UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

Mark One

 

þ                                    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

or

 

¨                                    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission file number 000-24939

 

 

EAST WEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

95-4703316

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

135 N. Los Robles Ave, 7th Floor, Pasadena, California 91101

(Address of principal executive offices) (Zip Code)

 

(626) 768-6000

(Registrant’s telephone number, including area code)

 

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 þ   No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ   No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer and accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer
þ

 

Accelerated filer
¨

Non-accelerated filer
¨

Smaller reporting company
¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No þ

 

Number of shares outstanding of the issuer’s common stock on the latest practicable date: 144,580,471 shares of common stock as of April 30, 2012.

 



 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

4

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

4

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

53

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

77

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

78

 

 

 

 

 

PART II - OTHER INFORMATION

 

78

 

 

 

Item 1.

 

Legal Proceedings

 

78

 

 

 

 

 

Item 1A.

 

Risk Factors

 

78

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

79

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

79

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

79

 

 

 

 

 

Item 5.

 

Other Information

 

79

 

 

 

 

 

Item 6.

 

Exhibits

 

80

 

 

 

 

 

SIGNATURE

 

81

 

2



 

Forward-Looking Statements

 

Certain matters discussed in this Quarterly Report contain or incorporate statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Exchange Act”), and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language, such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described in the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us.

 

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:

 

·                                          our ability to manage the loan portfolio acquired from FDIC-assisted acquisitions within the limits of the loss protection provided by the FDIC;

 

·                                          changes in our borrowers’ performance on loans;

 

·                                          changes in the commercial and consumer real estate markets;

 

·                                          changes in our costs of operation, compliance and expansion;

 

·                                          changes in the economy, including inflation;

 

·                                          changes in government interest rate policies;

 

·                                          changes in laws or the regulatory environment;

 

·                                          changes in critical accounting policies and judgments;

 

·                                          changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies;

 

·                                          changes in the equity and debt securities markets;

 

·                                          changes in competitive pressures on financial institutions;

 

·           effect of additional provision for loan losses;

 

·                                          fluctuations of our stock price;

 

·                                          success and timing of our business strategies;

 

·                                          impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity;

 

·                                          changes in our ability to receive dividends from our subsidiaries; and

 

·                                          political developments, wars or other hostilities may disrupt or increase volatility in securities or otherwise affect economic conditions.

 

For a more detailed discussion of some of the factors that might cause such differences, see the Company’s 2011 Form 10-K under the heading “ITEM 1A. RISK FACTORS” and the information set forth under “RISK FACTORS” in this Form 10-Q. The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

 

3



 

PART I – FINANCIAL INFORMATION

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

  $

1,635,854

 

  $

1,431,185

 

Short-term investments

 

177,576

 

61,834

 

Federal funds sold

 

30,000

 

 

Securities purchased under resale agreements

 

650,000

 

786,434

 

Investment securities available-for-sale, at fair value (with amortized cost of $2,737,687 at March 31, 2012 and $3,132,968 at December 31, 2011)

 

2,706,720

 

3,072,578

 

Loans held for sale

 

280,830

 

278,603

 

Loans receivable, excluding covered loans (net of allowance for loan losses of $214,253 at March 31, 2012 and $209,876 at December 31, 2011)

 

10,264,826

 

10,061,788

 

Covered loans (net of allowance for loan losses of $8,268 at March 31, 2012 and $6,647 at December 31, 2011)

 

3,683,698

 

3,923,142

 

Total loans receivable, net

 

13,948,524

 

13,984,930

 

FDIC indemnification asset

 

457,265

 

511,135

 

Other real estate owned, net

 

46,343

 

29,350

 

Other real estate owned covered, net

 

55,586

 

63,624

 

Total other real estate owned

 

101,929

 

92,974

 

Investment in affordable housing partnerships

 

160,672

 

144,445

 

Premises and equipment, net

 

116,266

 

118,926

 

Accrued interest receivable

 

95,337

 

89,686

 

Due from customers on acceptances

 

179,880

 

198,774

 

Premiums on deposits acquired, net

 

64,317

 

67,190

 

Goodwill

 

337,438

 

337,438

 

Other assets

 

807,174

 

792,535

 

TOTAL

 

  $

21,749,782

 

  $

21,968,667

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Customer deposit accounts:

 

 

 

 

 

Noninterest-bearing

 

  $

3,690,131

 

  $

3,492,795

 

Interest-bearing

 

13,648,438

 

13,960,207

 

Total deposits

 

17,338,569

 

17,453,002

 

Federal Home Loan Bank advances

 

394,719

 

455,251

 

Securities sold under repurchase agreements

 

995,000

 

1,020,208

 

Bank acceptances outstanding

 

179,880

 

198,774

 

Long-term debt

 

212,178

 

212,178

 

Accrued expenses and other liabilities

 

346,139

 

317,511

 

Total liabilities

 

19,466,485

 

19,656,924

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized; Series A, non-cumulative convertible, 200,000 shares issued and 85,710 shares outstanding in 2012 and 2011.

 

83,027

 

83,027

 

Common stock, $0.001 par value, 200,000,000 shares authorized; 157,003,114 and 156,798,011 shares issued in 2012 and 2011, respectively; 144,870,621 and 149,327,907 shares outstanding in 2012 and 2011, respectively.

 

157

 

157

 

Additional paid in capital

 

1,449,971

 

1,443,883

 

Retained earnings

 

986,195

 

934,617

 

Treasury stock, at cost 12,132,493 shares in 2012 and 7,470,104 shares in 2011

 

(219,175

)

(116,001

)

Accumulated other comprehensive loss, net of tax

 

(16,878

)

(33,940

)

Total stockholders’ equity

 

2,283,297

 

2,311,743

 

TOTAL

 

  $

21,749,782

 

  $

21,968,667

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

2012

 

2011

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

Loans receivable, including fees

 

  $

221,039

 

  $

227,526

 

Investment securities

 

21,232

 

18,857

 

Securities purchased under resale agreements

 

4,314

 

4,270

 

Investment in Federal Home Loan Bank stock

 

220

 

233

 

Investment in Federal Reserve Bank stock

 

713

 

709

 

Short-term investments

 

6,532

 

2,740

 

Total interest and dividend income

 

254,050

 

254,335

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

Customer deposit accounts

 

20,164

 

25,982

 

Federal funds purchased

 

2

 

 

Federal Home Loan Bank advances

 

2,142

 

5,778

 

Securities sold under repurchase agreements

 

11,722

 

12,017

 

Long-term debt

 

1,102

 

1,571

 

Other borrowings

 

 

153

 

Total interest expense

 

35,132

 

45,501

 

 

 

 

 

 

 

Net interest income before provision for loan losses

 

218,918

 

208,834

 

Provision for loan losses

 

18,100

 

26,506

 

Net interest income after provision for loan losses

 

200,818

 

182,328

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

Impairment loss on investment securities

 

(5,165

)

(5,555

)

Less: Noncredit-related impairment loss recorded in other comprehensive income

 

5,066

 

5,091

 

Net impairment loss on investment securities recognized in earnings

 

(99

)

(464

)

Decrease in FDIC indemnification asset and receivable

 

(5,418

)

(17,443

)

Branch fees

 

8,294

 

7,754

 

Net gain on sales of investment securities

 

483

 

2,515

 

Letters of credit fees and comissions

 

4,275

 

3,044

 

Foreign exchange income

 

1,796

 

1,927

 

Ancillary loan fees

 

2,008

 

1,991

 

Income from life insurance policies

 

990

 

984

 

Net gain on sales of loans

 

5,179

 

7,410

 

Other operating income

 

4,232

 

3,323

 

Total noninterest income

 

21,740

 

11,041

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

 

 

 

Compensation and employee benefits

 

46,409

 

38,270

 

Occupancy and equipment expense

 

13,518

 

12,598

 

Amortization of investments in affordable housing partnerships and other investments

 

4,466

 

4,525

 

Amortization of premiums on deposits acquired

 

2,873

 

3,185

 

Deposit insurance premiums and regulatory assessments

 

3,992

 

7,191

 

Loan-related expenses

 

4,481

 

3,099

 

Other real estate owned expense

 

10,865

 

10,664

 

Legal expense

 

7,173

 

4,101

 

Prepayment penalty for FHLB advances

 

1,321

 

4,022

 

Data processing

 

2,464

 

2,603

 

Deposit-related expenses

 

1,427

 

1,159

 

Consulting expense

 

1,467

 

1,626

 

Other operating expenses

 

