- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) <TABLE> <C> <S> /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 </TABLE> FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR <TABLE> <C> <S> / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 </TABLE> FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 000-24939 ------------------------ EAST WEST BANCORP, INC. (Exact name of registrant as specified in its charter) <TABLE> <S> <C> DELAWARE 95-4703316 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 415 HUNTINGTON DRIVE, SAN MARINO, CALIFORNIA 91108 (Address of principal executive offices) (Zip Code) </TABLE> Registrant's telephone number, including area code: (626) 799-5700 Securities registered pursuant to Section 12(b) of the Act: <TABLE> <CAPTION> NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED ------------------- ---------- <S> <C> NONE NONE </TABLE> Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.001 PAR VALUE (TITLE OF CLASS) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Number of shares of common stock of the registrant outstanding as of July 31, 2000: 22,453,188 shares - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
TABLE OF CONTENTS <TABLE> <S> <C> PART I--FINANCIAL INFORMATION............................... 3 Item 1. Interim Consolidated Financial Statements......... 3 Notes to Interim Consolidated Financial Statements.............................................. 7 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations........................................ 13 Item 3. Quantitative and Qualitative Disclosures of Market Risks............................................. 33 PART II--OTHER INFORMATION.................................. 34 Item 1. Legal Proceedings................................. 34 Item 2. Changes in Securities and Use of Proceeds......... 34 Item 3. Defaults upon Senior Securities................... 34 Item 4. Submission of Matters to a Vote of Security Holders........................................... 34 Item 5. Other Information................................. 34 Item 6. Exhibits and Reports on Form 8-K.................. 34 SIGNATURE................................................... 35 </TABLE> 2
PART I--FINANCIAL INFORMATION ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS EAST WEST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------- <S> <C> <C> ASSETS Cash and cash equivalents................................... $ 52,348 $ 43,497 Interest bearing deposits in banks.......................... 100 -- Investment securities available for sale, at fair value (with amortized cost of $515,577 in 2000 and $517,320 in 1999)..................................................... 490,407 496,426 Loans receivable, net of allowance for loan losses of $24,580 in 2000 and $20,844 in 1999....................... 1,657,149 1,486,641 Investment in Federal Home Loan Bank stock, at cost......... 21,334 26,954 Other real estate owned..................................... 830 577 Investments in affordable housing partnerships.............. 24,030 26,485 Premises and equipment, net................................. 27,074 22,646 Premiums on deposits acquired, net.......................... 8,820 3,812 Excess of purchase price over fair value of net assets acquired, net............................................. 16,703 6,770 Accrued interest receivable and other assets................ 42,917 30,503 Deferred tax asset.......................................... 16,689 8,319 ---------- ---------- TOTAL..................................................... $2,358,401 $2,152,630 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Customer deposit accounts................................... $1,813,078 $1,500,529 Short-term borrowings....................................... 38,000 600 Federal Home Loan Bank advances............................. 310,500 482,000 Notes payable............................................... 283 1,532 Accrued expenses and other liabilities...................... 20,178 15,861 Junior subordinated debt securities (Note 5)................ 10,750 -- ---------- ---------- Total liabilities......................................... 2,192,789 2,000,522 ---------- ---------- FAIR VALUE OF NET ASSETS ACQUIRED IN EXCESS OF PURCHASE PRICE, NET................................................ 1,820 2,028 COMMITMENTS AND CONTINGENCIES (Note 3) STOCKHOLDER'S EQUITY (Notes 4 and 5) Common stock (par value of $0.001 per share) Authorized - 50,000,000 shares Issued--23,945,132 shares and 23,908,731 shares in 2000 and 1999, respectively Outstanding--22,452,152 shares and 22,422,868 shares in 2000 and 1999, respectively............................. 24 24 Additional paid in capital.................................. 111,646 111,306 Retained earnings........................................... 82,731 67,001 Deferred compensation....................................... (653) (863) Treasury stock, at cost: 1,492,980 shares and 1,485,863 shares in 2000 and 1999, respectively..................... (14,734) (14,659) Accumulated other comprehensive loss, net of tax............ (15,222) (12,729) ---------- ---------- Total stockholders' equity................................ 163,792 150,080 ---------- ---------- TOTAL................................................... $2,358,401 $2,152,630 ========== ========== </TABLE> See accompanying notes to interim consolidated financial statements. 3
EAST WEST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- <S> <C> <C> <C> <C> INTEREST AND DIVIDEND INCOME Loans receivable, including fees.......................... $ 37,667 $ 25,759 $ 73,043 $ 49,017 Investment securities available for sale.................. 7,824 9,266 16,141 19,044 Investment securities held for trading.................... -- 14 -- 14 Short-term investments.................................... 45 606 209 1,811 Federal Home Loan Bank stock.............................. 584 373 968 793 -------- -------- -------- -------- Total interest and dividend income...................... 46,120 36,018 90,361 70,679 -------- -------- -------- -------- INTEREST EXPENSE Customer deposit accounts................................. 17,709 11,827 32,819 23,321 Short-term borrowings..................................... 595 194 770 542 Federal Home Loan Bank advances........................... 5,174 6,660 12,116 13,248 Junior subordinated debt securities....................... 291 -- 321 -- -------- -------- -------- -------- Total interest expense.................................. 23,769 18,681 46,026 37,111 -------- -------- -------- -------- NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES........ 22,351 17,337 44,335 33,568 PROVISION FOR LOAN LOSSES................................... 1,400 1,486 2,800 2,686 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 20,951 15,851 41,535 30,882 -------- -------- -------- -------- NONINTEREST INCOME Loan fees................................................. 430 598 958 1,126 Branch fees............................................... 1,260 883 2,476 1,611 Letters of credit fees and commissions.................... 1,080 1,058 2,162 2,040 Net gain on sales of investment securities available for sale.................................................... -- 304 261 684 Net gain (loss) on trading securities..................... (14) 407 48 425 Net gain on sales of investment in affordable housing partnerships............................................ -- -- 905 402 Net gain on sale of branch................................ -- 676 -- 676 Amortization of fair value of net assets acquired in excess of purchase price................................ 104 105 208 208 Other operating income.................................... 609 196 844 387 -------- -------- -------- -------- Total noninterest income................................ 3,469 4,227 7,862 7,559 -------- -------- -------- -------- NONINTEREST EXPENSE Compensation and employee benefits........................ 5,078 4,463 9,671 9,137 Net occupancy............................................. 1,926 1,337 3,706 2,701 Data processing........................................... 479 358 921 690 Amortization of premiums on deposits acquired and excess of purchase price over fair value of net assets acquired................................................ 842 358 1,622 668 Amortization of investment in affordable housing partnerships............................................ 991 777 1,956 1,187 Deposit insurance premiums and regulatory assessments..... 124 208 220 416 Other real estate owned operations, net................... (37) 23 (7) (261) Other operating expenses.................................. 2,774 2,056 5,822 3,859 -------- -------- -------- -------- Total noninterest expense............................... 12,177 9,580 23,911 18,397 -------- -------- -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES.................... 12,243 10,498 25,486 20,044 PROVISION FOR INCOME TAXES.................................. 3,879 3,398 8,409 6,932 -------- -------- -------- -------- NET INCOME.................................................. $ 8,364 $ 7,100 $ 17,077 $ 13,112 ======== ======== ======== ======== BASIC EARNINGS PER SHARE (Note 4)........................... $ 0.37 $ 0.31 $ 0.76 $ 0.57 DILUTED EARNINGS PER SHARE (Note 4)......................... $ 0.37 $ 0.31 $ 0.75 $ 0.57 AVERAGE NUMBER OF SHARES OUTSTANDING--BASIC................. 22,363 22,764 22,347 23,159 AVERAGE NUMBER OF SHARES OUTSTANDING--DILUTED............... 22,822 22,764 22,752 23,159 </TABLE> See accompanying notes to interim consolidated financial statements. 4
EAST WEST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> ACCUMULATED OTHER ADDITIONAL COMPREHENSIVE COMMON PAID-IN RETAINED DEFERRED TREASURY LOSS, NET OF STOCK CAPITAL EARNINGS COMPENSATION STOCK TAX -------- ---------- -------- ------------ -------- ------------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> BALANCE, JANUARY 1, 1999...... $24 $109,976 $41,718 $ -- $ -- $ (888) Comprehensive income: Net income for the year..... 28,027 Net unrealized loss on securities................ (11,841) Comprehensive income.......... Stock compensation costs...... 249 Issuance of 105,003 shares under Restricted Stock Plan........................ 1,112 (1,112) Issuance of 28,728 shares under Employee Stock Purchase Plan............... 218 Purchase of 1,485,863 shares of treasury stock........... (14,659) Dividends paid on common stock....................... (2,744) --- -------- ------- ------- -------- -------- BALANCE, DECEMBER 31, 1999.... $24 $111,306 $67,001 $ (863) $(14,659) $(12,729) Comprehensive income: Net income for the period... 17,077 Net unrealized loss on securities................ (2,493) Comprehensive income.......... Stock compensation costs...... 228 Issuance of 3,727 shares under Stock Incentive Plan........ 37 Issuance of 1,500 shares under Restricted Stock Plan....... 18 (18) Issuance of 31,174 shares under Employee Stock Purchase Plan............... 285 Purchase of 7,117 shares of treasury stock.............. (75) Dividends paid on common stock....................... (1,347) --- -------- ------- ------- -------- -------- BALANCE, JUNE 30, 2000........ $24 $111,646 $82,731 $ (653) $(14,734) $(15,222) === ======== ======= ======= ======== ======== <CAPTION> SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 2000 1999 ------------- ------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> DISCLOSURE OF RECLASSIFICATION AMOUNTS: Unrealized holding loss arising during period, net of tax benefit of $1,558 in 2000 and $7,620 in 1999.... Less: Reclassification adjustment for gain included in net income, net of tax expense of $104 in 2000 and $274 in 1999............................................................................................ Net unrealized loss on securities, net of tax benefit of $1,662 in 2000 and $7,894 in 1999................ <CAPTION> <S> <C> <C> BALANCE, JANUARY 1, 1999...... $150,830 Comprehensive income: Net income for the year..... $ 28,027 28,027 Net unrealized loss on securities................ (11,841) (11,841) -------- Comprehensive income.......... $ 16,186 ======== Stock compensation costs...... 249 Issuance of 105,003 shares under Restricted Stock Plan........................ -- Issuance of 28,728 shares under Employee Stock Purchase Plan............... 218 Purchase of 1,485,863 shares of treasury stock........... (14,659) Dividends paid on common stock....................... (2,744) -------- BALANCE, DECEMBER 31, 1999.... $150,080 Comprehensive income: Net income for the period... $ 17,077 17,077 Net unrealized loss on securities................ (2,493) (2,493) -------- Comprehensive income.......... $ 14,584 ======== Stock compensation costs...... 228 Issuance of 3,727 shares under Stock Incentive Plan........ 37 Issuance of 1,500 shares under Restricted Stock Plan....... -- Issuance of 31,174 shares under Employee Stock Purchase Plan............... 285 Purchase of 7,117 shares of treasury stock.............. (75) Dividends paid on common stock....................... (1,347) -------- BALANCE, JUNE 30, 2000........ $163,792 ======== DISCLOSURE OF RECLASSIFICATION Unrealized holding loss arisin $(2,337) $(11,430) Less: Reclassification adjustm $274 in 1999................ (156) (411) -------- -------- Net unrealized loss on securit $(2,493) $(11,841) ======== ======== </TABLE> See accompanying notes to interim consolidated financial statements. 5
