|
|
|
-
|
|
|
-
|
|
|
168
|
|
|
-
|
|
Stock warrants |
|
-
|
|
89
|
|
|
-
|
|
|
-
|
|
|
135
|
|
|
-
|
|
Dilutive
earnings per share |
$ |
32,051 |
|
58,293
|
|
$ |
0.55 |
|
$ |
23,519 |
|
|
53,963
|
|
$ |
0.44 |
|
Quarterly
Dividends - The
Company’s Board of Directors declared and paid quarterly common stock cash
dividends of $0.05 per share payable on or about January 24, 2006 to
shareholders of record on February 8, 2006. Cash dividends totaling $2.8 million
were paid to the Company’s shareholders during the first quarter of
2006.
8.
BUSINESS SEGMENTS
The
Company utilizes an internal reporting system to measure the performance of
various operating segments within the Bank and the Company overall. The Company
has identified four principal operating segments for purposes of management
reporting: retail banking, commercial lending, treasury, and residential
lending. Information related to the Company’s remaining centralized functions
and eliminations of inter-segment amounts 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 Bank’s branch network, certain designated branches have responsibility for
generating commercial deposits and loans. The commercial lending segment, which
includes commercial real estate, primarily generates commercial loans and
deposits through the efforts of commercial lending officers located in the
Bank’s northern and southern California production offices. The treasury
department’s primary focus is managing the Bank’s investments, liquidity, and
interest rate risk; the residential lending segment is mainly responsible for
the Bank’s portfolio of single family and multifamily residential
loans.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies described in Note 1 of our annual
report on Form 10-K for the year ended December 31, 2005. 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 re-pricing characteristics. Non-interest income and
non-interest 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
actual losses incurred and an allocation of the remaining provision based on new
loan originations for the period. The Company evaluates overall performance
based on profit or loss from operations before income taxes not including
nonrecurring gains and losses.
Future
changes in the Company’s management structure or reporting methodologies may
result in changes in the measurement of operating segment results. Results for
prior periods have been restated for comparability for changes in management
structure or reporting methodologies. Specifically, an adjustment was made to
reallocate the credit provided for the Company’s capital to the treasury segment
from the “Other” category. The adjustment resulted in an increase in the
treasury segment’s pretax profit of $ 6.5 million and $ 2.7 million
for the three months ended March 31, 2006 and 2005 respectively.
The following
tables present the operating results and other key financial measures for the
individual operating segments for the three months ended March 31, 2006 and
2005:
|
Three
Months Ended March 31, 2006 |
|
|
|
|
|
Treasury |
|
|
|
Other |
|
Total |
|
|
(In
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
$ |
47,499 |
|
$ |
59,650 |
|
$ |
11,431 |
|
$ |
16,410 |
|
$ |
2,312 |
|
$ |
137,302 |
|
Charge
for funds used |
|
(31,247 |
) |
|
(38,156 |
) |
|
(13,520 |
) |
|
(12,541 |
) |
|
-
|
|
|
(95,464 |
) |
Interest
spread on funds used |
|
16,252
|
|
|
21,494
|
|
|
(2,089 |
) |
|
3,869
|
|
|
2,312
|
|
|
41,838
|
|
Interest
expense |
|
(25,412 |
) |
|
(3,528 |
) |
|
(25,314 |
) |
|
-
|
|
|
-
|
|
|
(54,254 |
) |
Credit
on funds provided |
|
53,724
|
|
|
7,872
|
|
|
33,868
|
|
|
-
|
|
|
-
|
|
|
95,464
|
|
Interest
spread on funds provided |
|
28,312
|
|
|
4,344
|
|
|
8,554
|
|
|
-
|
|
|
-
|
|
|
41,210
|
|
Net
interest income |
$ |
44,564 |
|
$ |
25,838 |
|
$ |
6,465 |
|
$ |
3,869 |
|
$ |
2,312 |
|
$ |
83,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
$ |
2,593 |
|
$ |
173 |
|
$ |
(570 |
) |
$ |
345 |
|
$ |
263 |
|
$ |
2,804 |
|
Goodwill |
|
182,391
|
|
|
12,159
|
|
|
-
|
|
|
48,637
|
|
|
958
|
|
|
244,145
|
|
Segment
pretax profit (loss) |
|
25,944
|
|
|
21,925
|
|
|
8,315
|
|
|
2,363
|
|
|
(6,763 |
) |
|
51,782
|
|
Segment
assets |
|
2,260,751
|
|
|
2,927,849
|
|
|
1,028,411
|
|
|
2,513,089
|
|
|
550,435
|
|
|
9,280,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2005 |
|
|
|
|
|
|
|
|
Treasury |
|
|
|
|
|
Other |
|
|
Total |
|
|
(In
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
$ |
27,417 |
|
$ |
38,467 |
|
$ |
5,803 |
|
$ |
12,032 |
|
$ |
1,037 |
|
$ |
84,756 |
|
Charge
for funds used |
|
(14,283 |
) |
|
(19,337 |
) |
|
(5,534 |
) |
|
(6,732 |
) |
|
-
|
|
|
(45,886 |
) |
Interest
spread on funds used |
|
13,134
|
|
|
19,130
|
|
|
269
|
|
|
5,300
|
|
|
1,037
|
|
|
38,870
|
|
Interest
expense |
|
(10,773 |
) |
|
(1,412 |
) |
|
(10,349 |
) |
|
-
|
|
|
-
|
|
|
(22,534 |
) |
Credit
on funds provided |
|
24,761
|
|
|
3,238
|
|
|
17,887
|
|
|
-
|
|
|
-
|
|
|
45,886
|
|
Interest
spread on funds provided |
|
13,988
|
|
|
1,826
|
|
|
7,538
|
|
|
-
|
|
|
-
|
|
|
23,352
|
|
Net
interest income |
$ |
27,122 |
|
$ |
20,956 |
|
$ |
7,807 |
|
$ |
5,300 |
|
$ |
1,037 |
|
$ |
62,222 |
|
Depreciation
and amortization |
$ |
1,196 |
|
$ |
111 |
|
$ |
(140 |
) |
$ |
265 |
|
$ |
973 |
|
$ |
2,405 |
|
Goodwill |
|
32,133
|
|
|
2,142
|
|
|
-
|
|
|
8,569
|
|
|
958
|
|
|
43,802
|
|
Segment
pretax profit (loss) |
|
9,613
|
|
|
17,689
|
|
|
7,867
|
|
|
4,074
|
|
|
(2,609 |
) |
|
36,634
|
|
Segment
assets |
|
1,605,352
|
|
|
2,336,076
|
|
|
673,326
|
|
|
1,486,462
|
|
|
269,812
|
|
|
6,371,028
|
|
9.
SUBSEQUENT EVENTS
On April
21, 2006, the Company securitized $217.0 million in single family loans in a
private label guaranteed mortgage securitization issued through East West
Mortgage Securities, LLC. The underlying loans for the pass through securities
issued were all jumbo single family loans originated by the Bank. As a
result of
the securitization, the Company now has $211.5 million in AAA/Aa1 pass through
mortgage-backed securities that were retained and are held in the
available-for-sale portfolio. In accordance with SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement No. 125, the
transaction was accounted for as neither a sale nor a financing and the
transaction had no impact on the Company’s results of operations.
On April
25, 2006, the Company entered into a long-term transaction involving the sale of
securities under a repurchase agreement totaling $200.0 million. The repurchase
agreement has a term of ten years. The agreement is non-callable for the first
two years with an interest rate based on the three-month Libor minus 125 basis
points for the first two years. Thereafter, the interest rate is fixed rate at
5.128%. The counterparty has the right to a quarterly call after April 25, 2008.
The collateral for the repurchase agreement consists of private label and agency
mortgage-backed securities.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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. This information is intended to facilitate the understanding and
assessment of significant changes and trends related to our financial condition
and the results of our operations. This discussion and analysis should be read
in conjunction with our 2005 annual report on Form 10-K for the year ended
December 31, 2005, and the accompanying interim unaudited consolidated financial
statements and notes thereto.
Critical
Accounting Policies
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make a
number of judgments, estimates and assumptions that affect the reported amount
of assets, liabilities, income and expenses in our consolidated financial
statements and accompanying notes. We believe that the judgments, estimates and
assumptions used in the preparation of our consolidated financial statements are
appropriate given the factual circumstances as of March 31, 2006.
Various elements of
our accounting policies, by their nature, are inherently subject to estimation
techniques, valuation assumptions and other subjective assessments. In
particular, we have identified three accounting policies that, due to judgments,
estimates and assumptions inherent in those policies, are critical to an
understanding of our consolidated financial statements. These policies relate to
the classification and valuation of investment securities, the methodologies
that determine our allowance for loan losses, and the valuation of retained
interests and mortgage servicing assets related to securitizations and sales of
loans. In each area, we have identified the variables most important in the
estimation process. We have used the best information available to make the
estimations necessary to value the related assets and liabilities. Actual
performance that differs from our estimates and future changes in the key
variables could change future valuations and impact net income.
Our
significant accounting policies are described in greater detail in our 2005
Annual Report on Form 10-K in the “Critical Accounting Policies” section of
Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial
Statements—“Significant Accounting Policies” which are essential to
understanding Management’s Discussion and Analysis of Results of Operations and
Financial Condition.
Overview
During the
first quarter of 2006, we again generated record earnings totaling $32.1
million, or $0.56 per basic share and $0.55 per diluted share, compared with
$23.5 million, or $0.45 per basic share and $0.44 per diluted share, reported
during the first quarter of 2005. Loan growth, operating efficiencies and solid
asset quality contributed to our earnings performance for the first quarter of
2006. The annualized return on average assets during the first quarter of 2006
was 1.50%, compared with 1.52% for the same quarter in 2005. The annualized
return on average equity was 16.72% during the first quarter of 2006, compared
to 18.09% during the same period in 2005. The decrease in the annualized return
on average equity is primarily due to additional shares issued in connection
with the acquisition of Standard Bank. Based on the results of our performance
in the first quarter of 2006 and expected growth for the remainder of 2006, we
expect net income per diluted common share for the full year 2006 to be
approximately 14% to 16% higher than in 2005. This estimate is based on a
projected annualized loan growth of 15% to 17% for the remainder of 2006,
annualized deposit growth of 14% to 16% for the remainder of 2006, and an
increase in operating expenses of 25% to 28% for the entire year of 2006. Our
earnings projection for the full year of 2006 also assumes a stable or
marginally increasing interest rate environment and a net interest margin
between 4.10% and 4.15%.