14,307

 

13,746

 

Total noninterest expense

 

114,763

 

106,789

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

107,795

 

86,580

 

PROVISION FOR INCOME TAXES

 

39,712

 

30,509

 

NET INCOME

 

68,083

 

56,071

 

PREFERRED STOCK DIVIDENDS

 

1,714

 

1,715

 

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

 

  $

66,369

 

  $

54,356

 

 

 

 

 

 

 

EARNINGS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS

 

 

 

 

 

BASIC

 

  $

0.46

 

  $

0.37

 

DILUTED

 

  $

0.45

 

  $

0.37

 

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING

 

 

 

 

 

BASIC

 

145,347

 

146,837

 

DILUTED

 

151,996

 

153,334

 

DIVIDENDS DECLARED PER COMMON SHARE

 

  $

0.10

 

  $

0.01

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

 

 

 

 

2012

 

2011

 

Net income

 

  $

68,083

 

  $

56,071

 

Other comprehensive income, net of tax:

 

 

 

 

 

Unrealized gain on investment securities available-for-sale:

 

 

 

 

 

Unrealized holding gains arising during period

 

16,611

 

2,333

 

Reclassification adjustment for net losses/(gains) included in net income

 

3,379

 

3,611

 

Noncredit-related impairment loss on securities

 

(2,938)

 

(2,953

)

Foreign currency translation adjustments

 

10

 

(732

)

Other comprehensive income

 

17,062

 

2,259

 

COMPREHENSIVE INCOME

 

  $

85,145

 

  $

58,330

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

 

 

 

 

Additional

 

 

 

Additional

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Paid In

 

 

 

Paid In

 

 

 

 

 

Other

 

 

 

 

 

 

 

Capital

 

 

 

Capital

 

 

 

 

 

Comprehensive

 

Total

 

 

 

Preferred

 

Preferred

 

Common

 

Common

 

Retained

 

Treasury

 

Income (Loss),

 

Stockholders’

 

 

 

Stock

 

Stock

 

Stock

 

Stock

 

Earnings

 

Stock

 

Net of Tax

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, JANAURY 1, 2011

 

  $

 

  $

83,058

 

  $

156

 

  $

1,434,277

 

  $

720,116

 

  $

(111,262

)

  $

(12,414

)

  $

2,113,931

 

Net income

 

 

 

 

 

 

 

 

 

56,071

 

 

 

 

 

56,071

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

2,259

 

2,259

 

Stock compensation costs

 

 

 

 

 

 

 

2,287

 

 

 

 

 

 

 

2,287

 

Tax benefit from stock compensation plans, net

 

 

 

 

 

 

 

43

 

 

 

 

 

 

 

43

 

Issuance of 158,878 shares of common stock pursuant to various stock compensation plans and agreements

 

 

 

 

 

 

 

1,575

 

 

 

 

 

 

 

1,575

 

Conversion of 31 shares of Series A preferred stock into 2,014 shares of common stock

 

 

 

(31

)

 

 

31

 

 

 

 

 

 

 

 

Cancellation of 42,524 shares of common stock due to forfeitures of issued restricted stock

 

 

 

 

 

 

 

727

 

 

 

(727

)

 

 

 

Purchase of 23,676 shares of treasury stock due to the vesting of restricted stock

 

 

 

 

 

 

 

 

 

 

 

(548

)

 

 

(548

)

Preferred stock dividends

 

 

 

 

 

 

 

 

 

(1,715

)

 

 

 

 

(1,715

)

Common stock dividends

 

 

 

 

 

 

 

 

 

(1,486

)

 

 

 

 

(1,486

)

Repurchase of 1,517,555 common stock warrants

 

 

 

 

 

 

 

(14,500

)

 

 

 

 

 

 

(14,500

)

BALANCE, MARCH 31, 2011

 

  $

 

  $

83,027

 

  $

156

 

  $

1,424,440

 

  $

772,986

 

  $

(112,537

)

  $

(10,155

)

  $

2,157,917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, JANAURY 1, 2012

 

  $

 

  $

83,027

 

  $

157

 

  $

1,443,883

 

  $

934,617

 

  $

(116,001

)

  $

(33,940

)

  $

2,311,743

 

Net income

 

 

 

 

 

 

 

 

 

68,083

 

 

 

 

 

68,083

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

17,062

 

17,062

 

Stock compensation costs

 

 

 

 

 

 

 

3,637

 

 

 

 

 

 

 

3,637

 

Tax benefit from stock compensation plans, net

 

 

 

 

 

 

 

29

 

 

 

 

 

 

 

29

 

Issuance of 205,103 shares of common stock pursuant to various stock compensation plans and agreements

 

 

 

 

 

 

 

1,539

 

 

 

 

 

 

 

1,539

 

Cancellation of 47,489 shares of common stock due to forfeitures of issued restricted stock

 

 

 

 

 

 

 

883

 

 

 

(883

)

 

 

 

Purchase of 60,073 shares of treasury stock due to the vesting of restricted stock

 

 

 

 

 

 

 

 

 

 

 

(1,313

)

 

 

(1,313

)

Preferred stock dividends

 

 

 

 

 

 

 

 

 

(1,714

)

 

 

 

 

(1,714

)

Common stock dividends

 

 

 

 

 

 

 

 

 

(14,791

)

 

 

 

 

(14,791

)

Purchase of 4,554,827 shares of treasury stock pursuant to the Stock Repurchase Program

 

 

 

 

 

 

 

 

 

 

 

(100,978

)

 

 

(100,978

)

BALANCE, MARCH 31, 2012

 

  $

 

  $

83,027

 

  $

157

 

  $

1,449,971

 

  $

986,195

 

  $

(219,175

)

  $

(16,878

)

  $

2,283,297

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

  $

68,083

 

  $

56,071

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

19,459

 

15,429

 

(Accretion) of discount and amortization of premiums, net

 

(34,660

)

(45,236

)

Decrease in FDIC indemnification asset and receivable

 

5,418

 

17,443

 

Stock compensation costs

 

3,637

 

2,287

 

Deferred tax (benefit) expense

 

(20,159

)

26,901

 

Provision for loan losses

 

18,100

 

26,506

 

Impairment on other real estate owned

 

7,389

 

7,816

 

Net gain on sales of investment securities, loans and other assets

 

(7,014

)

(9,070

)

Originations and purchases of loans held for sale

 

(15,782

)

(6,150

)

Proceeds from sales of loans held for sale

 

 

7,235

 

Prepayment penalty for Federal Home Loan Bank advances, net

 

1,321

 

4,022

 

Prepayment penalty on modification of Federal Home Loan Bank advances

 

(37,678

)

 

Net proceeds from FDIC shared-loss agreements

 

39,358

 

44,399

 

Net change in accrued interest receivable and other assets

 

(27,165

)

26,138

 

Net change in accrued expenses and other liabilities

 

40,427

 

(15,143

)

Other net operating activities

 

(713

)

(338

)

Total adjustments

 

(8,062

)

102,239

 

Net cash provided by operating activities

 

60,021

 

158,310

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Net (increase) decrease in:

 

 

 

 

 

Loans

 

68,532

 

(8,348

)

Short-term investments

 

(115,742

)

2,975

 

Federal funds sold

 

(30,000

)

 

Purchases of:

 

 

 

 

 

Securities purchased under resale agreements

 

 

(268,369

)

Investment securities available-for-sale

 

(8,018

)

(590,045

)

Loans receivable

 

(116,486

)

(297,690

)

Investments in affordable housing partnerships

 

(17,850

)

(8,828

)

Proceeds from sale of:

 

 

 

 

 

Investment securities available-for-sale

 

260,261

 

312,870

 

Loans receivable

 

27,639

 

92,840

 

Loans held for sale originated for investment

 

52,559

 

143,244

 

Other real estate owned

 

22,791

 

33,612

 

Repayments, maturities and redemptions of investment securities available-for-sale

 

138,650

 

228,320

 

Paydowns, maturities and termination of securities purchased under resale agreements

 

136,434

 

 

Redemption of Federal Home Loan Bank stock

 

6,391

 

6,330

 

Other net investing activities

 

(832

)

(982

)

Net cash provided by (used in) investing activities

 

424,329

 

(354,071

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net increase (decrease) in:

 

 

 

 

 

Deposits

 

(113,801

)

795,971

 

Short-term borrowings

 

(25,208

)

(2,526

)

Proceeds from:

 

 

 

 

 

Issuance of common stock pursuant to various stock plans and agreements

 

1,539

 

1,575

 

Payment for:

 

 

 

 

 

Repayment of FHLB advances

 

(23,003

)

(420,887

)

Repurchase of common stock warrants

 

 

(14,500

)

Repurchase of shares of treasury stock pursuant to the Stock Repurchase Plan

 

(100,978

)

 

Cash dividends

 

(16,495

)

(3,201

)

Other net financing activities

 

(1,284

)

(505

)

Net cash (used in) provided by financing activities

 

(279,230

)

355,927

 

Effect of exchange rate changes on cash and cash equivalents

 

(451

)

(1,193

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

204,669

 

158,973

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

1,431,185

 

1,333,949

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

  $

1,635,854

 

  $

1,492,922

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

  $

34,140

 

  $

46,347

 

Income tax payments, net of refunds

 

23,422

 

3,282

 

Noncash investing and financing activities:

 

 

 

 

 

Loans transferred to loans held for sale

 

40,800

 

243,119

 

Transfers to other real estate owned

 

39,572

 

68,534

 

Loans to facilitate sales of other real estate owned

 

400

 

7,562

 

Loans to facilitate sales of loans

 

 

13,154

 

Conversion of preferred stock to common stock

 

 

31

 

 

See accompanying notes to condensed consolidated financial statements.