EAST WEST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, -------------------------- 2000 1999 ------------ ----------- (IN THOUSANDS) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 17,077 $ 13,112 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 4,263 1,887 Net loan fees deferred.................................. 350 1,246 Stock compensation costs................................ 228 -- Deferred tax benefit.................................... (1,710) (1,525) Provision for loan losses............................... 2,800 2,686 Provision for other real estate owned losses............ -- 22 Net gain on sales of investment securities and other assets................................................. (1,249) (2,673) Gain on trading securities.............................. (48) (425) Federal Home Loan Bank stock dividends.................. (962) (847) Proceeds from sale of trading securities................ -- 21,090 Purchases of trading securities......................... -- (20,665) Proceeds from sale of loans held for sale............... 6,157 37,462 Originations of loans held for sale..................... (6,078) (29,047) Increase in accrued interest receivable and other assets, net of effects from purchase of American International Bank and First Central Bank.............. (7,552) (688) Increase in accrued expenses and other liabilities, net of effects from purchase of American International Bank and First Central Bank................................. 990 904 ------------ ----------- Total adjustments..................................... (2,811) 9,427 ------------ ----------- Net cash provided by operating activities............. 14,266 22,539 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in loans....................................... (46,600) (78,166) Purchases of: Interest bearing deposits in banks...................... (100) -- Investment securities available for sale................ (94,957) (331,760) Loans receivable........................................ (126,693) (156,768) Federal Home Loan Bank stock............................ (1,326) (1,808) Investment in affordable housing partnerships........... (5,544) (5,647) Premises and equipment.................................. (6,262) (751) Proceeds from sale of: Investment securities available for sale................ 64,639 177,758 Other real estate owned................................. 47 2,295 Investment in affordable housing partnerships........... 6,948 3,267 Premises and equipment.................................. -- 2 Repayments, maturity and redemption of investment securities available for sale........................... 35,249 248,720 Redemption of Federal Home Loan Bank stock................ 7,908 8,200 Repayments on foreclosed properties....................... 13 100 Payment for purchase of First Central Bank, net of cash received................................................ (369) (5,413) Payment for purchase of American International Bank, net of cash received........................................ (25,218) -- ------------ ----------- Net cash used in investing activities................. (192,265) (139,971) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits.................................... 312,550 140,945 Net increase (decrease) in short-term borrowings.......... 37,400 (33,000) Proceeds from Federal Home Loan Bank advances............. 11,910,400 5,129,900 Repayment of Federal Home Loan Bank advances.............. (12,081,900) (5,194,900) Proceeds from issuance of junior subordinated debt securities.............................................. 10,750 -- Repayments of notes payable on affordable housing investments............................................. (1,250) (1,350) Proceeds from common stock options exercised.............. 322 -- Repurchases of common stock............................... (75) (12,869) Dividends paid on common stock............................ (1,347) (1,397) ------------ ----------- Net cash provided by financing activities............. 186,850 27,329 ------------ ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 8,851 (90,103) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 43,497 161,131 ------------ ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 52,348 $ 71,028 ============ =========== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid............................................. $ 46,198 $ 37,063 Income tax payments, net.................................. 10,729 10,400 Noncash investing and financing activities: Other real estate acquired through foreclosure.......... 311 1,130 Loans made to facilitate sales of other real estate owned.................................................. -- 650 Investment in affordable housing partnerships acquired through notes payable.................................. -- 3,033 </TABLE> See accompanying notes to interim consolidated financial statements. 6
EAST WEST BANCORP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of East West Bancorp, Inc. (the "Company") and its wholly-owned subsidiary bank, East West Bank and subsidiaries (the "Bank"). Intercompany transactions and accounts have been eliminated. The interim consolidated financial statements, presented in accordance with principles generally accepted in the United States of America ("GAAP"), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the period ended June 30, 2000 are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company's annual report on Form 10K for the year ended December 31, 1999. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. 2. AMERICAN INTERNATIONAL BANK ACQUISITION On January 18, 2000, the Company completed its $33.1 million acquisition of American International Bank ("AIB") in an all-cash transaction. American International Bank, with assets of $202 million, was a state-chartered bank with eight branches in Southern California. AIB specialized in servicing small-to- medium sized companies involved in international trade and other areas, as well as offering a full range of personal banking products and services to a predominantly Chinese-American customer base. The acquisition was accounted for under the purchase method of accounting, and accordingly, all assets and liabilities were adjusted to and recorded at their estimated fair values as of the acquisition date. The estimated tax effect of differences between tax bases and market values has been reflected in deferred income taxes. The Company recorded total goodwill of approximately $10.2 million, which is being amortized using the straight-line method over 15 years. 3. COMMITMENTS AND CONTINGENCIES CREDIT EXTENSIONS--In the normal course of business, there are various outstanding commitments to extend credit which are not reflected in the accompanying interim consolidated financial statements. Commitments are included in determining the appropriate level of the allowance for loan losses. As of June 30, 2000, undisbursed loan commitments, commercial and standby letters of credit, and commitments to fund mortgage loan applications in process amounted to $271.7 million, $149.3 million, and $36.9 million, respectively. LITIGATION--The Company is a party to various legal proceedings arising in the normal course of business. While it is difficult to predict the outcome of such litigation, the Company does not expect that such litigation will have a material adverse effect on its financial position and results of operations. 7
EAST WEST BANCORP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) 4. STOCKHOLDERS' EQUITY EARNINGS PER SHARE--The actual number of shares outstanding at June 30, 2000, was 22,452,152. Basic earnings per share are calculated on the basis of the weighted average number of shares outstanding during the period. Diluted earnings per share are calculated on the basis of the weighted average number of shares outstanding during the period plus shares issuable upon the assumed exercise of outstanding common stock options, warrants and restricted stock. The following tables set forth the Company's earnings per share calculations for the three and six months ended June 30, 2000 and 1999: <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------------- 2000 1999 -------------------------------- -------------------------------- NET NUMBER PER SHARE NET NUMBER PER SHARE INCOME OF SHARES AMOUNTS INCOME OF SHARES AMOUNTS -------- --------- --------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> Basic earnings per share............... $8,364 22,363 $0.37 $7,100 22,764 $0.31 Effect of dilutive securities: Stock options........................ -- 338 -- -- -- -- Restricted stock..................... -- 28 -- -- -- -- Stock warrants....................... -- 93 -- -- -- -- ------ ------ ----- ------ ------ ----- Dilutive earnings per share............ $8,364 22,822 $0.37 $7,100 22,764 $0.31 ====== ====== ===== ====== ====== ===== </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------- 2000 1999 -------------------------------- -------------------------------- NET NUMBER PER SHARE NET NUMBER PER SHARE INCOME OF SHARES AMOUNTS INCOME OF SHARES AMOUNTS -------- --------- --------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> Basic earnings per share............. $17,077 22,347 $0.76 $13,112 23,159 $0.57 Effect of dilutive securities: Stock options...................... -- 300 -- -- -- -- Restricted stock................... -- 23 -- -- -- -- Stock warrants..................... -- 82 -- -- -- -- ------- ------ ----- ------- ------ ----- Dilutive earnings per share.......... $17,077 22,752 $0.75 $13,112 23,159 $0.57 ======= ====== ===== ======= ====== ===== </TABLE> QUARTERLY DIVIDENDS--On January 20, 2000, the Company's Board of Directors declared a quarterly common stock cash dividend of $0.03 per share payable on or about February 16, 2000 to shareholders of record on February 2, 2000. On April 20, 2000, the Company declared another quarterly common stock cash dividend of $0.03 per share payable on or about May 17, 2000 to shareholders of record on May 3, 2000. For the first half of 2000, cash dividends totaling $1.3 million have been paid to the Company's shareholders. 8
EAST WEST BANCORP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) 5. SIGNIFICANT TRANSACTIONS During the first quarter of 2000, the Company filed a $50 million universal shelf registration statement with the Securities and Exchange Commission ("SEC") which became effective on February 22, 2000. Pursuant to the filing, the Company may, from time to time, offer new common stock, trust preferred, preferred stock and/or other debentures. The timing and amount of offerings will depend on market and general business conditions. The Company will utilize the net proceeds from the sale of securities for general business purposes, including supporting the growth of its commercial banking activities and possible future acquisitions. Additionally, on March 23, 2000, the Company issued $10.8 million of junior subordinated deferrable interest debentures. These securities have a scheduled maturity date of March 8, 2030 and bear an interest rate of 10.875% per annum. Interest payments are due on March 8 and September 8 of each year. On July 26, 2000, the Company issued another $10.0 million in junior subordinated deferrable interest debentures. The scheduled maturity date of these securities is July 19, 2030. These securities bear an interest rate of 10.945% per annum and interest payments are due on January 19 and July 19 of each year. Interest payments on these securities are deductible for tax purposes. These securities, which are not registered with the SEC, are recorded in the liability section of the consolidated balance sheet in accordance with GAAP. For regulatory reporting purposes, these securities qualify for Tier 1 capital treatment. On July 26, 2000, the Bank formed a closed-end, non-diversified regulated company subsidiary, East West Securities Company, Inc. (the "Fund"), registered under the Investment Company Act of 1940. The holdings of the Fund will consist of cash, investments and loans. The formation of the Fund provides the Bank with the flexibility to raise additional capital in a tax efficient manner for future business opportunities if deemed necessary. There can be no assurance as to the timing or ability of the Bank to raise capital through this subsidiary. 6. BUSINESS SEGMENTS Management utilizes an internal reporting system to measure the performance of various operating segments within the Company and the Company overall. Four principal operating segments have been identified by the Company for purposes of management reporting; retail banking, commercial lending, treasury, and residential lending. Information related to the Company's remaining centralized functions have been aggregated and included in "Other." Although all four operating segments offer financial products and services, they are managed separately based on each segment's strategic focus. While the retail banking segment focuses primarily on retail operations through the Company's branch network, certain designated branches have responsibility for generating commercial deposits and loans. The commercial lending segment primarily generates commercial loans and deposits through the efforts of commercial lending officers located in the Company's northern and southern California production offices. The treasury department's primary focus is managing the Company's investments, liquidity, and interest rate risk; the residential lending segment is mainly responsible for the Company's portfolio of single family and multifamily residential loans. Operating segment results are based on the Company's internal management reporting process, which reflects assignments and allocations of capital, certain operating and administrative costs and the provision for loan losses. Net interest income is based on the Company's internal funds transfer pricing system which 9