The most significant
highlight of the first quarter of 2006 is the closing of the Standard Bank
acquisition. Standard Bank represents our second largest acquisition to date,
with total assets of $897.3 million as of the acquisition closing date of March
17, 2006. Net loans acquired totaled $490.0 million and total deposits assumed
totaled $728.5 million. This acquisition resulted in total goodwill of $101.0
million and core deposit premium of $8.6 million. Standard Bank was
headquartered in Monterey Park, California and provided community banking
services through six branches located throughout the Los Angeles marketplace.
Certain operating systems have been successfully integrated into our
infrastructure with complete integration scheduled in the early part of the
third quarter of 2006. This acquisition added several thousand deposit customers
to our existing customer base, generating additional lending and deposit
opportunities for the Company. Perhaps more noteworthy than the size of this
transaction is the fact that this acquisition was consummated only six months
after we closed the acquisition of United National Bank (“UNB”) in September
2005. United National Bank is our largest acquisition to date with $946.9
million in total assets as of the closing date.
Another
highlight for the first quarter of 2006 is the issuance of $30.0 million in
junior subordinated debt in a private placement transaction. Similar to previous
offerings, these securities were issued through a newly formed statutory
business trust, East West Capital Trust VII (“Trust VII”), a wholly owned
subsidiary of the Company. The proceeds from the debt securities are loaned by
Trust VII to the Company and are classified as junior subordinated debt and
reported in the consolidated balance sheet under long-term debt. The securities
issued by Trust VII have a 30-year maturity term and bear interest at a per
annum rate based on the three-month Libor plus 135 basis points, payable on a
quarterly basis. The interest rate on this instrument was 6.28% as of March 31,
2006. This additional issuance of capital securities provides the Bank with a
cost-effective means of obtaining Tier 1 capital for regulatory
purposes.
Total
consolidated assets at March 31, 2006 increased 12% to $9.28 billion, compared
with $8.28 billion at December 31, 2005. A 13% growth in gross loans was the
primary driver of this increase, rising to a record $7.66 billion at March 31,
2006. Excluding the impact of the Standard Bank acquisition, organic loan growth
was $367.7 million or 5% year to date. The loan portfolio continues to grow
steadily and we estimate loan growth for the full year of 2006 to range from 15%
to 17%, reflecting the core rate of growth in the Bank’s lending markets, the
addition of new client relationships, and the utilization of additional lending
programs and products.
Total average
assets increased 39% to $8.57 billion during the first quarter of 2006, compared
to $6.18 billion for the same quarter in 2005, primarily due to growth in
average loans. Total average loans grew to $7.08 billion during the quarter
ended March 31, 2006, an increase of 35% over the corresponding period in the
prior year. The growth in average loans was driven by increases in all loan
sectors, except for trade finance and consumer products. Total average deposits
rose 35% during the first quarter of 2006 to $6.21 billion, compared to $4.62
billion for the same quarter in 2005. We experienced growth in almost all
deposit categories during the first quarter of 2006, with the largest dollar
impact coming from time deposits, money market accounts, and noninterest-bearing
demand accounts.
Net interest
income increased 33% to $83.0 million during the quarter ended March 31, 2006,
compared with $62.2 million during the same quarter in 2005. The substantial
increase in net interest income is
predominantly due to significant loan growth and steady increases in interest
rates by the Federal Reserve during the past year. These factors were partially
offset by increases in both the volume and rates paid for time deposits and
money market accounts, as well as growth in the volume of both short-term and
long-term borrowings and higher rates paid on FHLB advances. Our net interest
margin decreased 11 basis points to 4.18% during the first quarter of 2006,
compared to 4.29% during the same period in 2005. Our margin was negatively
impacted by continued competition in loan and deposit pricing and, to a lesser
extent, by the impact of assets acquired from Standard Bank. Assuming a stable
or marginally increasing interest rate environment during 2006, we anticipate
the net interest margin for the full year of 2006 to be in the range of 4.10% to
4.15%.
Total noninterest
income increased 37% to $8.9 million during the first quarter of 2006, compared
with $6.5 million for the corresponding quarter in 2005. This increase is
primarily attributable to higher branch-related fee income and net gains on
sales of available-for-sale securities, partially offset by a decrease in
letters of credit fees and commissions. For the full year of 2006, we anticipate
our core noninterest income to be comparable to that of the prior year.
As a result of our
continued expansion, total noninterest expense increased 33% to $36.8 million
during the first quarter of 2006, compared with $27.7 million for the same
period in 2005. This increase was largely due to increased staffing levels and
an overall increase in operating costs due to the acquisition of United National
Bank in the third quarter of 2005. Occupancy expense also increased due to the
recent relocation and expansion of our corporate offices. Our 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 non-interest income
remained at 37% during the first quarter of 2006 which is comparable to the same
period in 2005. We believe this to be a reflection of our ability to efficiently
and effectively utilize our resources and operating platform to support our
continuing growth. Due to the acquisition of Standard Bank and the overall
growth of the Bank, as well as the recent relocation of our corporate
headquarters, we anticipate noninterest expenses to increase by 25% to 28% for
the full year of 2006, but expect our efficiency ratio to remain in the 37% to
38% range.
Total
nonperforming assets amounted to $13.8 million, or 0.15% of total assets at
March 31, 2006, compared with $30.1 million, or 0.36% of total assets, at
December 31, 2005. The allowance for loan losses totaled $75.5 million at March
31, 2006, or 0.99% of outstanding total loans. Net recoveries totaled $46
thousand during the first quarter of 2006, representing less than 0.01% of
average loans for the quarter. This compares with $765 thousand in net
chargeoffs, or an annualized 0.06% of average loans, during the same quarter in
2005. We anticipate our overall asset quality to remain sound throughout the
remainder of 2006. We project that nonperforming assets will continue to be
below 0.50% of total assets and that net chargeoffs will remain below an
annualized 0.35% of average loans in 2006.
We continue
to be well-capitalized under all regulatory guidelines with a Tier 1 risk-based
capital ratio of 9.26%, a total risk-based capital ratio of 11.27%, and a Tier 1
leverage ratio of 8.96% at March 31, 2006. As previously mentioned, we raised
$30.0 million in additional regulatory capital through the issuance of trust
preferred securities in a trust preferred offering. Trust preferred securities
currently qualify as Tier 1 capital for regulatory purposes. The net proceeds
from the trust preferred offering were used to partially fund the acquisition of
Standard Bank and also to support the continued growth of the Bank.
Results
of Operations
We
reported first quarter 2006 net income of $32.1 million, or $0.56 per basic
share and $0.55 per diluted share, compared with $23.5 million, or $0.45 per
basic share and $0.44 per diluted share, reported during the first quarter of
2005. The 36% increase in net income is primarily attributable to higher net
interest income and higher noninterest-related revenues, partially offset by
higher operating expenses and a higher provision for income taxes. Our
annualized return on average total assets slightly decreased to 1.50% for the
quarter ended March 31, 2006, from 1.52% for the same period in 2005. The
annualized return on average stockholders’ equity also decreased to 16.72% for
the first quarter of 2006, compared with 18.09% for the first quarter of 2005
primarily due to additional shares issued in connection with the Standard Bank
acquisition.
Components
of Net Income
|
Three
Months Ended March 31, |
|
|
2006 |
|
2005 |
|
|
(In
millions) |
Net
interest income |
$ |
83.0 |
|
$ |
62.2 |
|
Provision
for loan losses |
|
(3.3 |
) |
|
(4.4 |
) |
Noninterest
income |
|
8.9
|
|
|
6.5
|
|
Noninterest
expense |
|
(36.8 |
) |
|
(27.7 |
) |
Provision
for income taxes |
|
(19.7 |
) |
|
(13.1 |
) |
Net
income |
$ |
32.1 |
|
$ |
23.5 |
|
|
|
|
|
|
|
|
Annualized
return on average total assets |
|
1.50 |
% |
|
1.52 |
% |
Annualized
return on average stockholders' equity |
|
16.72 |
% |
|
18.09 |
% |
Net
Interest Income
Our primary
source of revenue is net interest income, which is the difference between
interest income on earning assets and interest expense on interest-bearing
liabilities. Net interest income for the first quarter of 2006 totaled $83.0
million, a 33% increase over net interest income of $62.2 million for the same
period in 2005.
Total
interest and dividend income during the quarter ended March 31, 2006 increased
62% to $137.3 million, compared with $84.8 million during the same period in
2005. The increase in interest and dividend income during the first quarter of
2006 is attributable to a 37%, or $2.19 billion growth in average earning assets
for the quarter ended March 31, 2006. Growth in average loans was the primary
driver for the growth in average earning assets for the quarter ended March 31,
2006. The net growth in average earning assets was largely funded by increases
in time deposits, money market accounts, short-term borrowings, securities sold
under repurchase agreements, and additional long-term debt.
Total interest
expense during the first quarter of 2006 increased 141% to $54.3 million,
compared with $22.5 million for the same period a year ago. The increase in
interest expense during the first quarter of 2006 can be attributed to both a
44% growth in average interest-bearing liabilities, predominantly time deposits
and money market accounts, as well as higher rates paid on almost all categories
of interest-bearing liabilities, reflecting continuing increases in interest
rates and sustained pricing competition in the deposit market.