 

8



 

EAST WEST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

NOTE 1 — BASIS OF PRESENTATION

 

The condensed consolidated financial statements include the accounts of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) and its wholly-owned subsidiaries, East West Bank and subsidiaries (“East West Bank” or the “Bank”) and East West Insurance Services, Inc. Intercompany transactions and accounts have been eliminated in consolidation. East West also has seven wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, the Trusts are not consolidated into the accounts of East West Bancorp, Inc.

 

The interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments that, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the three months ended March 31, 2012 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. Events subsequent to the condensed consolidated balance sheet date have been evaluated through the date the financial statements are issued for inclusion in the accompanying financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Certain prior year balances have been reclassified to conform to current year presentation.

 

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

 

Derivative Financial Instruments—As part of its asset and liability management strategy, the Company uses derivative financial instruments to mitigate exposure to interest rate and foreign currency risks. All derivative instruments, including certain derivative instruments embedded in other contracts, are recognized on the condensed consolidated balance sheet at fair value with the change in fair value reported in earnings. When master netting agreements exist, the Company nets counterparty positions with any cash collateral received or delivered.

 

The Company’s interest rate swaps on certain certificates of deposit qualify for hedge accounting treatment under ASC 815, Derivatives and Hedging. The Company documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction at the time the derivative contract is executed. This includes designating the derivative contract as a “fair value hedge” which is a hedge of a recognized asset or liability. All derivatives designated as fair value hedges are linked to specific hedged items or to groups of specific assets and liabilities on the balance sheet. Both at inception and quarterly thereafter, the Company assesses whether the derivatives used in hedging transactions are highly effective (as defined in the guidance) in offsetting changes in the fair value of the hedged item. Retroactive effectiveness is also assessed as well as the continued expectation that the hedge will remain effective prospectively. Any ineffective portion of the changes of fair value hedges is recognized immediately in interest expense in the condensed consolidated statements of income.

 

9



 

The Company discontinues hedge accounting prospectively when (i) a derivative is no longer highly effective in offsetting changes in the fair value, (ii) a derivative expires or is sold, terminated, or exercised, or (iii) the Company determines that designation of a derivative as a hedge is no longer appropriate. If a fair value hedge derivative instrument is terminated or the hedge designation removed, the previous adjustments to the carrying amount of the hedged liability would be subsequently accounted for in the same manner as other components of the carrying amount of that liability. For interest-bearing liabilities, such adjustments would be amortized into earnings over the remaining life of the respective liability.

 

The Company adopted ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs and has made the accounting policy election to use the exception in ASC 820 with respect to measuring counterparty credit risk for derivative instruments. That exception permits the Company to measure the fair value of a group of financial assets and liabilities on the basis of the price that would be received to sell an asset position or to transfer a liability position for a particular risk exposure, based on specified criteria, which have been met by the Company.

 

Comprehensive Income—The term “comprehensive income” describes the total of all components of comprehensive income, including net income and other comprehensive income. “Other comprehensive income” refers to revenues, expenses, and gains and losses that are included in comprehensive income but are excluded from net income because they have been recorded directly in equity under the provisions of other Financial Accounting Standards Board statements. In accordance with the adoption of ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, the Company presents comprehensive income in the condensed consolidated statements of comprehensive income, which was formerly presented in the condensed consolidated statements of changes in stockholders’ equity.

 

Recent Accounting Standards

 

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies the guidance on the two conditions that must exist in evaluating whether a restructuring constitutes a troubled debt restructuring:  that the restructuring constitutes a concession and that the debtor is experiencing financial difficulties. In addition, ASU 2011-02 clarifies that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring. The amendments in ASU 2011-02 are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Additionally, ASU 2011-02 finalizes the effective date for the disclosures required by paragraphs 310-10-50-33 through 50-34, which were deferred by ASU 2011-01, for interim and annual periods beginning on or after June 15, 2011. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.

 

In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860):  Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 removes the transferor’s ability criterion from the consideration of effective control for repos and other agreements that both entitle and obligate the transferor to repurchase or redeem financial assets before their maturity. The amendments in ASU 2011-03 remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The FASB indicates that eliminating the transferor’s ability criterion and related implementation guidance from an entity’s assessment of effective control should improve the accounting for repos and other similar transactions.

 

10



 

The amendments in ASU 2011-03 are effective for the first interim or annual period beginning on or after December 15, 2011 and are to be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 addresses convergence between GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. The amendments in ASU 2011-04 are effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured, or when they must be reclassified to net income. The FASB amended ASU 2011-05 in December 2011, with the issuance of ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers only changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. Both standards are effective for interim and annual periods beginning after December 15, 2011. The adoption of these standards only affected the presentation of the Company’s condensed consolidated financial statements and did not have an impact on the financial amounts presented in the statements.

 

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 gives both public and nonpublic companies the option to qualitatively determine whether they can bypass the two-step goodwill impairment test under ASC 350-20, Intangibles – Goodwill and Other: Goodwill. Under ASU 2011-08, if a company chooses to perform a qualitative assessment and determines that it is more likely than not (a more than 50 percent likelihood) that the fair value of a reporting unit is less than its carrying amount, it would then perform Step 1 of the annual goodwill impairment test in ASC 350-20 and, if necessary, proceed to Step 2. Otherwise, no further evaluation would be necessary. The amended guidance is effective for interim and annual periods beginning after December 15, 2011. The Company has elected to continue to assess the two-step goodwill impairment, quantitatively. As such, this guidance did not have an impact on the Company’s condensed consolidated financial statements.

 

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 addresses the differences in offsetting requirements between GAAP and IFRS by enhancing disclosures about financial instruments and derivative instruments that are either offset in accordance with GAAP or are subject to an enforceable master netting arrangement or similar agreement.

 

11



 

Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The guidance is effective for interim and annual reporting periods beginning on or after January 1, 2013, and must be applied retrospectively to all comparative periods presented. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material effect on its condensed consolidated financial statements.

 

NOTE 3 — FAIR VALUE

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market and income approaches. Based on these approaches, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy noted below. The hierarchy is based on the quality and reliability of the information used to determine fair values. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

·                                          Level 1 – Quoted prices for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Level 1 financial instruments typically include U.S. Treasury securities.

 

·                                          Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data. Level 2 financial instruments typically include U.S. Government debt and agency mortgage-backed securities, municipal securities, corporate debt securities, single issue trust preferred securities, equity swap agreements, foreign exchange options, interest rate swaps, impaired loans and other real estate owned (“OREO”).

 

·                                          Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category typically includes pooled trust preferred securities and derivatives payable.

 

The Company records investment securities available-for-sale, equity swap agreements, derivative liabilities, foreign exchange options, interest rate swaps, short-term foreign exchange contracts and short-term call option at fair value on a recurring basis. Certain other assets such as mortgage servicing assets, impaired loans, other real estate owned, loans held for sale, goodwill, premiums on acquired deposits and other investments are recorded at fair value on a nonrecurring basis. Nonrecurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the remeasurement is performed.