EAST WEST BANCORP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) 6. BUSINESS SEGMENTS (CONTINUED) assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and noninterest expense, including depreciation and amortization, directly attributable to a segment are assigned to that business. Indirect costs, including overhead expense, are allocated to the segments based on several factors, including, but not limited to, full-time equivalent employees, loan volume and deposit volume. The provision for credit losses is allocated based on new loan originations for the period. The Company evaluates overall performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses. Future changes in the Company's management structure or reporting methodologies may result in changes in the measurement of operating segment results. Results for prior periods have been restated for comparability for changes in management structure and reporting methodologies. The following tables present the operating results and other key financial measures for the individual operating segments for the three and six months ended June 30, 2000 and 1999: <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, 2000 ---------------------------------------------------------------------- RETAIL COMMERCIAL RESIDENTIAL BANKING LENDING TREASURY LENDING OTHER TOTAL -------- ---------- -------- ----------- -------- ---------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Interest income................... $ 12,038 $ 15,484 $ 8,425 $ 9,643 $ 530 $ 46,120 Charges for funds used............ (8,163) (11,227) (7,970) (8,222) (106) (35,688) -------- -------- -------- -------- -------- ---------- Interest spread on funds used... 3,875 4,257 455 1,421 424 10,432 -------- -------- -------- -------- -------- ---------- Interest expense.................. (12,733) (1,379) (9,657) -- -- (23,769) Credit on funds provided.......... 22,027 2,590 11,071 -- -- 35,688 -------- -------- -------- -------- -------- ---------- Interest spread on funds provided...................... 9,294 1,211 1,414 -- -- 11,919 -------- -------- -------- -------- -------- ---------- Net interest income........... $ 13,169 $ 5,468 $ 1,869 $ 1,421 $ 424 $ 22,351 ======== ======== ======== ======== ======== ========== Depreciation and amortization..... $ 950 $ 130 $ 76 $ 144 $ 969 $ 2,269 Segment pretax profit............. 6,022 3,565 1,349 1,090 217 12,243 Segment assets as of June 30, 2000............................ 487,764 692,389 516,849 513,733 147,666 2,358,401 </TABLE> 10
EAST WEST BANCORP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) 6. BUSINESS SEGMENTS (CONTINUED) <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, 1999 --------------------------------------------------------------------- RETAIL COMMERCIAL RESIDENTIAL BANKING LENDING TREASURY LENDING OTHER TOTAL -------- ---------- -------- ----------- -------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Interest income....................... $ 6,716 $10,756 $10,135 $ 7,807 $ 604 $ 36,018 Charges for funds used................ (3,886) (6,249) (8,549) (5,299) (37) (24,020) ------- ------- ------- ------- ------- --------- Interest spread on funds used....... 2,830 4,507 1,586 2,508 567 11,998 ------- ------- ------- ------- ------- --------- Interest expense...................... (9,793) (691) (8,197) -- -- (18,681) Credit on funds provided.............. 13,714 1,226 9,080 -- -- 24,020 ------- ------- ------- ------- ------- --------- Interest spread on funds provided... 3,921 535 883 -- -- 5,339 ------- ------- ------- ------- ------- --------- Net interest income............... $ 6,751 $ 5,042 $ 2,469 $ 2,508 $ 567 $ 17,337 ======= ======= ======= ======= ======= ========= Depreciation and amortization......... $ 615 $ 69 $ 121 $ -- $ 347 $ 1,152 Segment pretax profit................. 1,642 4,171 2,599 1,958 128 10,498 Segment assets as of June 30, 1999.... 351,122 448,701 649,315 564,456 83,689 2,097,283 </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 2000 --------------------------------------------------------------------- RETAIL COMMERCIAL RESIDENTIAL BANKING LENDING TREASURY LENDING OTHER TOTAL -------- ---------- -------- ----------- -------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Interest income..................... $ 22,568 $ 30,655 $ 17,204 $ 18,594 $ 1,340 $ 90,361 Charges for funds used.............. (15,168) (21,685) (16,447) (15,542) (116) (68,958) -------- -------- -------- -------- ------- --------- Interest spread on funds used..... 7,400 8,970 757 3,052 1,224 21,403 -------- -------- -------- -------- ------- --------- Interest expense.................... (24,139) (2,546) (19,341) -- -- (46,026) Credit on funds provided............ 41,715 4,926 22,317 -- -- 68,958 -------- -------- -------- -------- ------- --------- Interest spread on funds provided........................ 17,576 2,380 2,976 -- -- 22,932 -------- -------- -------- -------- ------- --------- Net interest income............. $ 24,976 $ 11,350 $ 3,733 $ 3,052 $ 1,224 $ 44,335 ======== ======== ======== ======== ======= ========= Depreciation and amortization....... $ 2,034 $ 188 $ 235 $ 362 $ 1,444 $ 4,263 Segment pretax profit............... 11,505 7,832 3,148 2,447 554 25,486 Segment assets as of June 30, 2000.............................. 487,764 692,389 516,849 513,733 147,666 2,358,401 </TABLE> 11
EAST WEST BANCORP, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) 6. BUSINESS SEGMENTS (CONTINUED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1999 ---------------------------------------------------------------------- RETAIL COMMERCIAL RESIDENTIAL BANKING LENDING TREASURY LENDING OTHER TOTAL -------- ---------- -------- ----------- -------- ---------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Interest income.................... $ 12,050 $ 19,917 $ 21,496 $ 15,787 $ 1,429 $ 70,679 Charges for funds used............. (7,013) (11,520) (18,274) (10,623) (128) (47,558) -------- -------- -------- -------- ------- ---------- Interest spread on funds used.... 5,037 8,397 3,222 5,164 1,301 23,121 -------- -------- -------- -------- ------- ---------- Interest expense................... (19,364) (1,363) (16,384) -- -- (37,111) Credit on funds provided........... 27,037 2,335 18,186 -- -- 47,558 -------- -------- -------- -------- ------- ---------- Interest spread on funds provided....................... 7,673 972 1,802 -- -- 10,447 -------- -------- -------- -------- ------- ---------- Net interest income............ $ 12,710 $ 9,369 $ 5,024 $ 5,164 $ 1,301 $ 33,568 ======== ======== ======== ======== ======= ========== Depreciation and amortization...... $ 1,180 $ 130 $ 395 $ -- $ 182 $ 1,887 Segment pretax profit.............. 2,582 8,275 5,169 3,975 43 20,044 Segment assets as of June 30, 1999............................. 351,122 448,701 649,315 564,456 83,689 2,097,283 </TABLE> 7. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivative as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. Implementation of SFAS No. 133 has been postponed to fiscal periods beginning after June 15, 2000, and will be effective for the Company on January 1, 2001. Early implementation is permitted under this statement. Management of the Company has not yet determined whether the adoption of this standard will have a material impact on the Company's results of operations or financial position when adopted. On December 3, 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which summarizes the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. Under the provisions of SAB No. 101, if a transaction is within the scope of existing specific authoritative literature that provides revenue recognition guidance, such literature should be applied. SAB No. 101 is intended to provide additional or more consistent guidance only in the absence of authoritative literature addressing a specific arrangement or a specific industry as it relates to revenue recognition. It is the view of the SEC that revenue is generally realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller's price to the buyer is fixed or determinable, and (4) collectibility is reasonably assured. Management does not believe that the bulletin has a material impact on the Company's results of operations or financial position. 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of East West Bancorp, Inc. and its subsidiaries (the "Company"). This information is intended to facilitate the understanding and assessment of significant changes and trends related to the financial condition of the Company and the results of its operations. This discussion and analysis should be read in conjunction with the Company's 1999 annual report on Form 10-K for the year ended December 31, 1999, and the accompanying interim unaudited consolidated financial statements and notes thereto. In addition to historical information, this discussion includes certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which involve inherent risks and uncertainties. A number of important factors could cause the Company's actual results and performance in future periods to differ materially from those discussed in such forward-looking statements. These factors include, but are not limited to, the effect of interest rate and currency exchange fluctuations; competition in the financial services market for both deposits and loans; the Company's ability to efficiently incorporate acquisitions into its operations; the ability of the Company to increase its customer base; and regional and general economic conditions. Given these uncertainties, the reader is cautioned not to place undue reliance on such forward-looking statements. The Company expressly disclaims any obligation to update or revise any forward-looking statements contained herein to reflect any changes in the Company's expectations of results or any change in events. RESULTS OF OPERATIONS The Company reported second quarter 2000 net income of $8.4 million, or $0.37 per basic and diluted share, compared with $7.1 million, or $0.31 per basic and diluted share, reported during the second quarter of 1999. The 18% increase in second quarter net earnings is primarily attributable to continued growth in the loan portfolio and a higher net interest margin, offset by lower noninterest-related revenues and higher operating expenses. The Company's annualized return on average total assets increased to 1.43% for the quarter ended June 30, 2000, from 1.38% for the same period in 1999. The annualized return on average stockholders' equity increased to 21.18% for the second quarter of 2000, compared with 19.26% for the second quarter of 1999. Net income for the six months ended June 30, 2000 increased to $17.1 million, or $0.76 per basic share and $0.75 per diluted share, from $13.1 million, or $0.57 per basic and diluted share, for the first six months of 1999. The annualized return on average total assets increased to 1.47% for the first half of 2000, compared with 1.29% for the first half of 1999. The annualized return on average stockholders' equity increased to 22.11% for the first half of 2000, compared with 17.61% for the same period in 1999. 13
COMPONENTS OF NET INCOME <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (IN MILLIONS) (IN MILLIONS) <S> <C> <C> <C> <C> Net interest income..................... $ 22.4 $ 17.3 $ 44.3 $ 33.6 Provision for loan losses............... (1.4) (1.5) (2.8) (2.7) Noninterest income...................... 3.5 4.2 7.9 7.5 Noninterest expense..................... (12.2) (9.6) (23.9) (18.4) Provision for income taxes.............. (3.9) (3.3) (8.4) (6.9) ------ ------ ------ ------ Net income............................ $ 8.4 $ 7.1 $ 17.1 $ 13.1 ====== ====== ====== ====== Return on average total assets.......... 1.43% 1.38% 1.47% 1.29% ====== ====== ====== ====== </TABLE> NET INTEREST INCOME The Bank's primary source of revenue is net interest income, which is the difference between interest income on earning assets and interest expense on interest-bearing liabilities. Net interest income for the second quarter of 2000 totaled $22.4 million, a 29% increase over net interest income of $17.3 million for the same period in 1999. Total interest and dividend income during the quarter ended June 30, 2000 increased 28% to $46.1 million compared with $36.0 million during the same period in 1999. Similarly, year-to-date interest and dividend income increased 28% to $90.4 million, from $70.7 million during the first half of 1999. The increase in interest and dividend income during both the second quarter and the first six months of 2000 is derived primarily from a 13% growth in average earning assets and higher yields on all categories of earning assets. Growth in the Bank's average loan portfolio, partially offset by decreases in all other categories of earning assets, triggered the increase in average earning assets. The net growth in average earning assets was funded largely by increases in time deposits, money market and checking accounts, and noninterest-bearing demand deposits. Total interest expense during the second quarter of 2000 increased 27% to $23.8 million compared with $18.7 million for the same period a year ago. For the first half of 2000, total interest expense increased 24% to $46.0 million, from $37.1 million for the first half of 1999. The increase in second quarter and year-to-date 2000 interest expense is primarily attributable to higher rates paid on interest-bearing liabilities and growth in average money market accounts and time deposits, partially offset by a decrease in average FHLB advances. Net interest margin, defined as taxable equivalent net interest income divided by average earning assets, increased 51 basis points to 4.03% for the second quarter of 2000, compared with 3.52% for the second quarter of 1999. For the first six months of 2000, the Company's net interest margin increased 59 basis points to 4.02%, from 3.43% for the same period a year ago. The increase in net interest margin for both periods is due to higher overall yields on earning assets primarily resulting from average loan growth of 35% during the second quarter of 2000 and 38% for the first half of 2000, most notably in the multifamily residential, commercial real estate, construction and commercial business segments of the portfolio. Additionally, marked increases in the average prime rate of 150 basis points and 121 basis points during the second quarter and first six months of 2000, respectively, also contributed to higher yields on earning assets. The Company's overall cost of funds increased 61 basis points and 46 basis points, respectively, to 4.81% for the second quarter of 2000 and 4.66% for the first six months of 2000. The increase in the Company's overall cost of funds is primarily due to higher rates paid on new time deposits and on all other 14