Net interest
margin, defined as taxable equivalent net interest income divided by average
earning assets, decreased 11 basis points to 4.18% during the first quarter of
2006, compared with 4.29% during the first quarter of 2005. The overall yield on
earning assets increased 105 basis points to 6.90% in the first quarter of 2006,
from 5.85% in 2005, due to several consecutive Federal Reserve interest rate
increases during the past year. Our overall cost of funds increased by 136 basis
points to 3.38% for the three months ended March 31, 2006. The combined impact
of an increasing interest rate environment and heightened competition in the
deposit market were the primary drivers of our increased cost of funds during
the first quarter of 2006. To help fund our loan growth, we increased our
reliance on time deposits and other borrowings, further contributing to the
overall increase in our cost of funds for the quarter ended March 31, 2006. We
also continue to rely heavily on noninterest-bearing demand deposits as a
funding source, with average noninterest-bearing demand deposits increasing 13%
to $1.18 billion during the first quarter of 2006, compared to $1.05 billion
during the same period in 2005.
The following
table presents the net interest spread, net interest margin, average balances,
interest income and expense, and the average yields and rates by asset and
liability component for the three months ended March 31, 2006 and
2005:
|
Three
Months Ended March 31, |
|
2006 |
|
2005 |
|
|
|
Interest |
|
Yield
(1) |
|
|
|
Interest |
|
Yield
(1) |
|
|
(Dollars
in Thousands) |
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments |
$ |
10,816 |
|
$ |
121 |
|
|
4.54 |
% |
$ |
7,043 |
|
$ |
42 |
|
|
2.42 |
% |
Interest
bearing deposits in other banks |
|
255
|
|
|
2
|
|
|
3.18 |
% |
|
-
|
|
|
-
|
|
|
-
|
|
Securities
purchased under resale agreements |
|
78,889
|
|
|
1,347
|
|
|
6.92 |
% |
|
-
|
|
|
-
|
|
|
-
|
|
Investment
securities available-for-sale (2) (3) (4) |
|
838,142
|
|
|
9,214
|
|
|
4.46 |
% |
|
579,986
|
|
|
5,257
|
|
|
3.68 |
% |
Loans
receivable (2) (5) |
|
7,078,805
|
|
|
125,871
|
|
|
7.21 |
% |
|
5,236,534
|
|
|
78,896
|
|
|
6.11 |
% |
FHLB
and FRB stock |
|
60,105
|
|
|
747
|
|
|
5.04 |
% |
|
54,410
|
|
|
561
|
|
|
4.18 |
% |
Total
interest-earning assets |
|
8,067,012
|
|
|
137,302
|
|
|
6.90 |
% |
|
5,877,973
|
|
|
84,756
|
|
|
5.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks |
|
142,453
|
|
|
|
|
|
|
|
|
102,019
|
|
|
|
|
|
|
|
Allowance
for loan losses |
|
(70,429 |
) |
|
|
|
|
|
|
|
(52,397 |
) |
|
|
|
|
|
|
Other
assets |
|
429,212
|
|
|
|
|
|
|
|
|
252,907
|
|
|
|
|
|
|
|
Total
assets |
$ |
8,568,248 |
|
|
|
|
|
|
|
$ |
6,180,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking
accounts |
|
438,484
|
|
|
1,326
|
|
|
1.23 |
% |
|
335,850
|
|
|
633
|
|
|
0.76 |
% |
Money
market accounts |
|
1,027,211
|
|
|
7,834
|
|
|
3.09 |
% |
|
617,948
|
|
|
2,960
|
|
|
1.94 |
% |
Savings
deposits |
|
337,329
|
|
|
337
|
|
|
0.41 |
% |
|
330,172
|
|
|
190
|
|
|
0.23 |
% |
Time
deposits less than $100,000 |
|
993,794
|
|
|
7,836
|
|
|
3.20 |
% |
|
769,485
|
|
|
3,866
|
|
|
2.04 |
% |
Time
deposits $100,000 or greater |
|
2,232,937
|
|
|
21,556
|
|
|
3.92 |
% |
|
1,516,440
|
|
|
8,642
|
|
|
2.31 |
% |
Fed
funds purchased |
|
102,014
|
|
|
1,119
|
|
|
4.45 |
% |
|
5,456
|
|
|
42
|
|
|
3.12 |
% |
FHLB
Advances |
|
896,830
|
|
|
8,708
|
|
|
3.94 |
% |
|
902,067
|
|
|
5,181
|
|
|
2.33 |
% |
Securities
sold under repurchase agreements |
|
325,000
|
|
|
2,877
|
|
|
3.59 |
% |
|
-
|
|
|
-
|
|
|
-
|
|
Long-term
debt |
|
158,250
|
|
|
2,661
|
|
|
6.82 |
% |
|
57,476
|
|
|
1,020
|
|
|
7.20 |
% |
Total
interest-bearing liabilities |
|
6,511,849
|
|
|
54,254
|
|
|
3.38 |
% |
|
4,534,894
|
|
|
22,534
|
|
|
2.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits |
|
1,178,752
|
|
|
|
|
|
|
|
|
1,045,326
|
|
|
|
|
|
|
|
Other
liabilities |
|
110,793
|
|
|
|
|
|
|
|
|
80,250
|
|
|
|
|
|
|
|
Stockholders'
equity |
|
766,854
|
|
|
|
|
|
|
|
|
520,032
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity |
$ |
8,568,248 |
|
|
|
|
|
|
|
$ |
6,180,502 |
|
|
|
|
|
|
|
Interest
rate spread |
|
|
|
|
|
|
|
3.52 |
% |
|
|
|
|
|
|
|
3.83 |
% |
Net
interest income and net margin |
|
|
|
$ |
83,048 |
|
|
4.18 |
% |
|
|
|
$ |
62,222 |
|
|
4.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Annualized. |
(2)
Includes amortization of premium and accretion of discounts on investment
securities and loans receivable totaling $525 |
thousand
and $306 thousand, respectively, for the three months ended March 31,
2006, and $31 thousand and $231 thousand, respectively, for the three
months ended March 31, 2005. |
Also
includes the amortization of deferred loan fees totaling $1.6
million and $980 thousand for the three months ended March 31, 2006 and
2005, respectively. |
(3)
Average balances exclude unrealized gains or losses on available for sales
securities. |
(4)
The yields are not presented on a tax-equivalent basis as the effects are
not material. |
(5)
Average balances include nonperforming
loans. |
Analysis
of Changes in Net Interest Margin
Changes
in 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 periods 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.
|
Three
Months Ended March 31, 2006 vs.
2005 |
|
|
|
Changes
Due to |
|
|
|
Volume
(1) |
|
Rates
(1) |
|
(In
thousands) |
INTEREST-EARNING
ASSETS: |
|
|
|
|
|
Short-term
investments |
$ |
79 |
|
$ |
30 |
|
$ |
49 |
Interest
bearing deposits in other banks |
|
2
|
|
|
2
|
|
|
-
|
Securities
purchased under resale agreements |
|
1,347
|
|
|
1,347
|
|
|
-
|
Investment
securities available-for-sale |
|
3,958
|
|
|
2,677
|
|
|
1,281
|
Loans
receivable |
|
46,975
|
|
|
31,064
|
|
|
15,911
|
FHLB
and FRB stock |
|
185
|
|
|
6
|
|
|
179
|
Total
interest and dividend income |
$ |
52,546 |
|
$ |
35,126 |
|
$ |
17,420 |
|
|
|
|
|
|
|
|
|
INTEREST-BEARING
LIABILITIES |
|
|
|
|
|
|
|
|
Checking
accounts |
$ |
693 |
|
$ |
233 |
|
$ |
460 |
Money
market accounts |
|
4,874
|
|
|
2,573
|
|
|
2,301
|
Savings
deposits |
|
147
|
|
|
4
|
|
|
143
|
Time
deposits less than $100,000 |
|
3,970
|
|
|
1,344
|
|
|
2,626
|
Time
deposits $100,000 or greater |
|
12,914
|
|
|
5,231
|
|
|
7,683
|
Federal
funds purchased |
|
1,077
|
|
|
1,052
|
|
|
25
|
FHLB
advances |
|
3,527
|
|
|
(30 |
) |
|
3,557
|
Securities
sold under resale agreements |
|
2,877
|
|
|
2,877
|
|
|
-
|
Long-term
debt |
|
1,641
|
|
|
1,697
|
|
|
(56) |
Total
interest expense |
$ |
31,720 |
|
$ |
14,981 |
|
$ |
16,739 |
CHANGE
IN NET INTEREST INCOME |
$ |
20,826 |
|
$ |
20,145 |
|
$ |
681 |
|
|
|
|
|
|
|
|
|
(1)
Change 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 $3.3 million for the first quarter of 2006, compared
to $4.4 million for the same period in 2005. 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.
Noninterest
Income
Components
of Noninterest Income
|
Three Months Ended March
31, |
|
2006 |
|
2005 |
|
(In
millions) |
Branch
fees |
$ |
2.54 |
|
$ |
1.59 |
Letters
of credit fees and commissions |
|
2.17
|
|
|
2.54
|
Net
gain on investment securities available-for-sale |
|
1.72
|
|
|
0.45
|
Income
from life insurance policies |
|
0.90
|
|
|
0.74
|
Ancillary
loan fees |
|
0.78
|
|
|
0.52
|
Income
from secondary market activities |
|
0.14
|
|
|
0.19
|
Net
gain on sale of other real estate owned |
|
0.09
|
|
|
-
|
Other
operating income |
|
0.55
|
|
|
0.47
|
Total |
$ |
8.89 |
|
$ |
6.50 |
Noninterest
income includes revenues earned from sources other than interest income. These
sources include: service charges and fees on deposit accounts, fees and
commissions generated from trade finance activities and the issuance of letters
of credit, income from secondary market activities, ancillary fees on loans, net
gains on sales of loans, investment securities available-for-sale and other
assets, and other noninterest-related revenues.
Noninterest
income increased 37% to $8.9 million during the three months ended March 31,
2006 from $6.5 million for the same quarter in 2005. This is primarily due to
higher net gain on sales of available-for-sale securities which increased 283%
to $1.7 million for the first quarter of 2006, as compared to $448 thousand for
the same period in 2005. Sales of investment securities during the first quarter
of 2006 provided additional liquidity to sustain the increase in our loan
production activity during the quarter, replacing lower yields on investment
securities with higher yields on loans.