 

In determining the appropriate hierarchy levels, the Company performs a detailed analysis of assets and liabilities that are subject to fair value disclosure. The following tables present both financial and nonfinancial assets and liabilities that are measured at fair value on a recurring and nonrecurring basis. These assets and liabilities are reported on the condensed consolidated balance sheets at their fair values as of March 31, 2012 and December 31, 2011. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

 

12



 

There were no transfers in and out of Levels 1 and 2 during the first three months of 2012. There were also no transfers in and out of Levels 1 and 3 or Levels 2 and 3 during the first three months of 2012.

 

 

 

Assets (Liabilities) Measured at Fair Value on a Recurring Basis

 

 

 

as of March 31, 2012

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

Fair Value

 

Active Markets

 

Other

 

Significant

 

 

 

Measurements

 

for Identical

 

Observable

 

Unobservable

 

 

 

March 31,

 

Assets

 

Inputs

 

Inputs

 

 

 

2012

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(In thousands)

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

  $

20,618

 

  $

20,618

 

  $

 

  $

 

U.S. Government agency and U.S. Government sponsored enterprise debt securities

 

514,322

 

 

514,322

 

 

U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:

 

 

 

 

 

 

 

 

 

Commercial mortgage-backed securities

 

49,383

 

 

49,383

 

 

Residential mortgage-backed securities

 

924,631

 

 

924,631

 

 

Municipal securities

 

82,772

 

 

82,772

 

 

Corporate debt securities:

 

 

 

 

 

 

 

 

 

Investment grade

 

1,090,609

 

 

1,090,609

 

 

Non-investment grade

 

13,922

 

 

11,675

 

2,247

 

Other securities

 

10,463

 

 

10,463

 

 

Total investment securities available-for-sale

 

  $

2,706,720

 

  $

20,618

 

  $

2,683,855

 

  $

2,247

 

Equity swap agreements

 

  $

204

 

  $

 

  $

204

 

  $

 

Foreign exchange options

 

4,695

 

 

4,695

 

 

Interest rate swaps

 

18,432

 

 

18,432

 

 

Short-term foreign exchange contracts

 

2,045

 

 

2,045

 

 

Derivatives liabilities

 

(25,291

)

 

(22,169

)

(3,122

)

 

 

 

 

Assets (Liabilities) Measured at Fair Value on a Recurring Basis

 

 

 

as of December 31, 2011

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

Fair Value

 

Active Markets

 

Other

 

Significant

 

 

 

Measurements

 

for Identical

 

Observable

 

Unobservable

 

 

 

December 31,

 

Assets

 

Inputs

 

Inputs

 

 

 

2011

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(In thousands)

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

  $

20,725

 

  $

20,725

 

  $

 

  $

 

U.S. Government agency and U.S. Government sponsored enterprise debt securities

 

576,578

 

 

576,578

 

 

U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:

 

 

 

 

 

 

 

 

 

Commercial mortgage-backed securities

 

49,315

 

 

49,315

 

 

Residential mortgage-backed securities

 

993,770

 

 

993,770

 

 

Municipal securities

 

79,946

 

 

79,946

 

 

Corporate debt securities:

 

 

 

 

 

 

 

 

 

Investment grade

 

1,322,561

 

 

1,322,561

 

 

Non-investment grade

 

19,615

 

 

17,380

 

2,235

 

Other securities

 

10,068

 

 

10,068

 

 

Total investment securities available-for-sale

 

  $

3,072,578

 

  $

20,725

 

  $

3,049,618

 

  $

2,235

 

Equity swap agreements

 

  $

202

 

  $

 

  $

202

 

  $

 

Foreign exchange options

 

3,899

 

 

3,899

 

 

Interest rate swaps

 

20,474

 

 

20,474

 

 

Short-term foreign exchange contracts

 

1,403

 

 

1,403

 

 

Derivatives liabilities

 

(24,164

)

 

(21,530

)

(2,634

)

 

13



 

 

 

Assets Measured at Fair Value on a Non-Recurring Basis

 

 

 

as of and for the Three Months Ended March 31, 2012

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

Total Gains

 

 

 

Fair Value

 

Active Markets

 

Other

 

Significant

 

(Losses) for the

 

 

 

Measurements

 

for Identical

 

Observable

 

Unobservable

 

Three Months Ended

 

 

 

March 31,

 

Assets

 

Inputs

 

Inputs

 

March 31,

 

 

 

2012

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2012

 

 

 

(In thousands)

 

Non-covered impaired loans:

 

 

 

 

 

 

 

 

 

 

 

Total residential

 

$

5,564

 

$

 

$

5,564

 

$

 

$

(1,903

)

Total commercial real estate

 

21,073

 

 

21,073

 

 

(1,343

)

Total commercial and industrial

 

3,316

 

 

 

3,316

 

(984

)

Total consumer

 

7

 

 

7

 

 

(57

)

Total non-covered impaired loans

 

 

$

29,960

 

$

 

$

26,644

 

$

3,316

 

$

(4,287

)

Non-covered OREO

 

$

8,195

 

$

 

$

8,195

 

$

 

$

(855

)

Covered OREO (1)

 

$

25,585

 

$

 

$

25,585

 

$

 

$

(6,449

)

Loans held for sale

 

$

4,600

 

$

 

$

4,600

 

$

 

$

(4,730

)

 

 

 

Assets Measured at Fair Value on a Non-Recurring Basis

 

 

 

as of and for the Three Months Ended March 31, 2011

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

Total Gains

 

 

 

Fair Value

 

Active Markets

 

Other

 

Significant

 

(Losses) for the

 

 

 

Measurements

 

for Identical

 

Observable

 

Unobservable

 

Three Months Ended

 

 

 

March 31,

 

Assets

 

Inputs

 

Inputs

 

March 31,

 

 

 

2011

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

2011

 

 

 

(In thousands)

 

Non-covered impaired loans:

 

 

 

 

 

 

 

 

 

 

 

Total residential

 

$

3,025

 

$

 

$

3,025

 

$

 

$

(1,114

)

Total commercial real estate

 

35,837

 

 

35,837

 

 

(8,497

)

Total commercial and industrial

 

4,997

 

 

 

4,997

 

(11,722

)

Total consumer

 

1,114

 

 

1,114

 

 

(799

)

Total non-covered impaired loans

 

$

44,973

 

$

 

$

39,976

 

$

4,997

 

$

(22,132

)

Non-covered OREO

 

$

6,622

 

$

 

$

6,622

 

$

 

$

(1,052

)

Covered OREO (1)

 

$

45,877

 

$

 

$

45,877

 

$

 

$

(6,255

)

Loans held for sale

 

$

537

 

$

 

$

537

 

$

 

$

(959

)

 


(1)         Covered OREO results from the WFIB and UCB FDIC-assisted acquisitions for which the Company entered into shared-loss agreements with the FDIC whereby the FDIC will reimburse the Company for 80% of eligible losses. As such, the Company’s liability for losses is 20% of the $6.4 million in losses, or $1.3 million, and 20% of the $6.3 million in losses, or $1.3 million, for the three months ended March 31, 2012 and 2011, respectively.

 

At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The following tables provide a reconciliation of the beginning and ending balances for major asset and liability categories measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2012 and 2011:

 

14



 

 

 

Investment Securities Available-for-Sale

 

 

 

 

 

 

 

Other
Residential
Mortgage-
Backed
Securities

 

Corporate Debt
Securities

 

 

 

 

 

Total

 

Non-Investment
Grade

 

Non-Investment
Grade

 

Derivatives
Payable

 

 

 

(In thousands)

 

Opening balance, January 1, 2012

 

  $

2,235

 

  $

 

  $

2,235

 

  $

(2,634

)

Total gains or (losses) for the period: (1)

 

 

 

 

 

 

 

 

 

Included in earnings 

 

(99

)

 

(99

)

(488

)

Included in other comprehensive loss (unrealized) (2)

 

225

 

 

225

 

 

Purchases, issues, sales, settlements (3)

 

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

Issues

 

 

 

 

 

Sales

 

 

 

 

 

Settlements

 

(114

)

 

(114

)

 

Transfer from investment grade to non-investment grade

 

 

 

 

 

Transfers in and/or out of Level 3 (4)

 

 

 

 

 

Closing balance, March 31, 2012

 

  $

2,247

 

  $

 

  $

2,247

 

  $

(3,122

)

Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of March 31, 2012

 

  $

99

 

  $

 

  $

99

 

  $

488

 

 

 

 

Investment Securities Available-for-Sale

 

 

 

 

 

 

 

Other 
Residential
Mortgage-
Backed
Securities

 

Corporate Debt
Securities

 

 

 

 

 

Total

 

Non-Investment 
Grade

 

Non-Investment
Grade

 

Derivatives 
Payable

 

 

 

(In thousands)

 

Opening balance, January 1, 2011

 

  $

9,027

 

  $

6,254

 

  $

2,773

 

  $

(3,449

)

Total gains or (losses) for the period: (1)

 

 

 

 

 

 

 

 

 

Included in earnings

 

(6,124

)

(5,660

)

(464

)

179

 

Included in other comprehensive loss (unrealized) (2)

 

8,835

 

8,763

 

72

 

 

Purchases, issues, sales, settlements (3)

 

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

Issues

 

 

 

 

 

Sales

 

(9,357

)

(9,357

)

 

 

Settlements

 

(2

)

 

(2

)

 

Transfer from investment grade to non-investment grade

 

 

 

 

 

Transfers in and/or out of Level 3(4)

 

 

 

 

 

Closing balance, March 31, 2011

 

  $

2,379

 

  $

 

  $

2,379

 

  $

(3,270

)

Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of March 31, 2011

 

  $

464

 

  $

 

  $

464

 

  $

149

 

 


 

(1)        Total gains or losses represent the total realized and unrealized gains and losses recorded for Level 3 assets and liabilities. Realized gains or losses are reported in the condensed consolidated statements of income.