categories of interest-bearing liabilities resulting from the increase in overall interest rates. Growth in the average volume of time deposits and money markets accounts, partially offset by a decrease in average FHLB advances, further contributed to the increase in the Company's cost of funds. The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average yields and rates by asset and liability component for the three months ended June 30, 2000 and 1999: <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------------- 2000 1999 -------------------------------- -------------------------------- AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE (1) BALANCE INTEREST RATE (1) ---------- -------- -------- ---------- -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Short-term investments........... $ 1,968 $ 45 8.94% $ 39,665 $ 607 6.12% Taxable investment securities (2)(3)......................... 500,491 7,824 6.25 643,255 9,280 5.77 Loans receivable (2)(4).......... 1,695,101 37,667 8.89 1,259,692 25,758 8.18 FHLB stock....................... 23,473 584 9.95 28,912 373 5.16 ---------- ------- ---------- ------- Total interest-earning assets....................... 2,221,033 46,120 8.31 1,971,524 36,018 7.31 ------- ----- ------- ---- Noninterest-earning assets: Cash and due from banks.......... 48,693 29,766 Allowance for loan losses........ (24,345) (18,461) Other assets..................... 95,943 79,388 ---------- ---------- Total assets................... $2,341,324 $2,062,217 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Checking accounts................ $ 109,379 $ 330 1.21 $ 84,034 $ 245 1.17 Money market accounts............ 110,838 1,109 4.00 46,023 351 3.05 Savings deposits................. 218,299 912 1.67 220,772 1,059 1.92 Time deposits.................... 1,163,452 15,358 5.28 886,165 10,172 4.59 Short-term borrowings............ 37,071 595 6.42 15,035 194 5.16 FHLB advances.................... 329,314 5,174 6.28 528,530 6,660 5.04 Junior subordinated debt securities..................... 10,750 291 10.88 -- -- -- ---------- ------- ---------- ------- Total interest-bearing liabilities.................. 1,979,103 23,769 4.81 1,780,559 18,681 4.20 ------- ----- ------- ---- Noninterest-bearing liabilities: Demand deposits.................. 179,128 110,453 Other liabilities................ 25,123 23,784 Stockholders' equity............. 157,970 147,421 ---------- ---------- Total liabilities and stockholders' equity........... $2,341,324 $2,062,217 ========== ========== Interest rate spread............... 3.50% 3.11% ===== ==== Net interest income and net interest margin................... $22,351 4.03% $17,337 3.52% ======= ===== ======= ==== </TABLE> - -------------------------- (1) Annualized (2) Includes amortization of premiums and accretion of discounts on investment securities and loans receivable. Also includes the amortization of deferred loan fees. (3) Average balances exclude unrealized gains or losses on available for sale securities. (4) Average balances include nonperforming loans. 15
The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average yields and rates by asset and liability component for the six months ended June 30, 2000 and 1999: <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------- 2000 1999 -------------------------------- -------------------------------- AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE (1) BALANCE INTEREST RATE (1) ---------- -------- -------- ---------- -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Short-term investments........... $ 5,413 $ 209 7.65% $ 62,551 $ 1,811 5.79% Taxable investment securities (2)(3)......................... 521,893 16,141 6.19 665,911 19,058 5.72 Loans receivable (2)(4).......... 1,654,270 73,043 8.83 1,196,045 49,017 8.20 FHLB stock....................... 25,739 968 7.52 31,033 793 5.11 ---------- ------- ---------- ------- Total interest-earning assets....................... 2,207,315 90,361 8.19 1,955,540 70,679 7.23 ------- ----- ------- ----- Noninterest-earning assets: Cash and due from banks.......... 49,836 29,039 Allowance for loan losses........ (23,695) (17,642) Other assets..................... 96,932 73,076 ---------- ---------- Total assets................... $2,330,388 $2,040,013 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Checking accounts................ $ 106,690 $ 658 1.23 $ 81,883 $ 470 1.15 Money market accounts............ 101,508 1,734 3.42 42,057 625 2.97 Savings deposits................. 219,326 2,082 1.90 221,056 2,079 1.88 Time deposits.................... 1,115,265 28,345 5.08 872,077 20,147 4.62 Short-term borrowings............ 24,037 770 6.41 20,842 542 5.20 FHLB advances.................... 402,583 12,116 6.02 529,373 13,248 5.01 Junior subordinated debt securities..................... 5,917 321 10.88 -- -- -- ---------- ------- ---------- ------- Total interest-bearing liabilities.................. 1,975,326 46,026 4.66 1,767,288 37,111 4.20 ------- ----- ------- ----- Noninterest-bearing liabilities: Demand deposits.................. 177,872 104,676 Other liabilities................ 22,688 19,111 Stockholders' equity............... 154,502 148,938 ---------- ---------- Total liabilities and stockholders' equity........... $2,330,388 $2,040,013 ========== ========== Interest rate spread............... 3.53% 3.03% ===== ===== Net interest income and net interest margin................... $44,335 4.02% $33,568 3.43% ======= ===== ======= ===== </TABLE> - -------------------------- (1) Annualized (2) Includes amortization of premiums and accretion of discounts on investment securities and loans receivable. Also includes the amortization of deferred loan fees. (3) Average balances exclude unrealized gains or losses on available for sale securities. (4) Average balances include nonperforming loans. 16
ANALYSIS OF CHANGES IN NET INTEREST MARGIN Changes in the Bank's net interest income are a function of changes in rates and volumes of both interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in interest income and interest expense for the years indicated. The total change for each category of interest-earning asset and interest-bearing liability is segmented into the change attributable to variations in volume (changes in volume multiplied by old rate) and the change attributable to variations in interest rates (changes in rates multiplied by old volume). Nonaccrual loans are included in average loans used to compute this table. <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2000 VS 1999 JUNE 30, 2000 VS 1999 --------------------------------- --------------------------------- CHANGES DUE TO CHANGES DUE TO TOTAL ---------------------- TOTAL ---------------------- CHANGE VOLUME (1) RATES (1) CHANGE VOLUME (1) RATES (1) -------- ---------- --------- -------- ---------- --------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> INTEREST-EARNING ASSETS Short-term investments.............. $ (563) $(1,093) $ 530 $(1,604) $ (2,472) $ 868 Taxable investment securities....... (1,454) (2,336) 882 (2,914) (4,653) 1,739 Loans receivable, net............... 11,908 9,520 2,388 24,025 19,988 4,037 FHLB stock.......................... 211 (54) 265 175 (99) 274 ------- ------- ------ ------- -------- ------- Total interest and dividend income.......................... $10,102 $ 6,037 $4,065 $19,682 $ 12,764 $ 6,918 ------- ------- ------ ------- -------- ------- INTEREST-BEARING LIABILITIES Checking accounts................... $ 85 $ 76 $ 9 $ 188 $ 151 $ 37 Money market accounts............... 758 621 137 1,109 1,003 106 Savings deposits.................... (147) (12) (135) 3 (15) 18 Time deposits....................... 5,185 3,505 1,680 8,197 6,032 2,165 Short-term borrowings............... 401 344 57 228 91 137 FHLB advances....................... (1,486) (4,306) 2,820 (1,132) (7,342) 6,210 Junior subordinated debt securities........................ 292 292 -- 322 322 -- ------- ------- ------ ------- -------- ------- Total interest expense............ $ 5,088 $ 520 $4,568 $ 8,915 $ 242 $ 8,673 ======= ======= ====== ======= ======== ======= CHANGE IN NET INTEREST INCOME....... $ 5,014 $ 5,517 $ (503) $10,767 $ 12,522 $(1,755) ======= ======= ====== ======= ======== ======= </TABLE> - ------------------------ (1) Changes in interest income/expense not arising from volume or rate variances are allocated proportionately to rate and volume. PROVISION FOR LOAN LOSSES The provision for loan losses amounted to $1.4 million for the second quarter of 2000 compared to $1.5 million for the same period in 1999. For the first six months of 2000, the provision for loan losses totaled $2.8 million, compared to $2.7 million for the same period in 1999. Provisions for loan losses are charged to income to bring the allowance for credit losses to a level deemed appropriate by management based on the factors discussed under the"Allowance for Loan Losses" section of this report. 17
NONINTEREST INCOME COMPONENTS OF NONINTEREST INCOME <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (IN MILLIONS) (IN MILLIONS) <S> <C> <C> <C> <C> Loan ancillary fees.................................... $ 0.43 $ 0.60 $ 0.96 $ 1.13 Branch fees............................................ 1.26 0.88 2.48 1.61 Letters of credit fees and commissions................. 1.08 1.06 2.16 2.04 Net gain on sales of securities available for sale..... -- 0.30 0.26 0.68 Net gain on trading securities......................... (0.01) 0.41 0.05 0.43 Net gain on sale of affordable housing investments..... -- -- 0.90 0.40 Net gain on sale of branch............................. -- 0.68 -- 0.68 Amortization of negative intangibles................... 0.10 0.10 0.21 0.21 Other.................................................. 0.61 0.20 0.84 0.38 ------ ------ ------ ------ Total................................................ $ 3.47 $ 4.23 $ 7.86 $ 7.56 ====== ====== ====== ====== </TABLE> Noninterest income includes revenues earned from sources other than interest income. These sources include: ancillary fees on loans, service charges and fees on deposit accounts, fees and commissions generated from trade finance activities and the issuance of letters of credit, and net gain on sales of investment securities available for sale and affordable housing investments. Noninterest income decreased 18% to $3.5 million during the three months ended June 30, 2000, compared to $4.2 million for the same period in 1999 primarily due to lower gain on sales of selected assets. Included in noninterest income for the second quarter of 1999, are a one-time gain on sale of the Company's Irvine branch amounting to $676 thousand, gain on sales of securities available for sale amounting to $305 thousand and gain on trading securities of $407 thousand. There were no such noninterest-related revenues during the second quarter of 2000. Noninterest income for the first half of 2000 increased 4% to $7.9 million, from $7.6 million for the first half of 1999, primarily due to higher branch fees and gain on sale of affordable housing investments, partially offset by lower gains from trading securities and the sale of investment securities available for sale. Ancillary fees on loans include fees and service charges related to appraisal services, loan documentation, processing and underwriting, and secondary market-related activities. Ancillary loan fees decreased 28% to $430 thousand for the second quarter of 2000, compared to $598 thousand for the same period in 1999. For the first half of 2000, ancillary loan fee income decreased 15% to $958 thousand, from $1.1 million for the first half of 1999. The decrease in ancillary loan fees is primarily due to the Company's deliberate efforts to reduce its secondary marketing activities. Branch fees, which represent revenues derived from branch operations, amounted to $1.3 million for the second quarter of 2000, a 43% increase from the $883 thousand earned during the same period in 1999. For the six months ended June 30, 2000, branch fees increased 54% to $2.5 million, compared with $1.6 million for the same period in 1999. The rise in branch fees is primarily due to higher service-related fee income on transaction accounts resulting from the acquisition of American International Bank in mid-January 2000. Further, sustained growth in revenues from analysis charges on commercial deposit accounts and sales of nonproprietary mutual funds also contributed to the increase in branch fee income. Letters of credit fees and commissions increased 2% to $1.1 million for the second quarter of 2000. For the six months ended June 30, 2000, letters of credit fees and commissions increased 6% to $2.2 million, compared with $2.0 million for the same period in 1999. This increase is attributed primarily to continued growth in trade finance activities, partially offset by a decrease in issuance and maintenance fees related to standby letters of credit. 18