Branch
fees, which represent revenues derived from branch operations, increased 59% to
$2.5 million in the first quarter of 2006 from $1.6 million for the same quarter
in 2005. The increase in branch-related fees can be attributed primarily to
higher revenues from alternative investments offered to customers including
mutual fund and annuity products, as well as growth in wire transfer fee income
and analysis charges on commercial deposit accounts.
Net gain on
sale of other real estate owned (“OREO”) amounted to $88 thousand during the
first quarter of 2006. This represents the gain on sale of an OREO property,
specifically a condominium unit that was held as partial collateral for a
commercial business loan.
Other
noninterest income, which includes insurance commissions and insurance-related
service fees, rental income, and other miscellaneous income, increased 20% to
$561 thousand during the first quarter of 2006, from $469 thousand recorded
during the same quarter of 2005.
Noninterest
Expense
Components
of Noninterest Expense
|
Three Months Ended March
31, |
|
2006 |
|
2005 |
|
|
(In millions) |
Compensation
and employee benefits |
$ |
16.17 |
|
$ |
12.85 |
|
Occupancy
and equipment expense |
|
4.78
|
|
|
3.26
|
|
Deposit-related
expenses |
|
2.01
|
|
|
1.64
|
|
Amortization
of premiums on deposits acquired |
|
1.76
|
|
|
0.60
|
|
Amortization
of investments in affordable housing partnerships |
|
1.26
|
|
|
1.68
|
|
Data
processing |
|
0.76
|
|
|
0.57
|
|
Deposit
insurance premiums and regulatory assessments |
|
0.32
|
|
|
0.22
|
|
Other
operating expenses |
|
9.76
|
|
|
6.90
|
|
Total |
$ |
36.82 |
|
$ |
27.72 |
|
|
|
|
|
|
|
|
Efficiency
Ratio (1) |
|
37% |
|
|
37% |
|
|
|
|
|
|
|
|
(1)
Represents noninterest expense (excluding the amortization of intangibles
and investments in afffordable housing partnerships) divided by the
aggregate of net interest income before provision for loan losses and
noninterest income. |
Noninterest
expense, which is comprised primarily of compensation and employee benefits,
occupancy and other operating expenses increased 33% to $36.8 million during the
first quarter of 2006, from $27.7 million for the same quarter in 2005.
Compensation
and employee benefits increased 26% to $16.2 million during the first quarter of
2006, compared to $12.9 million for the same quarter last year primarily due to
increased staffing levels related to the acquisition of UNB in September 2005.
Moreover, the impact of annual salary adjustments and related cost increases for
existing employees further contributed to the rise in compensation expense and
employee benefits during the first quarter of 2006. The Company also recorded
$520 thousand in compensation expense relating to stock options as a result of
adopting SFAS No. 123(R) effective January 1, 2006. We anticipate compensation
and employee benefit expenses to further increase during the remainder of 2006
as a result of the acquisition of Standard Bank in mid-March 2006.
Occupancy
and
equipment expenses
increased 47% to $4.8 million during the quarter ended March 31, 2006, compared
with $3.3 million during the same period in 2005. The rise in occupancy expenses
can be attributed to the recent relocation and expansion of our corporate
headquarters to Pasadena, California, increasing rent, common area, and
depreciation expenses. Additionally, rent expense attributed to the eleven
branch locations acquired from UNB in September 2005 further contributed to the
increase in occupancy and equipment expense during the first quarter of 2006.
Similar to compensation and employee benefit expenses, we expect occupancy and
equipment expense to further increase during the remainder of 2006 due to
additional rent expense attributed to the six branch locations acquired from
Standard Bank as well as the opening of a new 99 Ranch in-store branch location
during March 2006.
The
amortization of premiums on deposits acquired increased 193% to $1.8 million
during the first quarter of 2006, compared with $603 thousand for the
corresponding quarter of 2005. The increase in amortization expense is due to
additional deposit premiums of $15.0 million recorded in connection with the
acquisition of UNB in September 2005. Premiums on acquired deposits are
amortized over their estimated useful lives.
Deposit-related
expenses increased 23% to $2.0 million during the first quarter of 2006,
compared to $1.6 million for the same quarter last year. Deposit-related
expenses, which represent various business-related expenses paid by the Bank on
behalf of its commercial account customers, are eventually recouped by the Bank
through subsequent account analysis charges to individual customer accounts. The
increase in deposit-related expenses is directly correlated to the growth in the
volume of commercial deposit accounts since the first quarter of
2005.
The
amortization of investments in affordable housing partnerships decreased 25% to
$1.3 million during the quarter ended March 31, 2006, from $1.7 million during
the comparable quarter in 2005. No additional investments in affordable housing
partnerships were purchased during 2005 and 2006 year-to-date. Total investments
in affordable housing partnerships decreased to $29.7 million as of March 31,
2006, compared to $35.8 million as of March 31, 2005.
Data
processing expenses increased 34% to $760 thousand during the first quarter of
2006, compared with $569 thousand for corresponding quarter in 2005. The
increase in data processing expenses is primarily due to increased transaction
volume stemming from overall growth, both organically and through acquisitions.
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 42% to
$9.8 million during the first quarter of 2006, from $6.9 million for the same
quarter in 2005. The increase in other operating expenses is largely due to
additional expenses incurred to support our continued overall expansion.
Additionally, we have amplified our advertising, public relations, and marketing
efforts to enhance our overall image and visibility in the community and in the
industry.
Our
efficiency ratio of 37% for the quarter ended March 31, 2006 remained stable
compared to the corresponding period in 2005. Although the Company has
experienced significant expansion and growth, we have managed to sustain our
operational efficiencies as a result of past and ongoing infrastructure
investments compounded by a general company-wide effort to monitor overall
operating expenses.
Provision
for Income Taxes
The
provision for income taxes increased 50% to $19.7 million for the first quarter
of 2006, compared with $13.1 million for the same quarter in 2005. The increase
in the provision for income taxes is primarily attributable to a 41% increase in
pretax earnings during the first quarter of 2006. The provision for income taxes
for the first quarter of 2006 also reflects the utilization of affordable
housing tax credits totaling $1.2 million, compared to $1.4 million utilized
during the first quarter of 2005. The first
quarter 2006 provision reflects an effective tax rate of 38.1%, compared with
35.8% for the corresponding period in 2005.
As
previously reported, the California Franchise Tax Board announced that it is
taking the position that certain tax deductions related to regulated investment
companies will be disallowed pursuant to California Senate Bill 614 and
California Assembly Bill 1601, which were signed into law in the fourth quarter
of 2003. East West Securities Company, Inc., a regulated investment company
formed and funded in July 2000 to raise capital in an efficient and economical
manner was dissolved on December 30, 2002 as a result of, among other reasons,
proposed legislation to change the tax treatments of RICs. The Fund provided
state tax benefits beginning in 2000 until the end of 2002, when the RIC was
officially dissolved. While the Company’s management continues to believe that
the tax benefits realized in previous years were appropriate and fully
defensible under the existing tax codes at that time, the Company has deemed it
prudent to participate in the voluntary compliance initiative offered by the
State of California to avoid certain potential penalties should the FTB choose
to litigate its announced position about the tax treatment of RICs for periods
prior to enactment of the legislation described above and should the FTB be
successful in that litigation.
Pursuant
to the VCI program, we filed amended California income tax returns on April 15,
2004 for all affected years and paid the resulting taxes and interest due to the
FTB. This amounted to an aggregate payment of $14.2 million for tax years 2000,
2001, and 2002. We continue to believe that the tax deductions are appropriate
and, as such, we have also filed refund claims for the amounts paid with the
amended returns. These refund claims are reflected as assets in the Company’s
consolidated financial statements. As a result of these actions—amending our
California income tax returns and subsequent related filing of refund claims—we
retain our potential exposure for assertion of an accuracy-related penalty
should the FTB prevail in its position, in addition to our risk of not being
successful in our refund claim for taxes and interest. Our potential exposure to
all other penalties, however, has been eliminated through this course of action.
The
Franchise Tax Board is currently in the process of reviewing and assessing our
refund claims for taxes and interest for tax years 2000 through 2002. Management
is continuing to pursue these refund claims, to monitor developments in the law
in this area, and to monitor the status of tax claims with respect to other
registered investment companies.
Operating
Segment Results
The
Company has identified four principal operating segments for purposes of
management reporting: retail banking, commercial lending, treasury, and
residential lending. 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 Bank’s branch network, certain designated branches have
responsibility for generating commercial deposits and loans. The commercial
lending segment, which includes commercial real estate, primarily generates
commercial loans and deposits through the efforts of commercial lending officers
located in the Bank’s northern and southern California production offices. The
treasury department’s primary focus is managing the Bank’s investments,
liquidity, and interest rate risk; the residential lending segment is mainly
responsible for the Bank’s portfolio of single family and multifamily
residential loans. The Company’s remaining centralized functions and
eliminations of inter-segment amounts have been aggregated and included in
“Other.”
Future
changes in the Company’s management structure or reporting methodologies may
result in changes in the measurement of operating segment results. Results for
prior periods have been restated for comparability for changes in management
structure or reporting methodologies. Specifically, an adjustment was made to
reallocate the credit provided for the Company’s capital to the treasury segment
from the “Other” category. The adjustment resulted in an increase in the
treasury segment’s pretax profit of $ 6.5 million and $ 2.7 million
for the three months ended March 31, 2006 and 2005 respectively. For more
information about our segments, including information about the underlying
accounting and reporting process, please see Note 8 to the Company’s condensed
consolidated financial statements presented elsewhere herein.
Retail
Banking Segment
The retail
banking segment’s pre-tax income for the three months ended March 31, 2006
increased 170% to $25.9 million, compared to $9.6 million for the same period in
2005. The increase in pre-tax income is largely attributable to the 64% increase
in net interest income to $44.6 million during the first quarter of 2006,
compared to $27.1 million for the same quarter in 2005. The increase in net
interest income is primarily due to our overall growth both organically and
through acquisitions. The acquisition of UNB in September 2005 added eleven new
locations to our expanding branch network as well as several thousand new
customers to our existing customer base.