 

(2)            Unrealized gains or losses on investment securities are reported in accumulated other comprehensive loss, net of tax, in the condensed consolidated statements of changes in stockholders’ equity.

 

(3)            Purchases, issuances, sales, and settlements represent Level 3 assets and liabilities that were either purchased, issued, sold, or settled during the period. The amounts are recorded at their end of period fair values.

 

(4)            Transfers in and/or out represent existing assets and liabilities that were either previously categorized as a higher level and the inputs to the model became unobservable or assets and liabilities that were previously classified as Level 3 and the lowest significant input became observable during the period. These assets and liabilities are recorded at their end of period fair values.

 

15



 

Valuation Methodologies

 

Investment Securities Available-for-Sale— The fair values of available-for-sale investment securities are generally determined by prices obtained from independent external pricing service providers who have experience in valuing these securities or by comparison to the average of at least two quoted market prices obtained from independent external brokers. In obtaining such valuation information from third parties, the Company has reviewed the methodologies used to develop the resulting fair values.

 

The Company’s Level 3 available-for-sale securities include four pooled trust preferred securities. The fair values of these investment securities represent less than 1% of the total available-for-sale investment securities. The fair values of the pooled trust preferred securities have traditionally been based on the average of at least two quoted market prices obtained from independent external brokers since broker quotes in an active market are given the highest priority. As a result of the continued illiquidity in the pool trust preferred securities market, it is the Company’s view that current broker prices (which are typically non-binding) on certain pooled trust preferred securities are based on forced liquidation or distressed sale values in very inactive markets that are not representative of the fair value of these securities. As such, the Company considered what weight, if any, to place on transactions that are not orderly when estimating fair value.

 

For the pooled trust preferred securities, the fair value was derived based on discounted cash flow analyses (the income method) prepared by management. In order to determine the appropriate discount rate used in calculating fair values derived from the income method for the pooled trust preferred securities, the Company has made assumptions using an exit price approach related to the implied rate of return which have been adjusted for general changes in market rates, estimated changes in credit risk and liquidity risk premium, specific nonperformance, and default experience in the collateral underlying the securities. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for credit risk and liquidity risk. The actual level 3 unobservable assumption rates used as of March 31, 2012 include: a constant prepayment rate of 0% for year 1-5 and 1% thereafter, a constant default rate of 1.2% for year 1-5 and 0.75% thereafter, and a recovery assumption of 0% for existing deferrals/defaults and 15% for future deferrals with a recovery lag of 60 months. The losses recorded in the period are recognized in noninterest income.

 

Derivatives Liabilities—The Company’s derivatives liabilities include derivatives payable that falls within Level 3 and all other derivative liabilities which fall within Level 2. The derivatives payable are recorded in conjunction with certain certificates of deposit (“host instrument”). These CD’s pay interest based on changes in either the HSCEI or based on changes in the Chinese currency Renminbi (“RMB”), as designated, and are included in interest-bearing deposits on the condensed consolidated balance sheets. The fair value of these embedded derivatives is based on the income approach. The payable is divided by the portion under FDIC insurance coverage and the non-insured portion. For the FDIC insured portion the Company applied a risk premium comparable to an agency security risk premium.  For the non-insured portion, the Company considered its own credit risk in determining the valuation by applying a risk premium based on our institutional credit rating, which resulted in a nominal adjustment to the valuation of the derivative liabilities for the three months ended March 31, 2012. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. The valuation of the derivatives payable falls within Level 3 of the fair value hierarchy since the significant inputs used in deriving the fair value of these derivative contracts are not directly observable. The actual level 3 unobservable input used as of March 31, 2012 was a credit risk adjustment with a range of 1.19% - 2.59%. The Level 2 derivative liabilities are mostly comprised of the off-setting interest rate swaps. Refer to “Interest Rate Swaps” within this footnote for complete discussion.

 

16



 

Equity Swap Agreements—The Company has entered into equity swap agreements to hedge against market fluctuations in a promotional equity index certificate of deposit product offered to bank customers. This deposit product, which has a term of 5 years, pays interest based on the performance of the Hang Seng China Enterprises Index (“HSCEI”). The fair value of these equity swap agreements is based on the income approach. The fair value is based on the change in the value of the HSCEI and the volatility of the call option over the life of the individual swap agreement. The option value is derived based on the volatility, the interest rate and the time remaining to maturity of the call option. The Company’s consideration of its counterparty’s credit risk resulted in a nominal adjustment to the valuation of the equity swap agreements for the three months ended March 31, 2012. The valuation of equity swap agreements falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of these derivative contracts. The fair value of the derivative contracts is provided by a third party.

 

Foreign Exchange Options—The Company has entered into foreign exchange option contracts with major investment firms. The settlement amount is determined based upon the performance of the Chinese currency RMB relative to the U.S. Dollar (“USD”) over the 5-year term of the contract. The performance amount is computed based on the average quarterly value of the RMB per the USD as compared to the initial value. The fair value of the derivative contract is provided by third parties and is determined based on the change in the RMB and the volatility of the option over the life of the agreement. The option value is derived based on the volatility of the option, interest rate, currency rate and time remaining to maturity. The Company’s consideration of the counterparty’s credit risk resulted in a nominal adjustment of $0.2 million to the valuation of the foreign exchange options for the three months ended March 31, 2012. The valuation of the option contract falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of this derivative contract.

 

Interest Rate Swaps—The Company has entered into a pay-fixed, receive-variable swap contracts with institutional counterparties to hedge against interest rate swap products offered to bank customers. This product allows borrowers to lock in attractive intermediate and long-term interest rates by entering into a pay-fixed, receive-variable swap contract with the Company, resulting in the customer obtaining a synthetic fixed rate loan. The Company has also entered into pay-variable, receive-fixed swap contracts with institutional counterparties to hedge against certificates of deposit issued. This product allows the Company to lock in attractive floating rate funding. The fair value of the interest rate swap contracts is based on a discounted cash flow approach. The Company’s consideration of the counterparty’s credit resulted in a $0.3 million adjustment to the valuation of the interest rate swaps for the three months ended March 31, 2012. The valuation of the interest rate swap falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of this derivative contract.

 

Short-term Foreign Exchange Contracts—The Company entered into short-term foreign exchange contracts to purchase/sell foreign currencies at set rates in the future. These contracts economically hedge against foreign exchange rate fluctuations.  The Company enters into contracts with institutional counterparties to hedge against foreign exchange products offered to bank customers. These products allow customers to hedge the foreign exchange risk of their deposits and loans denominated in foreign currencies. The Company does not assume any foreign exchange rate risk as the contract with the customer and the contract with the institutional party mirror each other. The fair value is determined at each reporting period based on the change in the foreign exchange rate. Given the short term nature of the contracts, the counterparties’ credit risks are considered nominal and resulted in no adjustments to the valuation of the short-term foreign exchange contracts for the three months ended March 31, 2012. The valuation of the contract falls within Level 2 of the fair value hierarchy due to the observable nature of the inputs used in deriving the fair value of this derivative contract.

 

Impaired Loans—The Company’s impaired loans are generally measured using the fair value of the underlying collateral, which is determined based on the most recent valuation information received.