NONINTEREST EXPENSE COMPONENTS OF NONINTEREST EXPENSE <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (IN MILLIONS) (IN MILLIONS) <S> <C> <C> <C> <C> Compensation and other employee benefits.............. $ 5.08 $4.46 $ 9.67 $ 9.14 Net occupancy......................................... 1.93 1.34 3.71 2.70 Amortization of affordable housing investments........ 0.99 0.78 1.96 1.19 Amortization of positive intangibles.................. 0.84 0.36 1.62 0.67 Data processing....................................... 0.48 0.36 0.92 0.69 Deposit insurance premiums and regulatory assessments......................................... 0.12 0.21 0.22 0.42 Other real estate owned operations, net............... (0.03) 0.02 (0.01) (0.26) Other................................................. 2.77 2.05 5.82 3.85 ------ ----- ------ ------ Total............................................... $12.18 $9.58 $23.91 $18.40 ====== ===== ====== ====== Efficiency Ratio (1)................................ 40% 39% 39% 40% ====== ===== ====== ====== </TABLE> - ------------------------ (1) Excludes the amortization of intangibles and investments in affordable housing partnerships. Noninterest expense, which is comprised primarily of compensation and employee benefits, occupancy and other operating expenses increased 27% to $12.2 million during the second quarter of 2000, from $9.6 million for the same period in 1999. Noninterest expense for the six months ended June 30, 2000 increased 30% to $23.9 million, from $18.4 million for the first half of 1999. The increase in noninterest expense is primarily due to higher expenses related to compensation and other employee benefits, occupancy, and amortization of intangibles. Compensation and employee benefits increased 14% to $5.1 million during the second quarter of 2000, compared to $4.5 million for the same period last year. For the first half of 2000, compensation and employee benefits increased 6% to $9.7 million, compared to $9.1 million for the same period in 1999. The rise in compensation and employee benefits is primarily related to the acquisition of American International Bank and also to the addition of several new loan officers with specialized lending experience. Occupancy expenses increased 44% to $1.9 million during the second quarter of 2000, compared to $1.3 million for the same period in 1999. For the first six months of 2000, occupancy expenses increased 37% to $3.7 million, from $2.7 million for the same period in 1999. The increase in occupancy expenses reflects the operations for the eight branch offices of American International Bank, an overhead factor which was not present during 1999. Additionally, the impact of normal rent adjustments in existing leases, and increased expenses related to the enhancement and maintenance of the Company's computer network system further contributed to the rise in occupancy expenses. The amortization of investments in affordable housing partnerships increased 28% to $991 thousand during the 2000 second quarter, compared with $777 thousand for the same period in 1999. For the six months ended June 30, 2000, the amortization of investments in affordable housing partnerships increased 65% to $2.0 million, from $1.2 million for the first half of 1999. The increase in amortization reflects the impact of $10.6 million in additional affordable housing investment purchases made since the second quarter of 1999, partially offset by sales totaling $6.7 million. The amortization of positive intangibles, which include premiums on deposits acquired and excess of purchase price over fair value of net assets acquired ("goodwill"), increased 135% to $842 thousand during the second quarter of 2000, compared to $358 thousand for the second quarter of 1999. For the six months ended June 30, 2000, the amortization of positive intangibles increased 143% to $1.6 million, from $668 thousand for the same period a year ago. The increase in the amortization of positive intangibles is due to 19
the acquisitions of First Central Bank and American International Bank. Combined goodwill of $14.0 million and deposit premiums of $8.6 million were recorded by the Company for both transactions which are being amortized straight line over 15 and 7 years, respectively. Data processing expenses increased 34% to $479 thousand for the second quarter of 2000, compared to $358 thousand for the second quarter of 1999. For the six months ended June 30, 2000, data processing expenses increased 33% to $921 thousand, from $690 thousand for the same period in 1999. The increase in data processing expenses for both periods is primarily related to the acquisition of American International Bank. Deposit insurance premiums and regulatory assessments decreased 40% to $124 thousand for the quarter ended June 30, 2000, compared with $208 thousand for the same period in 1999. For the first half of 2000, deposit insurance premiums decreased 47% to $220 thousand, from $416 thousand for the first half of 1999. This is primarily due to a significant decrease in the Savings Association Insurance Fund ("SAIF") Financing Corporation ("FICO") assessment rate effective in 2000. The annualized FICO rate decreased to 2.12 basis points and 2.08 basis points for the first and second quarters of 2000, respectively, compared with 6.10 basis points and 5.88 basis points for the first and second quarters of 1999, respectively. Net income related to OREO operations, which include net rental income collected from OREO properties and net gains or losses on subsequent sales, totaled $37 thousand for the second quarter of 2000, compared with net expenses of $23 thousand for the prior year period. For the six months ended June 30, 2000, net income related to OREO operations decreased 97% to $7 thousand, from $261 thousand for the same period in 1999. Other operating expenses include advertising and public relations, telephone and postage, stationery and supplies, bank and item processing charges, insurance, legal and other professional fees. Other operating expenses increased 35% to $2.8 million during the quarter ended June 30, 2000, compared with $2.1 million for the same period in 1999. For the first six months of 2000, other operating expenses increased 51% to $5.8 million, from $3.9 million for the first half of 1999. The increase in other operating expenses is due primarily to the Company's continued expansion, which includes the recent acquisitions of First Central Bank and American International Bank, as well as internal growth. Despite the Company's growth trend over the past several years, ongoing efforts to closely manage operational expenses continue to favorably impact the Company's efficiency ratio, which represents noninterest expense (excluding the amortization of intangibles and investments in affordable housing partnerships) divided by the aggregate of net interest income before provision for loan losses and noninterest income (excluding the amortization of intangibles). The Company's efficiency ratio increased marginally to 40% for the quarter ended June 30, 2000, compared to 39% for the corresponding quarter in 1999. For the first six months of 2000, the Company's efficiency ratio improved to 39%, compared to 40% for the same period a year ago. PROVISION FOR INCOME TAXES The provision for income taxes increased 14% to $3.9 million for the second quarter of 2000, compared with $3.4 million for the same period in 1999. This is primarily due to higher pretax income partially offset by tax credits from qualified affordable housing investments. Tax credits utilized during the second quarter of 2000 totaled $1.0 million, compared to $945 thousand for the second quarter of 1999. The second quarter 2000 provision reflects an effective tax rate of 31.7%, compared with 32.4% for the second quarter of 1999. For the six months ended June 30, 2000, the provision for income taxes totaled $8.4 million, a 21% increase from the $6.9 million income tax expense recorded for the same period a year ago. The effective tax rate of 33.0% for the first half of 2000 reflects tax credits of $2.0 million, compared with an effective tax rate of 34.6% for the first half of 1999 reflecting tax credits of $1.5 million. 20
BALANCE SHEET ANALYSIS The Company's total assets increased $205.8 million, or 10%, to $2.36 billion as of June 30, 2000, primarily due to loan growth. The increase in total assets was funded by increases of $312.5 million in deposits, $37.4 million in short-term borrowings and $10.8 million in junior subordinated debt securities, partially offset by decreases in FHLB advances of $171.5 million. INVESTMENT SECURITIES AVAILABLE FOR SALE Total investment securities available for sale decreased 1% to $490.4 million as of June 30, 2000. Investment securities with a net carrying value of $64.9 million were acquired from American International Bank during the first quarter of 2000, substantially all of which were sold during the same period. Total repayments and proceeds from sales of available for sale securities amounted to $35.2 million and $64.6 million, respectively, during the six months ended June 30, 2000. Proceeds from repayments and sales were applied towards additional investment securities purchases, repayment of FHLB advances, and funding a portion of the loan originations made during the first half of the 2000. The Bank recorded net gains totaling $261 thousand on sales of available for sale securities during the six months ended June 30, 2000. The following table sets forth the amortized cost and the estimated fair values of investment securities available for sale as of June 30, 2000 and December 31, 1999: <TABLE> <CAPTION> GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- (IN THOUSANDS) <S> <C> <C> <C> <C> AS OF JUNE 30, 2000 U.S. Treasury securities............................ $ 8,015 $-- $ -- $ 8,015 U.S. Government agency securities................... 75,620 -- (9,643) 65,977 Obligations of states and political subdivisions.... 200 1 -- 201 Mortgage-backed securities.......................... 407,212 60 (15,233) 392,039 Trust preferred securities.......................... 24,530 -- (355) 24,175 -------- --- -------- -------- Total investment securities available for sale.... $515,577 $61 $(25,231) $490,407 ======== === ======== ======== AS OF DECEMBER 31, 1999 U.S. Treasury securities............................ $ 985 $-- $ (10) $ 975 U.S. Government agency securities................... 75,610 -- (6,739) 68,871 Obligations of states and political subdivisions.... 200 2 -- 202 Mortgage-backed securities.......................... 440,525 51 (14,198) 426,378 -------- --- -------- -------- Total investment securities available for sale.... $517,320 $53 $(20,947) $496,426 ======== === ======== ======== </TABLE> LOANS Net loans receivable increased $170.5 million, or 12% to $1.7 billion at June 30, 2000. Excluding the $105.2 million of net loans acquired from American International Bank, loan growth during the first six months of 2000 amounted to $66.9 million, or 4%, compared to year-end 1999 levels. The increase in loans was funded primarily through deposit growth and through repayments and sales of investment securities available for sale. The growth in loans, excluding loans acquired from American International Bank, is comprised primarily of increases in single family loans of $33.7 million or 12%, construction loans of $13.0 million or 11%, commercial business loans, including trade finance products, of $29.5 million or 12%, and consumer loans, including home equity lines of credit, of $9.4 million or 39%. Partially offsetting the growth in these loan categories was a reduction in multifamily loans of $9.5 million or 3% and commercial real estate loans 21
of $9.7 million or 2%, primarily as a result of the Company's increased loan participation activity during 2000. The following table sets forth the composition of the loan portfolio as of the dates indicated: <TABLE> <CAPTION> JUNE 30, 2000 DECEMBER 31, 1999 JUNE 30, 1999 --------------------- --------------------- --------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------- -------- ---------- -------- ---------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Real estate loans: Residential, one to four units... $ 312,114 18.6% $ 278,161 18.4% $ 259,772 19.3% Residential, multifamily......... 301,707 17.9 311,193 20.6 258,902 19.3 Commercial and industrial real estate......................... 588,701 35.0 518,074 34.4 469,218 34.9 Construction..................... 142,697 8.5 122,363 8.1 96,089 7.1 ---------- ----- ---------- ----- ---------- ----- Total real estate loans........ 1,345,219 80.0 1,229,791 81.5 1,083,981 80.6 ---------- ----- ---------- ----- ---------- ----- Other loans: Business, commercial............. 297,426 17.7 248,865 16.5 235,956 17.5 Automobile....................... 5,850 0.3 5,284 0.4 4,981 0.4 Other consumer................... 33,624 2.0 23,834 1.6 20,107 1.5 ---------- ----- ---------- ----- ---------- ----- Total other loans.............. 336,900 20.0 277,983 18.5 261,044 19.4 ---------- ----- ---------- ----- ---------- ----- Total gross loans.......... 1,682,119 100.0% 1,507,774 100.0% 1,345,025 100.0% ---------- ===== ---------- ===== ---------- ===== Unearned fees, premiums and discounts, net................... (390) (289) (502) Allowance for loan losses.......... (24,580) (20,844) (20,019) ---------- ---------- ---------- Loans receivable, net.......... $1,657,149 $1,486,641 $1,324,504 ========== ========== ========== </TABLE> NONPERFORMING ASSETS Nonaccrual loans, which include loans 90 days or more past due, totaled $7.7 million at June 30, 2000, compared with $10.9 million at year-end 1999. Nonaccrual loans as a percentage of total loans outstanding were 0.46% and 0.73% at June 30, 2000 and December 31,1999, respectively. Loans totaling $2.7 million were placed on nonaccrual status during the second quarter of 2000. These additions to nonaccrual loans were offset by $2.5 million in payoffs, $1.3 million in chargeoffs, and $1.6 million in loans brought current. Additions to nonaccrual loans during the second quarter of 2000 were comprised of $1.2 million in residential single family loans, $264 thousand in commercial business loans, and $1.2 million in trade finance loans. For the six months ended June 30, 2000, nonaccrual loans decreased by $5.6 million due to payoffs totaling $2.9 million, gross chargeoffs totaling $2.0 million, loans brought current totaling $650 thousand, and one loan transferred to other real estate owned totaling $52 thousand. These were offset by $2.4 million of loans placed on nonaccrual status during the six months ended June 30, 2000. Restructured loans or loans that have had their original terms modified totaled $4.1 million at June 30, 2000, compared with $4.7 million at year-end 1999. The decrease in restructured loans is primarily due to payments received during the first six months of 2000. Other real estate owned ("OREO") includes properties acquired through foreclosure or through full or partial satisfaction of loans. Other real estate owned totaled $830 thousand and $577 thousand at June 30, 2000 and December 31, 1999, respectively. During the first six months of 2000, additions to OREO totaling $311 thousand were comprised of a parcel of commercial land acquired from American International Bank and two single family residential properties. One property with a carrying value of $44 22