Noninterest income
for this segment increased $1.8 million, or 54% to $5.1 million for the quarter
ended March 31, 2006, compared to $3.3 million recorded during the same period
in 2005. The increase in noninterest income is primarily due to increased fee
income related to both loan origination and deposit gathering activities, as
well as higher fees earned from alternative investment product offerings at the
branches.
Noninterest
expense for this segment increased 34% to $19.7 million during the first quarter
of 2006, compared with $14.7 million recorded during the first quarter of 2005.
The increase in noninterest expense is primarily due to a 35% increase in
compensation and employee benefits to $10.2 million during the quarter ended
March 31, 2006, from $7.5 million for the same quarter in 2005. The increase in
compensation and employee benefits can be attributed to higher staffing levels
due to the acquisition of UNB as well as the addition of relationship officers
and operational personnel throughout the past year. Occupancy expenses also
increased 40% to $3.1 million during the 2006 first quarter, from $2.2 million
during the first quarter of 2005. The notable increase in occupancy expenses is
due primarily to increased expenses associated with the eleven additional branch
locations from UNB. Further contributing to the increase in noninterest expense
is a 34% increase in other expenses to $3.8 million for the three months ended
March 31, 2006, compared to $2.9 million for the same period in 2005. The
increase in other expenses is due primarily to higher commercial deposit related
expenses which can be correlated to the growth in the volume of commercial
deposit accounts during the past year.
Commercial
Lending Segment
The
commercial lending segment’s pre-tax income increased 234% to $21.9 million
during the quarter ended March 31, 2006, compared with $17.7 million for the
same period in 2005. The primary driver of the increase in pre-tax income for
this segment is a 23% increase in net interest income to $25.8 million during
the first quarter of 2006, from $21.0 million for the comparable quarter in
2005. The increase in net interest income is primarily due to the notable growth
of our commercial loan portfolio, which includes commercial real estate,
construction, and commercial business loans, during the first quarter of 2006,
relative to the same period in the prior year. Specifically, the average
aggregate balance of all commercial loan categories grew 40% during the first
quarter of 2006, compared with the same period in 2005.
Noninterest income
for this segment increased $1.2 million or 21% to $6.8 million during the first
quarter of 2006, compared to the $5.6 million recorded in the same quarter of
2005. The increase in noninterest income is primarily due to higher loan fees
collected as a result of the growth in loan origination volume during the
quarter ended March 31, 2006, relative to the same period in 2005.
Noninterest
expense also increased 22% to $7.6 million during the first quarter of 2006,
from $6.2 million during the same quarter last year. The increase in noninterest
expense is largely a result of higher compensation and employee benefits which
increased 29% to $5.6 million during the first quarter of 2006, from $4.3
million during the corresponding quarter in 2005. The increase in compensation
and employee benefits is a result of increasing staffing levels due to the
acquisition of UNB as well as the addition of relationship officers and
operational personnel to support the continuing growth of the Bank.
Treasury
Segment
The treasury
segment’s pre-tax income increased 6% to $8.3 million during the first quarter
of 2006, compared to $7.9 million for the same quarter in 2005. Net interest
income decreased 17% to $6.5 million during the quarter ended March 31, 2006,
from $7.8 million during the same quarter in 2005 largely as a result of
increased market rates paid on borrowings relative to the interest earned on
investment securities.
In contrast, there
was a significant increase in noninterest income for this segment during the
first quarter of 2006. Specifically, noninterest income increased 238% to $1.7
million during the quarter ended March 31, 2006, compared to only $507 thousand
for the corresponding period in 2005. The increase in noninterest income can be
attributed almost entirely to net gains on sales of investment securities,
primarily U.S. Government sponsored enterprise mortgaged-backed securities and
equity securities.
Noninterest expense
also increased 135% to $562 thousand during the first quarter of 2006, from $239
thousand during the same quarter in 2005. The increase in noninterest expense is
primarily due to guarantee fees paid to FNMA in connection with multifamily loan
securitization transactions during 2005, and to a lesser degree, higher
compensation expense resulting from increased staffing levels.
Residential
Lending Segment
The
residential lending segment’s pre-tax income decreased 42% to $2.4 million
during the first quarter of 2006, from $4.1 million during the same quarter in
2005. The decrease in pre-tax income is partly due to the decrease in net
interest income for this segment, which declined 27% to $3.9 million during the
first quarter of 2006, compared with $5.3 million for the corresponding quarter
in 2005. The decrease in net interest income reflects the highly competitive
market environment for residential single family and multifamily loans.
Noninterest income
for this segment also decreased during the first quarter of 2006 to $738
thousand, a 26% decline from total noninterest income of $993 thousand recorded
during the first quarter of 2005. The decrease in noninterest income is
primarily due to the increase in fees waived on single family and multifamily
loan products resulting from competitive market pressures.
Noninterest expense
for this segment remained flat at $1.4 million for the three months ended March
31, 2006 and 2005.
Balance
Sheet Analysis
Our total
assets increased $1.00 billion, or 12%, to $9.28 billion, as of March 31, 2006,
relative to total assets of $8.28 billion at December 31, 2005. The increase in
total assets resulted primarily from increases in net loans of $852.2 million,
securities purchased under resale agreements of $50.0 million, and goodwill of
$100.9 million. The increase in total assets was largely funded by increases in
deposits of $765.1 million and FHLB advances of $121.3 million.
Investment
Securities Available-for-Sale
Total
investment securities available-for-sale decreased 2% to $850.0 million as of
March 31, 2006, compared with $869.8 million at December 31, 2005. Total
repayments/maturities and proceeds from sales of available-for-sale securities
amounted to $195.2 million and $105.4 million, respectively, during the three
months ended March 31, 2006. Proceeds from repayments, maturities, sales, and
redemptions were applied towards additional investment securities purchases
totaling $282.3 million as well as funding a portion of loan originations made
during the first quarter of 2006. We recorded net gains totaling $1.7 million on
sales of available-for-sale securities during the first quarter of 2006.
The
Company performs regular impairment analyses on the investment securities
available-for-sale portfolio. If the Company determines that a decline in fair
value is other-than-than temporary, an impairment writedown is recognized in
current earnings. Other-than-temporary declines in fair value are assessed based
on the duration the security has been in a continuous unrealized loss position,
the severity of the decline in value, the rating of the security and our ability
and intent on holding the securities until the fair values recover.
The
increase in net unrealized losses in our investment securities
available-for-sale portfolio of $3.2 million for the three-month period ended
March 31, 2006 is largely a result of market interest rate fluctuations.
Specifically, the increase in unrealized loss was largely due to a gross
unrealized loss in U.S. Government sponsored enterprise debt securities of $5.9
million and a gross unrealized loss in U.S. Government sponsored enterprise
mortgage-backed securities of $2.5 million at March 31, 2006. The issuers of
these securities have not, to our knowledge, established any cause for default
on these securities and the various rating agencies have reaffirmed these
securities’ long term investment grade status at March 31, 2006. The Company has
the ability and the intention to hold these securities until their fair values
recover. As such, management does not believe that there are any securities,
other than those previously identified in prior periods, that are
other-than-temporarily impaired, and therefore, no impairment charges as of
March 31, 2006 are warranted.
The following
table sets forth the amortized cost and the estimated fair values of investment
securities available-for-sale as of March 31, 2006 and December 31,
2005:
|
|
|
|
|
|
|
|
|
(In
thousands) |
As
of March 31, 2006 |
|
|
|
|
|
|
|
U.S.
Treasury securities |
$ |
2,483 |
|
$ |
- |
|
$ |
(4 |
) |
$ |
2,479 |
U.S.
Government agency securities and U.S. Government |
|
|
|
|
|
|
|
|
|
|
|
sponsored
enterprise debt securities |
|
710,450
|
|
|
-
|
|
|
(5,876 |
) |
|
704,574
|
U.S.
Government sponsored enterprise mortgage-backed securities |
|
110,897
|
|
|
296
|
|
|
(2,493 |
) |
|
108,700
|
Other
mortgage-backed securities |
|
10,826
|
|
|
-
|
|
|
(29 |
) |
|
10,797
|
Corporate
debt securities |
|
18,000
|
|
|
42
|
|
|
(248 |
) |
|
17,794
|
U.S.
Government sponsored enterprise equity securities |
|
4,648
|
|
|
22
|
|
|
-
|
|
|
4,670
|
Residual
interest in securitized loans |
|
-
|
|
|
1,004
|
|
|
-
|
|
|
1,004
|
Total
investment securities available-for-sale |
$ |
857,304 |
|
$ |
1,364 |
|
$ |
(8,650 |
) |
$ |
850,018 |
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities |
$ |
1,497 |
|
$ |
- |
|
$ |
- |
|
$ |
1,497 |
U.S.
Government agency securities and U.S. Government |
|
|
|
|
|
|
|
|
|
|
|
sponsored
enterprise debt securities |
|
615,105
|
|
|
-
|
|
|
(4,868 |
) |
|
610,237
|
U.S.
Government sponsored enterprise mortgage-backed securities |
|
189,147
|
|
|
2,526
|
|
|
(1,758 |
) |
|
189,915
|
Other
mortgage-backed securities |
|
14,119
|
|
|
-
|
|
|
(15 |
) |
|
14,104
|
Corporate
debt securities |
|
17,998
|
|
|
41
|
|
|
(227 |
) |
|
17,812
|
U.S.
Government sponsored enterprise equity securities |
|
36,103
|
|
|
-
|
|
|
(235 |
) |
|
35,868
|
Residual
interest in securitized loans |
|
-
|
|
|
404
|
|
|
-
|
|
|
404
|
Total
investment securities available-for-sale |
$ |
873,969 |
|
$ |
2,971 |
|
$ |
(7,103 |
) |
$ |
869,837 |
Loans
We offer
a broad range of products designed to meet the credit needs of our borrowers.