 

17



 

The fair values may be adjusted as needed based on factors such as the Company’s historical knowledge and changes in market conditions from the time of valuation. Impaired loans fall within Level 2 or Level 3 of the fair value hierarchy as appropriate. Level 2 values are measured at fair value based on the most recent valuation information received on the underlying collateral.  Level 3 values, additionally include adjustments by the Company for historical knowledge and for changes in market conditions.

 

Other Real Estate Owned—The Company’s OREO represents properties acquired through foreclosure or through full or partial satisfaction of loans and are recorded at estimated fair value less cost to sell at the time of foreclosure and at the lower of cost or estimated fair value less cost to sell subsequent to acquisition. The fair values of OREO properties are based on third party appraisals, broker price opinions or accepted written offers. These valuations are reviewed and approved by the Company’s appraisal department, credit review department, or OREO department. OREO properties are classified as Level 2 assets in the fair value hierarchy. The non-covered OREO balance of $46.3 million and the covered OREO balance of $55.6 million are included in the condensed consolidated balance sheets as of March 31, 2012.

 

Loans Held for Sale—The Company’s loans held for sale are carried at the lower of cost or market value. These loans are currently comprised of mostly student loans. For those loans, the fair value of loans held for sale is derived from current market prices and comparative current sales. For the remainder of the loans held for sale, which fall within Level 2, the fair value is derived from third party sale analysis, existing sale agreements, or appraisal reports on the loans’ underlying collateral. As such, the Company records any fair value adjustments on a nonrecurring basis.

 

Fair Value of Financial Instruments

 

The carrying amounts and fair values of the Company’s financial instruments as of March 31, 2012 and December 31, 2011 were as follows:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Amount or

 

 

 

Amount or

 

 

 

 

 

Notional

 

Estimated

 

Notional

 

Estimated

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

 

 

(In thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

1,635,854

 

  $

1,635,854

 

  $

1,431,185

 

  $

1,431,185

 

Short-term investments

 

177,576

 

177,576

 

61,834

 

61,834

 

Federal funds sold

 

30,000

 

30,000

 

 

 

Securities purchased under resale agreements

 

650,000

 

646,041

 

786,434

 

791,745

 

Investment securities available-for-sale

 

2,706,720

 

2,706,720

 

3,072,578

 

3,072,578

 

Loans held for sale

 

280,830

 

289,989

 

278,603

 

285,181

 

Loans receivable, net

 

13,948,524

 

13,310,866

 

13,984,930

 

13,520,712

 

Investment in Federal Home Loan Bank stock

 

130,506

 

130,506

 

136,897

 

136,897

 

Investment in Federal Reserve Bank stock

 

47,639

 

47,639

 

47,512

 

47,512

 

Accrued interest receivable

 

95,337

 

95,337

 

89,686

 

89,686

 

Equity swap agreements

 

22,709

 

204

 

22,709

 

202

 

Foreign exchange options

 

85,614

 

4,695

 

85,614

 

3,899

 

Interest rate swaps

 

533,735

 

18,432

 

585,196

 

20,474

 

Short-term foreign exchange contracts

 

200,898

 

2,045

 

210,295

 

1,403

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

Customer deposit accounts:

 

 

 

 

 

 

 

 

 

Demand, savings and money market deposits

 

10,563,249

 

10,563,249

 

10,307,001

 

10,307,001

 

Time deposits

 

6,775,320

 

6,821,016

 

7,146,001

 

7,194,125

 

Federal Home Loan Bank advances

 

394,719

 

420,758

 

455,251

 

479,029

 

Securities sold under repurchase agreements

 

995,000

 

1,172,723

 

1,020,208

 

1,177,331

 

Accrued interest payable

 

16,439

 

16,439

 

15,447

 

15,447

 

Long-term debt

 

212,178

 

139,361

 

212,178

 

144,392

 

Derivatives liabilities

 

1,041,860

 

25,291

 

835,913

 

24,164

 

 

18



 

The following table shows the level in the fair value hierarchy for the estimated fair values of only financial instruments that are not already on the condensed consolidated balance sheets at fair value at March 31, 2012 and December 31, 2011.

 

 

 

March 31, 2012

 

 

 

Estimated

 

 

 

 

 

 

 

 

 

Fair Value

 

 

 

 

 

 

 

 

 

Measurements

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

1,635,854

 

  $

1,635,854

 

  $

 

  $

 

Short-term investments

 

177,576

 

 

177,576

 

 

Federal funds sold

 

30,000

 

 

30,000

 

 

Securities purchased under resale agreements

 

646,041

 

 

646,041

 

 

Loans held for sale

 

289,989

 

 

289,989

 

 

Loans receivable, net

 

13,310,866

 

 

 

13,310,866

 

Investment in Federal Home Loan Bank stock

 

130,506

 

 

130,506

 

 

Investment in Federal Reserve Bank stock

 

47,639

 

 

47,639

 

 

Accrued interest receivable

 

95,337

 

 

95,337

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

Customer deposit accounts:

 

 

 

 

 

 

 

 

 

Demand, savings and money market deposits

 

10,563,249

 

 

10,563,249

 

 

Time deposits

 

6,821,016

 

 

 

6,821,016

 

Federal Home Loan Bank advances

 

420,758

 

 

420,758

 

 

Securities sold under repurchase agreements

 

1,172,723

 

 

1,172,723

 

 

Accrued interest payable

 

16,439

 

 

16,439

 

 

Long-term debt

 

139,361

 

 

139,361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

Estimated

 

 

 

 

 

 

 

 

 

Fair Value

 

 

 

 

 

 

 

 

 

Measurements

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

1,431,185

 

  $

1,431,185

 

  $

 

  $

 

Short-term investments

 

61,834

 

 

61,834

 

 

Federal funds sold

 

 

 

 

 

Securities purchased under resale agreements

 

791,745

 

 

791,745

 

 

Loans held for sale

 

285,181

 

 

285,181

 

 

Loans receivable, net

 

13,520,712

 

 

 

13,520,712

 

Investment in Federal Home Loan Bank stock

 

136,897

 

 

136,897

 

 

Investment in Federal Reserve Bank stock

 

47,512

 

 

47,512

 

 

Accrued interest receivable

 

89,686

 

 

89,686

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

Customer deposit accounts:

 

 

 

 

 

 

 

 

 

Demand, savings and money market deposits

 

10,307,001

 

 

10,307,001

 

 

Time deposits

 

7,194,125

 

 

 

7,194,125

 

Federal Home Loan Bank advances

 

479,029

 

 

479,029

 

 

Securities sold under repurchase agreements

 

1,177,331

 

 

1,177,331

 

 

Accrued interest payable

 

15,447

 

 

15,447

 

 

Long-term debt

 

144,392

 

 

144,392

 

 

 

The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value are explained below:

 

Cash and Cash Equivalents—The carrying amounts approximate fair values due to the short-term nature of these instruments. Due to the short term nature, the estimated fair value is considered to be within Level 1 of the fair value hierarchy.

 

19



 

Short-Term Investments—The fair values of short-term investments generally approximate their book values due to their short maturities. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

 

Federal Funds Sold—The carrying amounts approximate fair values due to the short-term nature of these instruments, as such due to the observable nature of the inputs used in deriving the estimated fair value these instruments are considered to be within Level 2 of the fair value hierarchy.

 

Securities Purchased Under Resale Agreements—Securities purchased under resale agreements with original maturities of 90 days or less are included in cash and cash equivalents. The fair value of securities purchased under resale agreements with original maturities of more than 90 days is estimated by discounting the cash flows based on expected maturities or repricing dates utilizing estimated market discount rates. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

 

Investment Securities Available-for-Sale—The fair values of the investment securities available-for-sale are generally determined by reference to the average of at least two quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, the Company has reviewed the methodologies used to develop the resulting fair values. For pooled trust preferred securities, fair values are based on discounted cash flow analyses. Due to the unobservable inputs used within the discounted cash flow analysis, the estimate for pooled trust preferred securities is considered to be within Level 3 of the fair value hierarchy. The remainder of the portfolio is classified within Level 1 and Level 2, as discussed earlier in this footnote.

 

Loans Held for Sale—The fair value of loans held for sale is derived from current market prices and comparative current sales or from third party sale analysis, existing sale agreements, or appraisal reports on the loans’ underlying collateral, as applicable.  Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

 

Loans Receivable, net (includes covered and non-covered loans)—The fair value of loans is determined based on a discounted cash flow approach considered for an entry price value. The discount rate is derived from the associated yield curve plus spreads, and reflects the offering rates in the market for loans with similar financial characteristics. No adjustments have been made for changes in credit within the loan portfolio. It is management’s opinion that the allowance for loan losses pertaining to performing and nonperforming loans results in a fair valuation of credit for such loans. Due to the unobservable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 3 of the fair value hierarchy.