thousand was sold during the six months ended June 30, 2000. The net gain recognized on this sale was $3 thousand. The following table sets forth information regarding nonaccrual loans, restructured loans and other real estate owned as of the dates indicated: <TABLE> <CAPTION> JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, 2000 2000 1999 1999 1999 --------- ---------- ------------- -------------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> Nonaccrual loans........................ $ 7,664 $10,426 $10,933 $ 5,843 $ 5,508 Accruing loans past due 90 days or more.................................. -- -- -- -- -- ------- ------- ------- ------- ------- Total nonperforming loans............. 7,664 10,426 10,933 5,843 5,508 ------- ------- ------- ------- ------- Restructured loans...................... 4,142 4,113 4,700 6,060 7,249 Other real estate owned, net............ 830 888 577 2,823 3,034 ------- ------- ------- ------- ------- Total nonperforming assets............ $12,636 $15,427 $16,210 $14,726 $15,791 ======= ======= ======= ======= ======= Total nonperforming assets to total assets................................ 0.54% 0.66% 0.75% 0.71% 0.75% Allowance for loan losses to nonperforming loans................... 320.72 230.31 190.65 351.41 363.45 Nonperforming loans to total gross loans................................. 0.46 0.63 0.73 0.42 0.41 </TABLE> At June 30, 2000, the Bank had classified $17.6 million of its loans as impaired, compared with $20.9 million at December 31, 1999. Specific reserves on impaired loans totaled $1.4 million at June 30, 2000 and $1.3 million at December 31, 1999. Total chargeoffs on impaired loans totaled $3 thousand and $184 thousand for the six months ended June 30, 2000 and 1999, respectively. The Bank's average recorded investment in impaired loans for the six months ended June 30, 2000 and 1999 were $17.8 million and $13.2 million, respectively. During the six months ended June 30, 2000 and 1999, gross interest income that would have been recorded on impaired loans, had they performed in accordance with their original terms, totaled $957 thousand and $630 thousand, respectively. Of this amount, actual interest recognized on impaired loans, on a cash basis, was $759 thousand and $468 thousand, respectively. ALLOWANCE FOR LOAN LOSSES Management of the Bank is committed to maintaining the allowance for loan losses at a level that is considered to be commensurate with estimated and known, as well as inherent, risks in the portfolio. Although the adequacy of the allowance is reviewed quarterly, management performs an ongoing assessment of the risks inherent in the portfolio. While management believes that the allowance for loan losses is adequate at June 30, 2000, future additions to the allowance will be subject to continuing evaluation of estimated and known, as well as inherent, risks in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses which is charged against current period operating results, and is decreased by the amount of net chargeoffs during the period. At June 30, 2000, the allowance for loan losses amounted to $24.6 million, or 1.46% of total loans, compared with $20.8 million, or 1.38% of total loans, at December 31, 1999, and $20.0 million, or 1.49% of total loans, at June 30, 1999. The $3.7 million increase in the allowance for loan losses at June 30, 2000, from year-end 1999, is primarily due to $2.3 million in allowance for losses acquired from American International Bank. The remaining $1.5 million increase in the allowance during the first six months of 2000 is comprised of $2.8 million in additional loss provisions less $1.3 million in net chargeoffs recorded during the period. 23
The provision for loan losses of $1.4 million for the second quarter of 2000 represents a 6% decrease from the $1.5 million in loss provisions recorded during the second quarter of 1999. Second quarter 2000 net chargeoffs totaling $832 thousand represent 0.05% of average loans outstanding for the three months ended June 30, 2000. This compares to net chargeoffs of $177 thousand, or 0.01% of average loans outstanding for the same period in 1999. For the six months ended June 30, 2000, the provision for loan losses totaled $2.8 million, a 4% increase over the $2.7 million provision recorded during the same period in 1999. Net chargeoffs for the first half of 2000 totaling $1.3 million represent 0.08% of average loans outstanding for the six months ended June 30, 2000. This compares to net chargeoffs of $323 thousand for the first half of 1999, or 0.03% of average loans outstanding. The Bank continues to record loss provisions to compensate for both the growth and the changing composition of the overall loan portfolio, reflecting a shift towards commercial real estate, construction and commercial business loans. The following table summarizes activity in the allowance for loan losses for the three and six months ended June 30, 2000 and 1999: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> Allowance balance, beginning of period........ $ 24,012 $ 17,560 $ 20,844 $ 16,506 Allowance from acquisition.................... -- 1,150 2,256 1,150 Provision for loan losses..................... 1,400 1,486 2,800 2,686 Charge-offs: 1-4 family residential real estate.......... -- 18 -- 21 Multifamily real estate..................... -- 39 -- 39 Commercial and industrial real estate....... -- -- 3 -- Business, commercial........................ 1,277 274 2,029 601 Automobile.................................. 7 -- 7 -- Other....................................... -- 1 -- 1 ---------- ---------- ---------- ---------- Total charge-offs......................... 1,284 332 2,039 662 ---------- ---------- ---------- ---------- Recoveries: 1-4 family residential real estate.......... 27 -- 227 -- Multifamily real estate..................... -- -- 9 70 Commercial and industrial real estate....... 7 (43) 7 27 Business, commercial........................ 388 198 442 228 Automobile.................................. 30 -- 33 14 Other....................................... -- -- 1 -- ---------- ---------- ---------- ---------- Total recoveries.......................... 452 155 719 339 ---------- ---------- ---------- ---------- Net charge-offs......................... 832 177 1,320 323 ---------- ---------- ---------- ---------- Allowance balance, end of period.............. $ 24,580 $ 20,019 $ 24,580 $ 20,019 Average loans outstanding..................... $1,695,101 $1,259,692 $1,654,270 $1,196,045 Total gross loans outstanding, end of period...................................... $1,682,119 $1,345,025 $1,682,119 $1,345,025 Net charge-offs to average loans.............. 0.05% 0.01% 0.08% 0.03% Allowance for loan losses to total gross loans....................................... 1.46 1.49 1.46 1.49 </TABLE> The Bank's total allowance for loan losses is comprised of two components-allocated and unallocated. The Bank utilizes several methodologies to determine the allocated portion of the allowance and to test overall adequacy. The two primary methodologies, the classification migration model and the individual loan review analysis methodology, provide the basis for determining allocations between the various loan categories as well as the overall adequacy of the allowance. These methodologies are augmented by 24
ancillary analyses, which include historical loss analyses, peer group comparisons, and analyses based on the federal regulatory interagency policy for loan and lease losses. The classification migration model utilizes net losses incurred by the Bank during the preceding five years in conjunction with current internal asset classifications. The model calculates loss factors for every classification category (i.e. pass, special mention, substandard and doubtful) for each loan type, except consumer loans which are analyzed as a homogeneous pool. These calculated loss factors are applied to outstanding loan balances, unused commitments and off-balance sheet exposures, such as letters of credit. While the amount of losses actually observed can vary significantly from estimated amounts derived from the model, the loss migration model is designed to be self-correcting by taking into account the Bank's recent loss experience. In addition, minimum loss rates are also utilized by management as a self- correcting mechanism to compensate for the lack of historical loss information on certain loan types and to reduce differences between estimated and actual observed losses. Specific allowances are established for loans where management believes that the probability of loss is in excess of the amount determined by the application of the migration model. These specific allowances for individual loans are incorporated into the migration model to determine the overall allowance requirement. The individual loan review analysis method provides a more contemporaneous assessment of the portfolio by incorporating individual asset evaluations prepared by both the Bank's credit administration department and an independent external credit review group. Specific monitoring policies and procedures are applied in analyzing the existing loan portfolios which vary according to relative risk profile. Residential single family and consumer loans are relatively homogeneous and no single loan is individually significant in terms of size or potential risk of loss. Therefore, residential and consumer portfolios are analyzed as a pool of loans, and individual loans are criticized or classified based solely on performance. In contrast, the monitoring process for multifamily, commercial real estate, construction, and commercial business loans include a periodic review of individual loans. Loans are reviewed at least annually and more frequently, if warranted by circumstances. For instance, loans that are performing but have shown some signs of weakness are subjected to more stringent reporting and oversight. Real estate loans and commercial business loans which are subject to individual loan review, and out-of-cycle individually reviewed loans, are monitored based on problem loan indicators such as loan payment, delinquencies, loan covenant or reporting violations, and property tax status. The estimated exposure and subsequent charge-offs that result from these individual loan reviews provide the basis for loss factors assigned to the various loan categories. The results from the classification migration model and the individual loan review analysis are then compared to various analyses, including historical losses, peer group comparisons and the federal regulatory interagency policy for loan and lease losses, to determine an overall allowance requirement amount. Factors that are considered in determining the final allowance requirement amount are scope and volume of completed individual loan reviews during the period, trends and applicability of historical loss migration analysis compared to current loan portfolio concentrations, and comparison of allowance levels to actual historical losses. 25
The following table reflects management's allocation of the allowance for loan losses by loan category and the ratio of each loan category to total loans as of the dates indicated: <TABLE> <CAPTION> JUNE 30, 2000 DECEMBER 31, 1999 JUNE 30, 1999 ------------------- ------------------- ------------------- AMOUNT % AMOUNT % AMOUNT % -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> 1-4 family residential real estate.......... $ 272 18.6% $ 345 18.4% $ 497 19.3% Multifamily real estate..................... 1,396 17.9 2,735 20.6 3,316 19.3 Commercial and industrial real estate....... 3,722 35.0 3,110 34.4 3,659 34.9 Construction................................ 3,038 8.5 2,597 8.1 1,489 7.1 Business, commercial........................ 12,375 17.7 9,244 16.5 7,498 17.5 Automobile.................................. 20 0.3 30 0.4 26 0.4 Consumer and other.......................... 26 2.0 9 1.6 29 1.5 Year 2000 exposure.......................... -- -- 650 Unallocated................................. 3,731 2,774 2,855 ------- ----- ------- ----- ------- ----- Total..................................... $24,580 100.0% $20,844 100.0% $20,019 100.0% ======= ===== ======= ===== ======= ===== </TABLE> Despite a 12% increase in the volume of single family loans at June 30, 2000 from year-end 1999 levels, allocated reserves on single family loans decreased $73 thousand, or 21%, to $272 thousand. primarily due to a decrease in the loss factor for single family loans that are not classified (i.e. rated "pass.") Over 98% of the loans within this category are rated "pass." Allocated reserves on multifamily loans decreased $1.3 million, or 49%, to $1.4 million as of June 30, 2000 primarily due to a significantly lower level of criticized (i.e. rated "special mention") assets within this loan category when compared to year-end 1999 levels. Further, a 3% decrease in the volume of loans in this loan category at June 30, 2000 in comparison to December 31, 1999 also contributed to the decrease in allocated reserves on this pool of loans. Allocated reserves on commercial real estate loans increased $612 thousand, or 20%, to $3.7 million primarily due to a 14% increase in the volume of loans in this category since December 31, 1999. In addition, the loss factor on commercial real estate loans rated "pass" decreased at June 30, 2000 when compared to the loss factor at December 31, 1999. Almost 99% of all commercial real estate loans have a "pass" rating. The $441 thousand, or 17%, increase in allocated reserves on construction loans to $3.0 million is primarily due to the increase in the volume of loans in this category, which rose 17% at June 30, 2000 relative to year-end 1999 levels. Allocated reserves on commercial business loans increased $3.1 million, or 34%, to $12.4 million as of June 30, 2000 for two reasons: a 20% increase in loan volume since year-end 1999 and higher levels of classified assets within this loan category compared to December 31, 1999 classifications. The allowance for loan losses of $24.6 million at June 30, 2000 exceeded the Bank's allocated allowance by $3.7 million, or 15% of the total allowance. This compares to an unallocated allowance of $2.8 million, or 13%, as of December 31, 1999. The $3.7 million unallocated allowance at June 30, 2000 is essentially comprised of two elements. First, the Bank has set aside approximately $2.1 million, or 10% of the allocated allowance amount of $20.9 million at June 30, 2000, to compensate for the estimation risk associated with the classification migration and individual loan review analysis methodologies. The second element, which accounts for approximately $1.4 million of the unallocated allowance, has been established for the foreign transaction risk associated with credit lines extended to financial institutions in foreign countries totaling $83.0 million. Loss factors, ranging from 0.50% to 2.50% of the total credit facility, have been assigned to absorb the loss exposure on this type of credit offering. These loss factors are internally determined based on the sovereign risk ratings of the various countries which range from BBB to AA. 26