Our lending activities consist of residential single family loans, residential
multifamily loans, commercial real estate loans, construction loans, commercial
business loans, trade finance loans, and consumer loans. Loan growth continued
to be strong during the first three months of 2006. Total gross loans increased
$862.8 million, or 13% to $7.66 billion at March 31, 2006. Excluding the impact
of the $495.1 million in gross loans acquired from Standard Bank, organic loan
growth for the first quarter of 2006 amounted to $367.7 million, or an increase
of 5% (22% annualized).
The
growth in loans, excluding the impact of the Standard Bank acquisition, is
comprised of net increases in single family loans of $92.7 million or 18%,
multifamily loans of $53.3 million or 4%, commercial real estate loans of $68.0
million or 2%, construction loans of $107.7 million or 17%, and commercial
business loans of $75.3 million or 12%. These increases are partially offset by
net decreases in trade finance loans of $11.4 million or 5% and consumer loans,
including home equity lines of credit, of $17.8 million or 9%.
The following
table sets forth the composition of the loan portfolio as of the dates
indicated:
|
March
31, 2006 |
|
December
31, 2005 |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
(Dollars
in thousands) |
Real
estate loans: |
|
|
|
|
|
|
|
Residential,
single family |
$ |
648,415 |
|
8.5 |
% |
$ |
509,151 |
|
|
7.5 |
% |
Residential,
multifamily |
|
1,597,442
|
|
20.8 |
% |
|
1,239,836
|
|
|
18.3 |
% |
Commercial
and industrial real estate |
|
3,512,886
|
|
45.9 |
% |
|
3,321,520
|
|
|
48.9 |
% |
Construction |
|
767,925
|
|
10.0 |
% |
|
640,654
|
|
|
9.4 |
% |
Total
real estate loans |
|
6,526,668
|
|
85.2 |
% |
|
5,711,161
|
|
|
84.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Other
loans: |
|
|
|
|
|
|
|
|
|
|
|
Commercial
business |
|
718,833
|
|
9.4 |
% |
|
643,296
|
|
|
9.5 |
% |
Trade
finance |
|
219,350
|
|
2.9 |
% |
|
230,771
|
|
|
3.4 |
% |
Automobile |
|
9,883
|
|
0.1 |
% |
|
8,543
|
|
|
0.1 |
% |
Other
consumer |
|
182,135
|
|
2.4 |
% |
|
200,254
|
|
|
2.9 |
% |
Total
other loans |
|
1,130,201
|
|
14.8 |
% |
|
1,082,864
|
|
|
15.9 |
% |
Total
gross loans |
|
7,656,869
|
|
100.0 |
% |
|
6,794,025
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
fees, premiums and discounts, net |
|
(4,848 |
) |
|
|
|
(1,070 |
) |
|
|
|
Allowance
for loan losses |
|
(75,493 |
) |
|
|
|
(68,635 |
) |
|
|
|
Loan
receivable, net |
$ |
7,576,528 |
|
|
|
$ |
6,724,320 |
|
|
|
|
Nonperforming
Assets
Nonperforming
assets are comprised of nonaccrual loans, loans past due 90 days or more but not
on nonaccrual, restructured loans and other real estate owned, net.
Nonperforming assets totaled $13.8 million or 0.15% of total assets at March 31,
2006 and $30.1 million or 0.36% of total assets at December 31, 2005. Nonaccrual
loans amounted to $11.0 million at March 31, 2006, compared with $24.1 million
at year-end 2005. Loans totaling $5.8 million were placed on nonaccrual status
during the first quarter of 2006. These additions to nonaccrual loans were
offset by $8.3 million in payoffs and principal paydowns, $7.8 million in loans
brought current, and one loan transferred to other real estate owned. Additions
to nonaccrual loans during the first quarter of 2006 were comprised of $2.0
million in single family loans, a $437 thousand multifamily loan, $2.4 million
in commercial real estate loans, a $186 thousand construction loan, a $750
thousand trade finance loan, a $7 thousand SBA loan, and a $6 thousand lease
financing loan.
There
were no loans past due 90 days or more but not on nonaccrual status at March 31,
2006. This compares to $5.7 million in such loans at December 31, 2005
representing four trade finance loans that were fully guaranteed by the
Export-Import Bank of United States. During the first quarter of 2006, three of
these loans totaling $2.2 million were paid in full through claims to the
Export-Import Bank of the United States. The other loan amounting to $3.4
million was brought current during the quarter ended March 31,
2006.
Restructured
loans represent loans that have had their original terms modified. There were no
restructured loans as of March 31, 2006 and December 31, 2005.
Other
real estate owned includes properties acquired through foreclosure or through
full or partial satisfaction of loans. We had one OREO property at March 31,
2006 with a carrying value of $2.8 million representing an industrial park
property held as collateral for a commercial real estate loan. In comparison, we
had one OREO property with a carrying value of $299 thousand at December 31,
2005, representing a condominium unit that was held as partial collateral for a
commercial business loan. This OREO property was sold in March 2006 resulting in
a gain on sale of $88 thousand.
The following
table sets forth information regarding nonaccrual loans, loans past due 90 days
or more but not on nonaccrual, restructured loans and other real estate owned as
of the dates indicated:
|
|
|
|
|
|
(Dollars
in thousands) |
|
|
|
|
|
Nonaccrual
loans |
$ |
10,988 |
|
$ |
24,149 |
|
Loans
past due 90 days or more but not on nonaccrual |
|
-
|
|
|
5,670
|
|
Total
nonperforming loans |
|
10,988
|
|
|
29,819
|
|
|
|
|
|
|
|
|
Restructured
loans |
|
-
|
|
|
-
|
|
Other
real estate owned, net |
|
2,786
|
|
|
299
|
|
Total
nonperforming assets |
$ |
13,774 |
|
$ |
30,118 |
|
|
|
|
|
|
|
|
Total
nonperforming assets to total assets |
|
0.15
|
% |
|
0.36
|
% |
Allowance
for loan losses to nonperforming loans |
|
687.05
|
% |
|
230.17
|
% |
Nonperforming
loans to total gross loans |
|
0.14
|
% |
|
0.44
|
% |
We
evaluate loan impairment according to the provisions of SFAS No. 114,
Accounting
by Creditors for Impairment of a Loan, as
amended. Under SFAS No. 114, loans are considered impaired when it is probable
that we will be unable to collect all amounts due according to the contractual
terms of the loan agreement, including scheduled interest payments. 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. If the measure of the impaired loan
is less than the recorded investment in the loan, the deficiency will be charged
off against the allowance for loan losses.
At March
31, 2006, we classified $11.0 million of our loans as impaired, compared with
$24.1 million at December 31, 2005. Specific reserves on impaired loans amounted
to $444 thousand at March 31, 2006, compared with $1.3 million at December 31,
2005. Our average recorded investment in impaired loans for the three months
ended March 31, 2006 and 2005 were $11.0 million and $4.1 million, respectively.
During the three months ended March 31, 2006 and 2005, gross interest income
that would have been recorded on impaired loans, had they performed in
accordance with their original terms, totaled $245 thousand and $60 thousand,
respectively. Of this amount, actual interest recognized on impaired loans, on a
cash basis, was $78 thousand and $12 thousand, respectively.
Allowance
for Loan Losses
We are
committed to maintaining the allowance for loan losses at a level that is
considered to be commensurate with estimated and known risks in the portfolio.
Although the adequacy of the allowance is reviewed quarterly, our management
performs an ongoing assessment of the risks inherent in the portfolio. While we
believe that the allowance for loan losses is adequate at March 31, 2006, future
additions to the allowance will be subject to continuing evaluation of estimated
and known, as well as inherent, risks in the loan portfolio.
The
allowance for loan losses is increased by the provision for loan losses which is
charged against current period operating results, and is decreased by the amount
of net chargeoffs during the period. At March 31, 2006, the allowance for loan
losses amounted to $75.5 million, or .99% of total loans, compared with $68.6
million, or 1.01% of total loans, at December 31, 2005, and $53.9 million, or
1.00% of total loans, at March 31, 2005. The $6.9 million increase in the
allowance for loan losses at March 31, 2006, from year-end 2005, is comprised of
$3.3 million in additional loss provisions, and $4.1 million in loss reserves
acquired from Standard Bank, and $46 thousand in net recoveries recorded during
the period. Additionally, we reclassified $605 thousand from the allowance for
loan losses to other liabilities during the first quarter of 2006. This amount
represents additional loss allowances required for unfunded loan commitments and
off-balance sheet credit exposures related primarily to our trade finance
lending activities. The allowance for unfunded loan commitments and off-balance
sheet credit exposures is included in accrued expenses and other liabilities and
amounted to $11.7 million at March 31, 2006.
The
provision for loan losses of $3.3 million for the first quarter of 2006
represents a 24% decrease from the $4.4 million in loss provisions charged
during the first quarter of 2005. First quarter 2006 net recoveries amounted to
$46 thousand and represent less than 0.01% of average loans outstanding for the
three months ended March 31, 2006. This compares to net chargeoffs of $765
thousand or 0.01% of average loans outstanding for the same period in 2005. We
continue to record loss provisions to compensate for both the sustained growth
of our loan portfolio and our continued lending focus on increasing our
portfolio of commercial real estate, commercial business, including trade
finance, and construction loans.