 

Investment in Federal Home Loan Bank Stock and Federal Reserve Bank Stock—The carrying amount approximates fair value, as the stock may be sold back to the Federal Home Loan Bank and the Federal Reserve Bank at carrying value. The valuation of these instruments is the carrying amount as these investments can only be sold and purchased from the Federal Home Loan Bank and Federal Reserve Bank respectively. The valuation of these investments is considered to be within Level 2 of the fair value hierarchy, as the restrictions and value of the investments are the same for all financial institutions which are required to hold these investments.

 

Accrued Interest Receivable— The carrying amounts approximate fair values due to the short-term nature of these instruments, as such due to the observable nature of the inputs used in deriving the estimated fair value these instruments are considered to be within Level 2 of the fair value hierarchy.

 

20



 

Equity Swap Agreements—The fair value of the derivative contracts is provided by a third party and is determined based on the change in value of the HSCEI and the volatility of the call option over the life of the individual swap agreement. The option value is derived based on the volatility of the option, interest rate, and time remaining to maturity. We also considered the counterparty’s credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

 

Foreign Exchange Options—The fair value of the derivative contracts is provided by third parties and is determined based on the change in the RMB and the volatility of the option over the life of the agreement. The option value is derived based on the volatility of the option, interest rate, and time remaining to maturity. We also considered the counterparty’s credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

 

Interest Rate Swaps—The fair value of the interest rate swap contracts is provided by a third party and is determined based on a discounted cash flow approach. The Company also considered the counterparty’s credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

 

Short-term Foreign Exchange Contracts—The fair value of short-term foreign exchange contracts is determined based on the change in foreign exchange rate. We also considered the counterparty’s credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

 

Customer Deposit Accounts— The carrying amounts approximate fair value for demand and interest checking deposits, savings deposits, and certain money market accounts as the amounts are payable on demand at the reporting date. Due to the observable nature of the inputs used in deriving the estimated fair value these instruments are considered to be within Level 2 of the fair value hierarchy. For time deposits, the cash flows are based on the contractual runoff and are discounted by the Bank’s current offering rates, plus spread. Due to the unobservable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 3 of the fair value hierarchy.

 

Federal Home Loan Bank Advances—The fair value of Federal Home Loan Bank (“FHLB”) advances is estimated based on the discounted value of contractual cash flows, using rates currently offered by the FHLB of San Francisco for fixed-rate credit advances with similar remaining maturities at each reporting date. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

 

Securities Sold Under Repurchase Agreements—For securities sold under repurchase agreements with original maturities of 90 days or less, the carrying amounts approximate fair values due to the short-term nature of these instruments. At March 31, 2012 and December 31, 2011, most of the securities sold under repurchase agreements are long-term in nature and the fair values of securities sold under repurchase agreements are calculated by discounting future cash flows based on expected maturities or repricing dates, utilizing estimated market discount rates, and taking into consideration the call features of each instrument. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

 

Accrued Interest Payable— The carrying amounts approximate fair values due to the short-term nature of these instruments, as such due to the observable nature of the inputs used in deriving the estimated fair value these instruments are considered to be within Level 2 of the fair value hierarchy.

 

21



 

Long-Term Debt—The fair values of long-term debt are estimated by discounting the cash flows through maturity based on current market rates the Bank would pay for new issuances. Due to the observable nature of the inputs used in deriving the estimated fair value of these instruments, the estimate is considered to be within Level 2 of the fair value hierarchy.

 

Derivatives Liabilities—The Company’s derivatives liabilities include “derivatives payable” and all other derivative liabilities. The Company’s derivatives payable are recorded in conjunction with certain certificates of deposit (“host instrument”). These CD’s pay interest based on changes in either the HSCEI or based on changes in the RMB, as designated. The fair value of derivatives payable is estimated using the income approach. The payable is divided by the portion under FDIC insurance coverage and the non-insured portion. For the FDIC insured portion the Company applied the agency discount rate.  For the non-insured portion, the Company considered its own credit risk in determining the valuation by applying a discount rate for our institutional credit rating, which resulted in a nominal adjustment to the valuation of the derivative liabilities for the three months ended March 31, 2012. A The fair value of the interest rate swap contracts is provided by a third party and is determined based on a discounted cash flow approach. The Company also considered the counterparty’s credit risk in determining the fair value. Due to the observable nature of the inputs used in deriving the estimated fair value of the interest rate swaps within derivative liabilities, the estimate is considered to be within Level 2 of the fair value hierarchy. Due to the unobservable nature of the inputs used in deriving the estimated fair value of derivatives payable within derivative liabilities, this estimate is considered to be within Level 3 of the fair value hierarchy.

 

The fair value estimates presented herein are based on pertinent information available to management as of each reporting date. Although we are not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

NOTE 4 — STOCK-BASED COMPENSATION

 

During the three months ended March 31, 2012, total compensation expense recognized in the condensed consolidated statements of income related to stock options and restricted stock awards reduced income before taxes by $3.6 million and net income by $2.1 million.

 

During the three months ended March 31, 2011, total compensation expense recognized in the condensed consolidated statements of income related to stock options and restricted stock awards reduced income before taxes by $2.3 million and net income by $1.3 million.

 

The Company received $1.5 million and $1.6 million as of March 31, 2012 and March 31, 2011, respectively, in cash proceeds from stock option exercises. The net tax benefit recognized in equity for stock compensation plans was $29 thousand and $43 thousand for March 31, 2012 and March 31, 2011, respectively.

 

As of March 31, 2012, there are 4,299,396 shares available to be issued, subject to the Company’s current 1998 Stock Incentive Plan, as amended.

 

22



 

Stock Options

 

The Company issues fixed stock options to certain employees, officers, and directors. Stock options are issued at the current market price on the date of grant with a three-year or four-year vesting period and contractual terms of 7 or 10 years. The Company issues new shares upon the exercise of stock options.

 

A summary of activity for the Company’s stock options as of and for the three months ended March 31, 2012 is presented below:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

 

 

Exercise

 

Contractual

 

Value

 

 

 

Shares

 

Price

 

Term

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of period

 

945,080

 

$

27.19

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(93,753

)

16.42

 

 

 

 

 

Forfeited

 

(80,129

)

36.06

 

 

 

 

 

Outstanding at end of period

 

771,198

 

$

27.58

 

2.22 years

 

$

1,446

 

Vested or expected to vest at end of period

 

766,785

 

$

27.65

 

2.21 years

 

$

1,407

 

Exercisable at end of period

 

727,070

 

$

28.39

 

2.15 years

 

$

1,054

 

 

A summary of changes in unvested stock options and related information for the three months ended March 31, 2012 is presented below:

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant Date Fair Value

 

Unvested Options

 

Shares

 

(per share)

 

 

 

 

 

 

 

Unvested at January 1, 2012

 

186,914

 

$

4.77

 

 

 

 

 

 

 

Granted

 

 

 

Vested

 

(134,132

)

4.51

 

Forfeited

 

(8,654

)

13.21

 

 

 

 

 

 

 

Unvested at March 31, 2012

 

44,128

 

$

3.89

 

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2012 (5)

 

2011

 

 

Expected term (1)

 

N/A

 

4 years

 

 

Expected volatility (2)

 

N/A

 

78.5%

 

 

Expected dividend yield (3)

 

N/A

 

0.2%

 

 

Risk-free interest rate (4)

 

N/A

 

1.6%

 

 


 

(1)                The expected term (estimated period of time outstanding) of stock options granted was estimated using the historical exercise behavior of employees.

(2)                The expected volatility was based on historical volatility for a period equal to the stock option’s expected term.

(3)                The expected dividend yield is based on the Company’s prevailing dividend rate at the time of grant.

(4)                The risk-free rate is based on the U.S. Treasury strips in effect at the time of grant equal to the stock option’s expected term.

(5)                The Company did not issue any stock options during the three months ended March 31, 2012.

 

23



 

During the three months ended March 31, 2012 and 2011, information related to stock options is presented as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Weighted average grant date fair value of stock
options granted during the period
(1)

 

N/A

 

$

13.21

 

Total intrinsic value of options exercised (in thousands)

 

$

575

 

$

1,197

 

Total fair value of options vested (in thousands)

 

$

3,001

 

$

1,144

 

 


 

(1)                The Company did not issue any stock options during the three months ended March 31, 2012.