DEPOSITS Deposits increased $312.5 million, or 21%, to $1.81 billion at June 30, 2000. The increase in deposits reflects $170.8 million in deposits acquired from American International Bank in January 2000. Excluding this transaction, internal deposit growth amounted to $141.8 million, or 9%, over December 31, 1999. This internal growth was primarily due to a 9% increase in time deposits of $93.6 million, resulting from the growth in brokered deposits and various promotions associated with the Chinese New Year holiday. Although the Company occasionally promotes certain time deposit products, its efforts are largely concentrated in increasing the volume of low-cost transaction accounts which generate higher fee income and are a less costly source of funds in comparison to time deposits. Excluding deposits acquired from American International Bank, noninterest-bearing demand deposits increased $15.8 million, or 12%, and money market accounts increased $22.2 million, or 32%, primarily due to new and existing commercial account relationships. Included in time deposits at June 30, 2000 are $124.6 million of brokered deposits, compared with $82.7 million as of December 31, 1999. The increase of $41.9 million essentially reflects the continued replacement of Federal Home Loan Bank advances with brokered deposits as an alternate source of funding. The transition to brokered deposits as an alternate source of funding enabled the Bank to release some investment securities which were previously pledged as collateral against FHLB advances. BORROWINGS The Bank regularly uses short-term borrowings and FHLB advances to manage its liquidity position. Short-term borrowings, which consist of federal funds purchased and securities sold under agreements to repurchase increased to $38.0 million at June 30, 2000, compared to $600 thousand at December 31, 1999. The increase in short-term borrowings during the first half of 2000 was primarily due to partial repayments of FHLB advances. FHLB advances decreased 36% to $310.5 million as of June 30, 2000, a decrease of $171.5 million from December 31, 1999. The decrease in FHLB advances resulted primarily from the growth in brokered deposits and short-term borrowings as alternate sources of funding. Cash acquired from American International Bank and runoffs on investment securities available for sale also contributed to the decrease in FHLB advances during the first six months of 2000. CAPITAL RESOURCES The primary source of capital for the Company is the retention of net after tax earnings. At June 30, 2000, stockholders' equity totaled $163.8 million, a 9% increase from $150.1 million as of December 31, 1999. The increase is due primarily to: (i) net income of $17.1 million during the first six months of 2000; (ii) net issuance of common stock totaling $45 thousand from the exercise of stock options; and (iii) stock compensation costs amounting to $228 thousand related to the Company's Restricted Stock Award Program. These transactions were offset by (i) payment of first and second quarter 2000 cash dividends totaling $1.3 million; (ii) forfeitures of restricted stock awards totaling $75 thousand; and (iii) a net increase of $2.5 million in unrealized losses on available-for-sale securities. Management is committed to maintaining capital at a level sufficient to assure shareholders, customers and regulators that the Company and its bank subsidiary are financially sound. The Company and its bank subsidiary are subject to risk-based capital regulations adopted by the federal banking regulators in January 1990. These guidelines are used to evaluate capital adequacy and are based on an institution's asset risk profile and off-balance sheet exposures. According to the regulations, institutions whose Tier 1 and total capital ratios meet or exceed 6% and 10%, respectively, are deemed to be "well-capitalized." At June 30, 2000, the Bank's Tier 1 and total capital ratios were 9.1% and 10.4%, respectively, compared to 9.3% and 10.6%, respectively, at December 31, 1999. During the first half of 2000, the Company filed a $50 million universal shelf registration statement with the Securities and Exchange Commission. Pursuant to this filing, the Company may offer new 27
common stock, trust preferred, preferred stock and/or other debentures to augment its capital resources. The timing and amount of offerings will depend on market and general business conditions. The Company intends to utilize the net proceeds from the sale of securities for general business purposes, which include supporting the growth of its commercial banking activities and possible future acquisitions. Additionally, the Company has issued a total of $20.8 million of junior subordinated deferrable interest debentures in two separate transactions. These securities qualify as Tier 1 capital for regulatory reporting purposes. The following table compares the Company's and the Bank's actual capital ratios at June 30, 2000, to those required by regulatory agencies for capital adequacy and well-capitalized classification purposes: <TABLE> <CAPTION> MINIMUM WELL EAST WEST EAST WEST REGULATORY CAPITALIZED BANCORP BANK REQUIREMENTS REQUIREMENTS --------- --------- ------------ ------------ <S> <C> <C> <C> <C> Total Capital (to Risk-Weighted Assets).......... 10.4% 10.4% 8.0% 10.0% Tier 1 Capital (to Risk-Weighted Assets)......... 9.1 9.1 4.0 6.0 Tier 1 Capital (to Average Assets)............... 7.2 7.1 4.0 5.0 </TABLE> ASSET LIABILITY AND MARKET RISK MANAGEMENT LIQUIDITY Liquidity management involves the Bank's ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers' credit needs and ongoing repayment of borrowings. The Bank's liquidity is actively managed on a daily basis and reviewed periodically by the Asset/Liability Committee and the Board of Directors. This process is intended to ensure the maintenance of sufficient funds to meet the needs of the Bank, including adequate cash flow for off-balance sheet instruments. The Bank's primary sources of liquidity are derived from financing activities which include the acceptance of customer and broker deposits, federal funds facilities, repurchase agreement facilities and advances from the Federal Home Loan Bank of San Francisco. These funding sources are augmented by payments of principal and interest on loans, the routine liquidation of securities from the available-for-sale portfolio and securitizations of eligible loans. Primary uses of funds include withdrawal of and interest payments on deposits, originations and purchases of loans, purchases of investment securities, and payment of operating expenses. During the six months ended June 30, 2000 and 1999, the Company experienced net cash inflows of $14.3 million and $22.5 million, respectively, from operating activities. The increase in net cash inflows from operating activities for both periods was due primarily to the growth in interest income on loans and investment securities. For the six months ended June 30, 1999, net proceeds from sales of loans held for sale also contributed to operating cash inflows for the period. Net cash outflows from investing activities totaled $192.3 million and $140.0 million, respectively, for the six months ended June 30, 2000 and 1999, primarily due to the growth of the Bank's loan portfolio. Financing activities provided net cash inflows of $186.9 million and $27.3 million, respectively, for the six months ended June 30, 2000 and 1999. Deposit growth largely accounted for the increase in net cash inflows from financing activities for both periods. As a means of augmenting its liquidity, the Bank has established federal funds lines with four correspondent banks and several master repurchase agreements with major brokerage companies. At June 30, 2000, the Bank's available borrowing capacity includes approximately $30.3 million in repurchase arrangements, $47.0 million in federal funds line facilities, and $245.7 million in unused FHLB advances. Management believes its liquidity sources to be stable and adequate. At June 30, 2000, management was not aware of any information that was reasonably likely to have a material effect on the Bank's liquidity position. 28
The liquidity of the parent company, East West Bancorp, Inc. is primarily dependent on the payment of cash dividends by its subsidiary, East West Bank, subject to limitations imposed by the Financial Code of the State of California. For the second quarter of 2000, total dividends paid by the Bank to East West Bancorp, Inc. totaled $331 thousand, compared with $6.8 million for the second quarter of 1999. For the six months ended June 30, 2000, total dividends paid by the Bank to East West Bancorp, Inc. totaled $1.2 million compared to $14.7 million for the same period in 1999. As of June 30, 2000, approximately $38.3 million of undivided profits of the Bank were available for dividends to the Company. INTEREST RATE SENSITIVITY MANAGEMENT The Bank's success is largely dependent upon its ability to manage interest rate risk, which is the impact of adverse fluctuations in interest rates on the Bank's net interest income and net portfolio value. Although in the normal course of business the Bank manages other risks, such as credit and liquidity risk, management considers interest rate risk to be its most significant market risk and could potentially have the largest material effect on the Bank's financial condition and results of operations. The fundamental objective of the asset liability management process is to manage the Bank's exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. The Bank's strategy is formulated by the Asset/Liability Committee, which coordinates with the Board of Directors to monitor the Bank's overall asset and liability composition. The Committee meets regularly to evaluate, among other things, the sensitivity of the Bank's assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses on its available-for-sale portfolio (including those attributable to hedging transactions), purchase and securitization activity, and maturities of investments and borrowings. The Bank's overall strategy is to minimize the adverse impact of immediate incremental changes in market interest rates (rate shock) on net interest income and net portfolio value. Net portfolio value is defined as the present value of assets, minus the present value of liabilities and off-balance sheet instruments. The attainment of this goal requires a balance between profitability, liquidity and interest rate risk exposure. The table below shows the estimated impact of changes in interest rates on net interest income and market value of equity as of June 30, 2000 and December 31, 1999, assuming a parallel shift of 100 to 200 basis points in both directions: <TABLE> <CAPTION> NET INTEREST INCOME NET PORTFOLIO VALUE VOLATILITY (1) VOLATILITY (2) ------------------------- ------------------------- CHANGE IN INTEREST RATES JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, (BASIS POINTS) 2000 1999 2000 1999 -------------- --------- ------------- --------- ------------- <S> <C> <C> <C> <C> +200 4.4% 2.6% (13.9)% (13.0)% +100 3.6% 2.1% (4.3)% (5.3)% -100 (3.6)% (2.7)% 8.0% 8.5% -200 (7.3)% (5.9)% 9.2% 8.5% </TABLE> - -------------------------- (1) The percentage change represents net interest income for twelve months in a stable interest rate environment versus net interest income in the various rate scenarios. (2) The percentage change represents net portfolio value of the Bank in a stable rate environment versus net portfolio value in the various rate scenarios. All interest-earning assets, interest-bearing liabilities and related derivative contracts are included in the interest rate sensitivity analysis at June 30, 2000 and December 31, 1999. At June 30, 2000 and December 31, 1999, the Bank's estimated changes in net interest income and net portfolio value were within the ranges established by the Board of Directors. 29