The following
table summarizes activity in the allowance for loan losses for the three months
ended March 31, 2006 and 2005:
|
Three Months Ended March
31, |
|
2006 |
|
2005 |
|
(Dollars
in thousands) |
|
|
|
|
Allowance
balance, beginning of period |
$ |
68,635 |
|
$ |
50,884 |
Allowance
from acquisition |
|
4,084
|
|
|
-
|
Allowance
for unfunded loan commitments |
|
|
|
|
|
and
letters of credit |
|
(605) |
|
|
(621) |
Provision
for loan losses |
|
3,333
|
|
|
4,370
|
Chargeoffs: |
|
|
|
|
|
Commercial
business |
|
-
|
|
|
820
|
Automobile |
|
-
|
|
|
44
|
Other
consumer |
|
1
|
|
|
-
|
Total
chargeoffs |
|
1
|
|
|
864
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
Residential,
single family |
|
-
|
|
|
20
|
Commercial
business |
|
45
|
|
|
55
|
Automobile |
|
2
|
|
|
24
|
Total
recoveries |
|
47
|
|
|
99
|
Net
chargeoffs |
|
(46) |
|
|
765
|
|
|
|
|
|
|
Allowance
balance, end of period |
$ |
75,493 |
|
$ |
53,868 |
Average
loans outstanding |
$ |
7,078,805 |
|
$ |
5,236,534 |
Total
gross loans outstanding, end of period |
$ |
7,656,869 |
|
$ |
5,391,644 |
Annualized
net chargeoffs to average loans |
|
0.00% |
|
|
0.06% |
Allowance
for loan losses to total gross loans |
|
|
|
|
|
at
the end of period |
|
0.99% |
|
|
1.00% |
Prior to
the third quarter of 2005, we utilized two primary methodologies to determine
the overall adequacy of the allowance - the classification migration model and
the individual loan review analysis methodology. The results from these two
methodologies were compared to various ancillary analyses, including historical
loss analyses, peer group comparisons, and analyses based on the federal
regulatory interagency policy for loan and lease losses to determine an overall
allowance requirement amount. Largely in response to the significant growth of
the Bank’s loan portfolio in the past couple of years, we refined the
classification migration analysis in the third quarter of 2005 to take into
consideration the increasing diversity and risk profiles of loans within the
same loan categories. As a result of our enhanced approach to the classification
migration analysis, management has determined that the individual loan review
analysis methodology and separate historical loss analyses are no longer
necessary in determining the overall adequacy of the allowance since the results
of these analyses have been incorporated into the enhanced migration
model.
Under the
classification migration approach implemented prior to the third quarter of
2005, we utilized only six risk-rated loan pools. This now has been expanded to
eighteen categories. Automobile loans and homogeneous loans, which are
predominantly consumer-related credits (i.e. home equity lines, overdraft
protection, and credit card loans), remain unchanged under the enhanced model.
All other categories (i.e. single family residential, multifamily residential,
commercial real estate, construction, and commercial business) have been broken
down into additional subcategories. For example, instead of one commercial real
estate loan category, this category has been segmented into six subcategories
based on industry sector, namely, retail, office, industrial, land, hotel/motel,
and other miscellaneous. By sectionalizing loan categories into smaller
subgroups, we are better able to isolate and identify the risk associated with
each subgroup based on historical loss trends.
In
addition to increasing the number of loan categories, we have also expanded the
loss horizon from five to thirteen years in order to better capture the Bank’s
historical loss trends to make the analysis more complete and accurate. The
thirteen-year loss horizon was selected because this represents the timeframe
when the Bank started to monitor and track losses incurred in the loan
portfolio. We continue to utilize minimum loss rates as a self-correcting
mechanism to better reflect the loss potential for certain categories that have
little or no historical losses. Similar to the previous periods, minimum loss
rates are established based on relative risk profiles for certain loan
categories. However, in contrast to previous periods, the current minimum loss
rates utilized under the enhanced methodology more closely reflect historical
loss rates than previously utilized minimum loss rates as a result of the
expanded loss horizon. For example, minimum loss rates on construction loans
will be higher than minimum loss rates established for commercial real estate
loans due to their riskier credit profiles. Even within various subgroups in a
broad loan category such as commercial real estate, minimum loss rates are also
established based on the relative risk profile of various industry sectors.
Commercial real estate loans in the retail sector, for example, will have a
lower minimum loss rate than commercial real estate loans in the hotel/motel
sector. The allowance requirement for each pool continues to be based on the
higher of historical loss factors or established minimum loss rates for each
classification category (i.e. pass, special mention, substandard, and doubtful).
Besides
quantitative adjustments, the enhanced classification migration methodology also
utilizes qualitative adjustments which were previously considered in conjunction
with the individual loan review analysis methodology. These qualitative
adjustments include, but are not limited to, credit concentrations, delinquency,
non-accrual and problem loan trends, qualification of lending management and
staff, and quality of the loan review system. Qualitative adjustments can either
be positive or negative, and generally range from -2% to 5%. Total net
qualitative adjustments for each loan pool are reflected as a percent adjustment
and are calculated on top of the required allowance amount based on historical
losses or minimum loss rates. By incorporating various qualitative adjustments
into the migration methodology, we have essentially integrated the principles of
the individual loan review analysis methodology.
Previously,
we used a 10% estimation risk factor to compensate for the modeling risk
associated with the classification migration and individual loan review analysis
models. Additionally, we also used a 5% economic risk factor in consideration of
the tenuous state of the national economy, recent corporate scandals, continuing
geopolitical instability in the Middle East, and the unfavorable impact of Fed
rate increases on consumer cash flows. With the enhanced migration model, both
the estimation and economic risk factors are included in the qualitative
adjustments for each loan category. Although a certain degree of subjectivity is
still inevitable in determining the adequacy of the loan loss allowance, it is
management’s opinion that the new expanded classification migration method is
more accurate in assessing the allowance requirement for each loan
subcategory.
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:
|
March
31, 2006 |
|
December
31, 2005 |
|
|
Amount |
|
% |
|
Amount |
|
% |
|
|
(Dollars
in thousands) |
Residential,
single family |
$ |
2,249 |
|
|
8.5 |
% |
$ |
1,401 |
|
|
7.5 |
% |
Residential,
multifamily |
|
6,192
|
|
|
20.8 |
% |
|
5,152
|
|
|
18.3 |
% |
Commercial
and industrial real estate |
|
22,757
|
|
|
45.9 |
% |
|
22,241
|
|
|
48.9 |
% |
Construction |
|
13,363
|
|
|
10.0 |
% |
|
10,751
|
|
|
9.4 |
% |
Commercial
business |
|
15,333
|
|
|
9.4 |
% |
|
13,452
|
|
|
9.5 |
% |
Trade
finance |
|
14,747
|
|
|
2.9 |
% |
|
14,680
|
|
|
3.4 |
% |
Automobile |
|
238
|
|
|
0.1 |
% |
|
205
|
|
|
0.1 |
% |
Other
consumer |
|
614
|
|
|
2.4 |
% |
|
753
|
|
|
2.9 |
% |
Total |
$ |
75,493 |
|
|
100.0 |
% |
$ |
68,635 |
|
|
100.0 |
% |
Loss
reserves on single family loans increased $848 thousand, or 61%, to $2.2 million
due primarily to a 27% increase in the volume of single family loans at March
31, 2006 in comparison to year-end 2005 levels. Moreover, criticized (i.e. rated
“special mention”) and classified (i.e. rated “substandard” and “doubtful”)
single family loans amounted to $114 thousand and $2.9 million, respectively, at
March 31, 2006. All criticized and classified single family loans at March 31,
2006 were assumed through the acquisition of Standard Bank in mid-March 2006. In
comparison, there were no criticized or classified single family loans at
December 31, 2005.
Loss
reserves on multifamily loans increased $1.0 million, or 20%, to $6.2 million at
March 31, 2006 primarily due to a 29% increase in the volume of multifamily
loans at March 31, 2006 from year-end 2005 levels. Further contributing to the
increase in loss allowances on multifamily loans is an increase in substandard
loans to $2.8 million at March 31, 2006, compared to $2.0 million at December
31, 2005. Partially offsetting these factors is a decrease in special mention
loans in this category to $2.0 million at March 31, 2006, compared to $3.7
million at year-end 2005.
Loss
reserves on commercial real estate loans increased $516 thousand, or 2%, to
$22.8 million at March 31, 2006 due primarily to a 6% increase in the volume of
loans in this loan category relative to year-end 2005. Further contributing to
the increase in loss allowances for this loan category is a $6.7 million
increase in substandard commercial real estate loans, relative to year-end 2005,
with the majority of the increase coming from the hotel sector and, to a much
lesser degree, from the commercial retail and industrial sectors. Partially
offsetting these factors is a $5.1 million decrease in commercial real estate
loans rated special mention, relative to December 31, 2005, with notable
decreases in the land, single purpose and commercial office
sectors.
Loss
reserves on construction loans increased $2.6 million, or 24%, to $13.4 million
at March 31, 2006 primarily due to a 20% increase in the volume of loans in this
category when compared to December 31, 2005. Furthermore, residential
construction loans rated “substandard” increased to $7.6 million at March 31,
2006, compared to only $2.5 million at December 31, 2005. One substandard
residential construction loan amounting to $3.4 million was inherited from the
acquisition of Standard Bank in March 2006. In contrast, there were no
residential construction loans rated “special mention” at March 31, 2006,
representing a $5.0 million decrease from year-end 2005. There were no
criticized or classified construction loans on commercial properties at March
31, 2006 and December 31, 2005. Residential construction loans represented 63%
of the total construction loan portfolio at March 31, 2006, with the remaining
37% comprised of commercial construction loans.
Loss
reserves on commercial business loans increased $1.9 million, or 14%, to $15.3
million at March 31, 2006 primarily due to a 12% increase in the volume of loans
in this category relative to year-end 2005. Furthermore, substandard commercial
business loans increased to $13.4 million at March 31, 2006, compared to $8.3
million at year-end 2005. This is partially offset by a decrease in commercial
business loans rated “special mention” to $2.4 million at March 31, 2006,
compared with $5.1 million at December 31, 2005.
Loss
reserves on trade finance loans remained relatively flat, increasing by only $67
thousand, or less than 1%, to $14.7 million at March 31, 2006 primarily due to
an increase in classified trade finance loans. Specifically, trade finance loans
rated “substandard” increased to $7.7 million at March 31, 2006, from $1.3
million at December 31, 2005. Almost offsetting the entire impact of additional
classified assets are the following factors: (1) a 5% decrease in the volume of
loans in this category relative to year-end 2005; (2) a decrease in the
historical loss rate in this loan category to 3.53% at March 31, 2006, compared
to 3.75% at December 31, 2005; (3) a $2.0 million decrease in trade finance
loans rated “special mention;” and (4) a $1.2 million decrease in specific
allowances related to one loan.
Loss
reserves on automobile loans increased $33 thousand, or 16%, to $238 thousand as
of March 31, 2006, primarily reflecting the 16% increase in the volume of loans
in this category at March 31, 2006 relative to December 31, 2005.
Loss
reserves on consumer loans decreased $139 thousand, or 18%, to $614 thousand as
of March 31, 2006, primarily due to the 8% decrease in the volume of consumer
loans at March 31, 2006 relative to year-end 2005. Consumer loans are comprised
predominantly of home equity loans and home equity lines of credit, and to a
lesser extent, credit card and overdraft protection lines.
Deposits
Deposits
increased 12% to $7.02 billion at March 31, 2006, from $6.26 billion at December
31, 2005, largely due to $728.5 million in deposits acquired from Standard Bank.
Deposit growth was comprised of increases in time deposits of $439.4 million or
14%, money market accounts of $142.7 million or 15%, savings accounts of $125.6
million or 38%, and noninterest-bearing demand deposits of $57.7 million or 4%.
These increases were partially offset by a decrease in interest-bearing checking
accounts of $284 thousand, representing less than 1%. The acquisition of
Standard Bank accounted for the large increase in time deposits, with their time
deposit base comprising 74% of their total deposit portfolio. Core deposits, or
non-time deposit accounts, amounted to $3.44 billion at March 31, 2006,
representing 49% of total deposits, with time deposits representing the
remaining 51%. This is comparable to the 50% core deposit ratio at year-end
2005.
The following
table sets forth the composition of the deposit portfolio as of the dates
indicated:
|
|
|
|
|
(In
thousands) |
|
|
|
|
Demand
deposits (noninterest-bearing) |
$ |
1,389,675 |
|
$ |
1,331,992 |
Checking
accounts (interest-bearing) |
|
472,327
|
|
|
472,611
|
Money
market accounts |
|
1,121,378
|
|
|
978,678
|
Savings
deposits |
|
452,428
|
|
|
326,806
|
Total
core deposits |
|
3,435,808
|
|
|
3,110,087
|
Time
deposits: |
|
|
|
|
|
Less
than $100,000 |
|
1,165,273
|
|
|
927,793
|
$100,000
or greater |
|
2,422,595
|
|
|
2,220,707
|
Total
time deposits |
|
3,587,868
|
|
|
3,148,500
|
Total
deposits |
$ |
7,023,676 |
|
$ |
6,258,587 |
Borrowings
We
utilize a combination of short-term and long-term borrowings to manage our
liquidity position. Federal funds purchased generally mature within one to three
business days from the transaction date. At March 31, 2006, federal funds
purchased amounted to $5.5 million, a 94% decrease from the $91.5 million
balance at December 31, 2005. The decrease in federal funds purchased can be
attributed to the replacement of this funding source with FHLB advances which
had more attractive market rates during the first quarter of 2006. FHLB advances
increased 20% to $739.0 million as of March 31, 2006, compared to $617.7 million
at December 31, 2005. A large portion of outstanding FHLB advances at March 31,
2006 totaling $345.0 million represents overnight advances, compared to $280.0
million as of December 31, 2005. During the first quarter of 2006, we assumed
$70.0 million in term FHLB advances from Standard Bank with original maturity
terms ranging from 15 months to 10 years and fixed interest rates ranging from
4.01% to 5.71%. Additionally, during the quarter ended March 31, 2006, we
entered into $50.0 million in additional term FHLB advances with 3-year maturity
terms at a fixed rate of 4.66%. These advances were entered into in connection
with our community reinvestment initiatives.
In
addition to federal funds purchased and FHLB advances, we have outstanding
securities sold under repurchase agreements totaling $325.0 million at March 31,
2006 and December 31, 2005. Repurchase agreements are accounted for as
collateralized financing transactions and recorded at the amounts at which the
securities were sold. The terms of these repurchase agreements range from seven
to ten years. The rates are all initially floating rate for the first one to
three years, ranging from the three-month Libor minus 80 basis points to the
three-month Libor minus 125 basis points. Thereafter, the rates are fixed for
the remainder of the term, with interest rates ranging from 4.075% to 4.55%.
As of March
31, 2006, long-term debt totaled $184.0 million, compared to $153.1 million at
December 31, 2005. Long-term debt is comprised of subordinated debt and junior
subordinated debt issued in connection with our various trust preferred
securities offerings. As previously mentioned, the increase in long-term debt at
March 31, 2006 is due to the issuance of $30.0 million in junior subordinated
debt securities through a pooled trust preferred offering. Similar to previous
offerings, these securities were issued through a newly formed statutory
business trust, East West Capital Trust VII, a wholly-owned subsidiary of the
Company. The securities have a 30-year maturity and bear interest at a per annum
rate based on the three-month Libor plus 135 basis points, payable on a
quarterly basis.
Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations
During
the quarter ended March 31, 2006, material changes outside the ordinary course
of our business related to off-balance sheet arrangements or contractual
obligations include $50.0 million in additional securities purchased under
resale agreements and $30.0 million in additional junior subordinated
debt.
The
following table presents, as of March 31, 2006 the Company’s significant fixed
and determinable contractual obligations, within the categories described below,
by payment date. These contractual obligations are included in the Condensed
Consolidated Statement of Financial Condition. The payment amounts represent the
amounts and interest contractually due to the recipient.
|
|
Payment
Due by Period |
Contractual
Obligations |
|
|
|
1-3
years |
|
3-5
years |
|
|
|
|
|
Total |
|
|
(In
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
3,399,864 |
|
$ |
233,086 |
|
$ |
31,567 |
|
$ |
1,003 |
|
$ |
3,441,248 |
|
$ |
7,106,768 |
Federal
funds purchased |
|
|
5,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,501
|
FHLB
advances |
|
|
539,903
|
|
|
135,410
|
|
|
73,095
|
|
|
13,987
|
|
|
-
|
|
|
762,395
|
Securities
sold under |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
repurchase
agreements |
|
|
12,368
|
|
|
24,735
|
|
|
24,735
|
|
|
378,004
|
|
|
-
|
|
|
439,842
|
Notes
payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,833
|
|
|
8,833
|
Long-term
debt obligations |
|
|
12,250
|
|
|
24,500
|
|
|
24,500
|
|
|
383,139
|
|
|
-
|
|
|
444,389
|
Operating
lease obligations |
|
|
9,239
|
|
|
17,711
|
|
|
13,728
|
|
|
35,228
|
|
|
-
|
|
|
75,906
|
Total
contractual obligations |
|
$ |
3,979,125 |
|
$ |
435,442 |
|
$ |
167,625 |
|
$ |
811,361 |
|
$ |
3,450,081 |
|
$ |
8,843,634 |
A
schedule of significant commitments at March 31, 2006 follows:
|
Payment
Due |
|
(In
thousands) |
Undisbursed
loan commitments |
$ |
1,952,118
|
Standby
letters of credit |
|
347,227
|
Commercial
letters of credit |
|
40,342
|
Capital
Resources
Our
primary source of capital is the retention of net after tax earnings. At March
31, 2006, stockholders’ equity totaled $903.5 million, a 23% increase from
$734.1 million as of December 31, 2005. The increase is comprised of the
following: (1) net income of $32.1 million recorded during the first three
months of 2006; (2) stock compensation costs amounting to $1.9 million related
to grants of restricted stock and stock options; (3) tax benefits of $3.8
million resulting from the exercise of nonqualified stock options; (4) tax
benefits of $543 thousand resulting from the vesting of restricted stock; (5)
net issuance of common stock totaling $2.6 million, representing 310,426 shares,
pursuant to various stock plans and agreements; (6) net issuance of common stock
totaling $133.9 million, representing 3,647,441 shares, in connection with the
Standard Bank acquisition; and (7) issuance of common stock to Standard Bank
employees totaling $105 thousand, representing 2,670 shares. These transactions
were offset by (1) payments of first quarter 2006 cash dividends totaling $2.8
million, (2) an increase of $2.2 million in unrealized losses on
available-for-sale securities, and (3) forfeitures of restricted stock totaling
$440 thousand, representing 12,648 restricted shares cancelled during the first
quarter of 2006.
As previously
mentioned, we reduced additional paid-in capital in the amount of $8.2 million,
representing the remaining deferred compensation balance in the consolidated
statement of stockholders’ equity as of January 1, 2006. The transaction was
recorded in accordance with the transition provisions of SFAS No. 123(R) which
we adopted on January 1, 2006.
On March 15,
2006, the Company issued $30.0 million in junior subordinated debt securities
through a pooled trust preferred offering. Similar to previous offerings, these
securities were issued through a newly formed statutory business trust, Trust
VII, a wholly-owned subsidiary of the Company. The proceeds from the debt
securities are loaned by Trust VII to the Company and are included in long-term
debt in the accompanying Condensed Consolidated Statement of Financial
Condition. The securities issued by Trust VII have a scheduled maturity of June
15, 2036 and bear interest at a per annum rate based on the three-month Libor
plus 135 basis points, payable on a quarterly basis. At March 31, 2006, the
interest rate on the junior subordinated debt was 6.28%. The junior subordinated
debt issued qualifies as Tier I capital for regulatory reporting purposes.
Our
management is committed to maintaining capital at a level sufficient to assure
our shareholders, our customers and our regulators that our company and our bank
subsidiary are financially sound. We are subject to risk-based capital
regulations adopted by the federal banking regulators in January 1990. These
guidelines are used to evaluate capital adequacy and are based on an
institution’s asset risk profile and off-balance sheet exposures. According to
the regulations, institutions whose Tier 1 and total capital ratios meet or
exceed 6% and 10%, respectively, are deemed to be “well-capitalized.” At March
31, 2006, the Bank’s Tier 1 and total capital ratios were 9.0% and 11.0%,
respectively, compared to 8.8% and 11.0%, respectively, at December 31,
2005.