The primary analytical tool used by the Bank to gauge interest rate sensitivity is a simulation model used by many major banks and bank regulators, and is based on the actual maturity and repricing characteristics of interest-rate sensitive assets and liabilities. The model attempts to predict changes in the yields earned on assets and the rates paid on liabilities in relation to changes in market interest rates. The model also incorporates prepayment assumptions and market rates of interest provided by independent broker/dealer quotations, an independent pricing model and other available public sources. Adjustments are made to reflect the shift in the Treasury and other appropriate yield curves. The model factors in projections of anticipated activity levels by Bank product line and takes into account the Bank's increased ability to control rates offered on deposit products in comparison to its ability to control rates on adjustable-rate loans tied to published indices. The following tables provide the outstanding principal balances and the weighted average interest rates of the Bank's non-derivative financial instruments as of June 30, 2000 and December 31, 1999. The Bank does not consider these financial instruments to be materially sensitive to interest rate fluctuations. Historically, the balances of these financial instruments have remained fairly constant over various economic conditions. The information presented below is based on the repricing date for variable rate instruments and the expected maturity date for fixed rate instruments. <TABLE> <CAPTION> EXPECTED MATURITY OR REPRICING DATE BY YEAR ----------------------------------------------------------------- AFTER FAIR VALUE AT 2000 2001 2002 2003 2004 2004 TOTAL JUNE 30, 2000 ---------- -------- -------- -------- -------- -------- ---------- -------------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> AT JUNE 30, 2000 ASSETS: Short-term investments......... $ 5,000 $ -- $ -- $ -- $ -- $ -- $ 5,000 $ 5,000 Weighted average rate........ 6.00% --% --% --% --% --% 6.00% Investment securities available- for-sale (fixed rate)........ $ 47,780 $48,916 $35,161 $28,552 $22,584 $137,622 $ 320,615 $ 301,659 Weighted average rate........ 6.14% 6.20% 6.14% 6.15% 6.17% 6.35% 6.24% Investment securities available- for-sale (variable rate)..... $ 194,962 $ -- $ -- $ -- $ -- $ -- $ 194,962 $ 188,748 Weighted average rate........ 6.87% --% --% --% --% --% 6.87% Total gross loans.............. $1,370,283 $95,412 $74,178 $51,747 $37,554 $ 52,946 $1,682,120 $1,682,199 Weighted average rate........ 9.20% 8.12% 7.95% 8.00% 8.08% 8.13% 8.95% LIABILITIES: Checking accounts.............. $ 107,783 $ -- $ -- $ -- $ -- $ -- $ 107,783 $ 107,783 Weighted average rate........ 1.26% --% --% --% --% --% 1.26% Money market accounts.......... $ 116,361 $ -- $ -- $ -- $ -- $ -- $ 116,361 $ 116,361 Weighted average rate........ 3.77% --% --% --% --% --% 3.77% Savings deposits............... $ 223,199 $ -- $ -- $ -- $ -- $ -- $ 223,199 $ 223,199 Weighted average rate........ 1.92% --% --% --% --% --% 1.92% Time deposits.................. $1,109,919 $28,305 $ 7,143 $ 1,850 $ 1,791 $ 29,905 $1,178,913 $1,176,333 Weighted average rate........ 5.34% 5.29% 5.87% 5.23% 5.69% 7.00% 5.39% Short-term borrowings.......... $ 38,000 $ -- $ -- $ -- $ -- $ -- $ 38,000 $ 38,000 Weighted average rate........ 6.59% --% --% --% --% --% 6.59% FHLB advances.................. $ 286,500 $ 5,000 $ 9,000 $10,000 $ -- $ -- $ 310,500 $ 311,380 Weighted average rate........ 6.60% 6.55% 6.21% 5.78% --% --% 6.56% Junior subordinated debt securities................... $ -- $ -- $ -- $ -- $ -- $ 10,750 $ 10,750 $ 11,632 Weighted average rate........ --% --% --% --% --% 10.88% 10.88% </TABLE> 30
<TABLE> <CAPTION> EXPECTED MATURITY OR REPRICING DATE BY YEAR ----------------------------------------------------------------- AFTER FAIR VALUE AT 1999 2000 2001 2002 2003 2003 TOTAL DEC. 31, 1999 ---------- -------- -------- -------- -------- -------- ---------- -------------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> AT DECEMBER 31, 1999 ASSETS: Short-term investments......... $ 10,000 $ -- $ -- $ -- $ -- $ -- $ 10,000 $ 10,000 Weighted average rate........ 4.00% --% --% --% --% --% 4.00% Investment securities available-for-sale (fixed rate)........................ $ 49,783 $41,527 $35,429 $30,313 $24,322 $110,906 $ 292,280 $ 275,783 Weighted average rate........ 6.13% 6.14% 6.14% 6.14% 6.15% 6.16% 6.15% Investment securities available-for-sale (variable rate)........................ $ 225,040 $ -- $ -- $ -- $ -- $ -- $ 225,040 $ 220,643 Weighted average rate........ 6.43% --% --% --% --% --% 6.43% Total gross loans.............. $1,299,273 $78,110 $44,223 $32,686 $27,286 $ 26,196 $1,507,774 $1,511,241 Weighted average rate........ 8.42% 8.10% 8.02% 8.16% 8.21% 7.65% 8.37% LIABILITIES: Checking accounts.............. $ 89,545 $ -- $ -- $ -- $ -- $ -- $ 89,545 $ 89,545 Weighted average rate........ 1.22% --% --% --% --% --% 1.22% Money market accounts.......... $ 69,434 $ -- $ -- $ -- $ -- $ -- $ 69,434 $ 69,434 Weighted average rate........ 3.38% --% --% --% --% --% 3.38% Savings deposits............... $ 211,818 $ -- $ -- $ -- $ -- $ -- $ 211,818 $ 211,818 Weighted average rate........ 1.85% --% --% --% --% --% 1.85% Time deposits.................. $ 930,167 $36,894 $ 1,250 $ 667 $ 2,202 $ 30,000 $1,001,180 $1,002,176 Weighted average rate.......... 4.70% 5.03% 5.06% 5.09% 5.50% 7.00% 4.79% Short-term borrowings.......... $ 600 $ -- $ -- $ -- $ -- $ -- $ 600 $ 600 Weighted average rate........ 5.75% --% --% --% --% --% 5.75% FHLB advances.................. $ 468,000 $ -- $ -- $14,000 $ -- $ -- $ 482,000 $ 482,507 Weighted average rate.......... 5.86% --% --% 5.94% --% --% 5.87% </TABLE> Expected maturities of assets are contractual maturities adjusted for projected payment based on contractual amortization and unscheduled prepayments of principal as well as repricing frequency. Expected maturities for deposits are based on contractual maturities adjusted for projected rollover rates and changes in pricing for deposits with no stated maturity dates. The Bank utilizes assumptions supported by documented analyses for the expected maturities of its loans and repricing of its deposits. It also relies on third party data providers for prepayment projections for amortizing securities. The actual maturities of these instruments could vary significantly if future prepayments and repricing differ from the Bank's expectations based on historical experience. The fair values of short-term investments approximate their book values due to their short maturities. The fair values of available for sale securities are based on bid quotations from third party data providers. The fair values of loans are estimated for portfolios with similar financial characteristics and takes into consideration discounted cash flows based on expected maturities or repricing dates utilizing estimated market discount rates as projected by third party data providers. Transaction deposit accounts, which include checking, money market and savings accounts, are presumed to have equal book and fair values because the interest rates paid on these accounts are based on prevailing market rates. The fair value of time deposits is based upon the discounted value of contractual cash flows, which is estimated using current rates offered for deposits of similar remaining terms. The fair value of short-term borrowings approximates book value due to their short maturities. The fair value of FHLB advances is estimated by discounting the cash flows through maturity or the next repricing date based on current rates offered by the FHLB for borrowings with similar maturities. The fair value of junior subordinated debt securities is estimated by discounting the cash flows through maturity based on current rates offered on the 30-year Treasury bond. 31
The Asset/Liability Committee is authorized to utilize a wide variety of off-balance sheet financial techniques to assist in the management of interest rate risk. Derivative positions are integral components of the Bank's asset/liability management strategy. Therefore, the Bank does not believe it is meaningful to separately analyze the derivatives components of its risk management activities in isolation from their related positions. The Bank uses derivative instruments, primarily interest rate swap and cap agreements, as part of its management of asset and liability positions in connection with its overall goal of minimizing the impact of interest rate fluctuations on the Bank's net interest margin or its stockholders' equity. These contracts are entered into for purposes of reducing the Bank's interest rate risk and not for trading purposes. The Bank enters into interest rate swap agreements for the purposes of converting fixed rate loans and deposits to floating rate assets and liabilities. The total gross notional amount of interest rate swaps was $58.5 million as of June 30, 2000 and December 31, 1999. At June 30, 2000, the net unrealized loss on the entire swap agreement portfolio was $1.2 million compared to a net unrealized loss of $1.4 million at December 31, 1999. The Bank has also entered into interest rate cap agreements which are primarily linked to the three-month LIBOR. Prior to October 1, 1999, the Bank used interest rate caps for purposes of hedging against market fluctuations in the Bank's available-for-sale securities portfolio. Due to the volatility of the correlation between the Treasury yield curve and fixed rate mortgage-backed securities, the Bank ceased using interest rate caps to hedge against fluctuations in the investment securities available for sale portfolio, effective October 1, 1999. The Bank continues to record interest rate caps at their estimated fair values, with resulting gains or losses recorded in current earnings. The unrealized gains and losses reflected in accumulated other comprehensive income (loss) in stockholders' equity as of September 30, 1999 are amortized into interest income or expense over the expected remaining lives of the interest rate cap agreements. The following table summarizes the expected maturities, weighted average pay and receive rates, and the unrealized gains and losses of the Bank's interest rate contracts as of June 30, 2000 and December 31, 1999. The fair values reflected in the table are based on quoted market prices from broker dealers making a market for these derivatives. <TABLE> <CAPTION> EXPECTED MATURITY ---------------------------------------------------- UNREALIZED AVERAGE AFTER GAIN EXPECTED 2000 2001 2002 2003 2003 TOTAL (LOSS) MATURITY -------- -------- -------- -------- -------- -------- ---------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> AT JUNE 30, 2000 Interest rate swap agreements: Notional amount............ $-- $10,000 $18,500 $ -- $30,000 $58,500 $(1,194) 5.6 Years Weighted average receive rate..................... --% 6.14% 6.13% --% 7.00% 6.58% Weighted average pay rate..................... --% 6.46% 6.45% --% 6.17% 6.31% Interest rate cap agreements: Notional amount............ $-- $18,000 $18,000 $ -- $ -- $36,000 $ -- 1.6 Years LIBOR cap rate............. --% 6.50% 7.00% --% --% 6.75% </TABLE> 32
<TABLE> <CAPTION> EXPECTED MATURITY ---------------------------------------------------- UNREALIZED AVERAGE AFTER GAIN EXPECTED 1999 2000 2001 2002 2002 TOTAL (LOSS) MATURITY -------- -------- -------- -------- -------- -------- ---------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> AT DECEMBER 31, 1999 Interest rate swap agreements: Notional amount............ $-- $ -- $10,000 $18,500 $30,000 $58,500 $(1,408) 6.1 Years Weighted average receive rate..................... --% --% 5.24% 5.29% 7.00% 6.16% Weighted average pay rate..................... --% --% 6.46% 6.45% 6.10% 6.27% Interest rate cap agreements: Notional amount............ $-- $ -- $18,000 $18,000 $ -- $36,000 $ -- 2.1 Years LIBOR cap rate............. --% --% 6.50% 7.00% --% 6.75% </TABLE> ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISKS For quantitative and qualitative disclosures regarding market risks in the Bank's portfolio, see, "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations--Asset Liability and Market Risk Management." 33
PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Neither the Bank nor the Company is involved in any material legal proceedings. The Bank, from time to time is party to litigation which arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. In the opinion of management, based upon the advice of legal counsel, the resolution of any such issues would not have a material adverse impact on the financial position, results of operations, or liquidity of the Bank or the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS No events have transpired which would make response to this item appropriate. ITEM 3. DEFAULTS UPON SENIOR SECURITIES No events have transpired which would make response to this item appropriate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No events have transpired which would make response to this item appropriate. ITEM 5. OTHER INFORMATION No events have transpired which would make response to this item appropriate. ITEM 6. ITEM EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Index <TABLE> <CAPTION> EXHIBIT NUMBER EXHIBIT DESCRIPTION - -------------- ------------------- <S> <C> 27 Financial Data Schedule </TABLE> All other material referenced in this report which is required to be filed as an exhibit hereto has previously been submitted. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the second quarter of 2000. 34
SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. <TABLE> <S> <C> <C> Dated: August 11, 2000 EAST WEST BANCORP, INC. (Registrant) By: /s/ JULIA GOUW ----------------------------------------- JULIA GOUW EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER </TABLE> 35