 

As of March 31, 2012, total unrecognized compensation cost related to stock options amounted to $73 thousand. The cost is expected to be recognized over a weighted average period of 1.5 years.

 

Restricted Stock Awards

 

In addition to stock options, the Company also grants restricted stock awards to directors, officers and employees. The restricted stock awards fully vest after one to five years of continued employment from the date of grant; some of the awards are also subject to achievement of certain established financial goals. The Company becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted stock when the restrictions are released and the shares are issued. Restricted stock awards are forfeited if officers and employees terminate prior to the lapsing of restrictions or if established financial goals are not achieved. The Company records forfeitures of issued restricted stock as treasury share repurchases.

 

A summary of the activity for the Company’s time-based and performance-based restricted stock awards as of March 31, 2012, including changes during the three months then ended, is presented below:

 

 

 

March 31, 2012

 

 

 

Restricted Stock Awards

 

 

 

Time-Based

 

Performance-Based

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Average

 

 

 

Shares

 

Price

 

Shares

 

Price

 

Outstanding at beginning of period

 

1,812,890

 

$

16.79

 

480,735

 

$

22.19

 

Granted

 

18,115

 

20.98

 

465,175

 

22.05

 

Vested

 

(80,306

)

27.21

 

(90,406

)

23.11

 

Forfeited

 

(47,489

)

17.84

 

(9,898

)

22.84

 

Outstanding at end of period

 

1,703,210

 

$

16.32

 

845,606

 

$

22.01

 

 

Restricted stock awards are valued at the closing price of the Company’s stock on the date of award. The weighted average fair values of time-based restricted stock awards granted during the period ended March 31, 2012 and 2011 were $20.98 and $21.61, respectively. The weighted average fair value of performance-based restricted stock awards granted during the period ended March 31, 2012 and 2011 were $22.05 and $23.11, respectively. The total fair value of time-based restricted stock awards vested for the three months ended March 31, 2012 and 2011 was $1.8 million and $1.7 million, respectively. The total fair value of performance-based restricted stock awards vested during the period ended March 31, 2012 was $1.9 million.  There were no performance-based restricted stock awards vested during the period ended March 31, 2011.

 

24



 

As of March 31, 2012, total unrecognized compensation cost related to time-based and performance-based restricted stock awards amounted to $13.8 million and $16.0 million, respectively. This cost is expected to be recognized over a weighted average period of 2.0 years and 2.5 years, respectively.

 

NOTE 5 — INVESTMENT SECURITIES

 

An analysis of the investment securities available-for-sale portfolio is presented as follows:

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

(In thousands)

 

As of March 31, 2012

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

19,903

 

$

715

 

$

 

$

20,618

 

U.S. Government agency and U.S. Government sponsored enterprise debt securities

 

514,003

 

844

 

(525

)

514,322

 

U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:

 

 

 

 

 

 

 

 

 

Commercial mortgage-backed securities

 

46,248

 

3,135

 

 

49,383

 

Residential mortgage-backed securities

 

893,214

 

31,786

 

(369

)

924,631

 

Municipal securities

 

78,414

 

4,358

 

 

82,772

 

Corporate debt securities:

 

 

 

 

 

 

 

 

 

Investment grade

 

1,151,013

 

7,227

 

(67,631

)

1,090,609

 

Non-investment grade (1)

 

24,616

 

13

 

(10,707

)

13,922

 

Other securities

 

10,276

 

187

 

 

10,463

 

Total investment securities available-for-sale

 

$

2,737,687

 

$

48,265

 

$

(79,232

)

$

2,706,720

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2011

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

19,892

 

$

833

 

$

 

$

20,725

 

U.S. Government agency and U.S. Government sponsored enterprise debt securities

 

575,148

 

1,709

 

(279

)

576,578

 

U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:

 

 

 

 

 

 

 

 

 

Commercial mortgage-backed securities

 

46,008

 

3,307

 

 

49,315

 

Residential mortgage-backed securities

 

963,688

 

30,854

 

(772

)

993,770

 

Municipal securities

 

76,255

 

3,696

 

(5

)

79,946

 

Corporate debt securities:

 

 

 

 

 

 

 

 

 

Investment grade

 

1,411,409

 

6,762

 

(95,610

)

1,322,561

 

Non-investment grade (1)

 

30,693

 

 

(11,078

)

19,615

 

Other securities

 

9,875

 

195

 

(2

)

10,068

 

Total investment securities available-for-sale

 

$

3,132,968

 

$

47,356

 

$

(107,746

)

$

3,072,578

 

 


(1)                For the three months ended March 31, 2012, the Company recorded $99 thousand, on a pre-tax basis, of the credit portion of OTTI through earnings and $5.1 million of the non-credit portion of OTTI for pooled trust preferred securities in other comprehensive income. The Company recorded $633 thousand, on a pre-tax basis, of the credit portion of OTTI through earnings and $5.1 million of the non-credit portion of OTTI for pooled trust preferred securities and other mortgage-backed securities in other comprehensive income for the year ended December 31, 2011.

 

The fair values of investment securities are generally determined by reference to the average of at least two quoted market prices obtained from independent external brokers or prices obtained from independent external pricing service providers who have experience in valuing these securities. The Company performs a monthly analysis on the broker quotes received from third parties to ensure that the prices represent a reasonable estimate of fair value. The procedures include, but are not limited to, initial and ongoing review of third party pricing methodologies, review of pricing trends, and monitoring of trading volumes. The Company assesses whether the prices received from independent brokers represent a reasonable estimate of fair value through the use of internal and external cash flow models developed that are based on spreads and, when available, market indices. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon available market data, the price received from third parties is adjusted accordingly.

 

25



 

Prices from third party pricing services are often unavailable for securities that are rarely traded or are traded only in privately negotiated transactions. As a result, certain securities are priced via independent broker quotations that utilize inputs that may be difficult to corroborate with observable market based data. Additionally, the majority of these independent broker quotations are non-binding.

 

As a result of the global financial crisis and illiquidity in the U.S. markets, the market for the pooled trust preferred securities has been inactive since mid-2007. It is the Company’s view that current broker prices (which are typically non-binding) on these securities are based on forced liquidation or distressed sale values in very inactive markets that are not representative of the fair value of these securities. As such, the Company considered what weight, if any, to place on transactions that are not orderly when estimating fair value. For the pooled trust preferred securities the Company determined their fair values using the methodologies set forth in Note 3 to the Company’s condensed consolidated financial statements presented elsewhere in this report.

 

The following table shows the Company’s rollforward of the amount related to OTTI credit losses for the periods shown:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Beginning balance

 

$

115,412

 

$

124,340

 

Addition of other-than-temporary impairment that was not previously recognized

 

 

 

Additional increases to the amount related to the credit loss for which an other-than-temporary impairment was previously recognized

 

99

 

464

 

Reduction for securities sold

 

 

(9,561

)

Ending balance

 

$

115,511

 

$

115,243

 

 

The following tables show the Company’s investment portfolio’s gross unrealized losses and related fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2012 and December 31, 2011:

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

(In thousands)

 

As of March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

 

$

 

$

 

$

 

$

 

$

 

U.S. Government agency and U.S. Government sponsored enterprise debt securities

 

141,223

 

(525

)

 

 

141,223

 

(525

)

U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage-backed securities

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

93,968

 

(369

)

 

 

93,968

 

(369

)

Municipal securities

 

 

 

 

 

 

 

Corporate debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade

 

450,019

 

(30,057

)

357,426

 

(37,574

)

807,445

 

(67,631

)

Non-investment grade

 

2,352

 

(30

)

9,389

 

(10,677

)

11,741

 

(10,707

)

Other securities

 

 

 

 

 

 

 

Total investment securities available-for-sale

 

$

687,562

 

$

(30,981

)

$

366,815

 

$

(48,251

)

$

1,054,377

 

$

(79,232

)

 

26



 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

(In thousands)

 

As of December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

 

$

 

$

 

$

 

$

 

$

 

U.S. Government agency and U.S. Government sponsored enterprise debt securities

 

143,265

 

(279

)

 

 

143,265

 

(279

)

U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage-backed securities

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

195,393

 

(772

)

 

 

195,393

 

(772

)

Municipal securities

 

1,158

 

(5

)

 

 

1,158

 

(5

)

Corporate debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade

 

754,055

 

(61,935

)

350,181

 

(33,675

)

1,104,236

 

(95,610

)

Non-investment grade

 

9,973

 

(565

)

9,595

 

(10,513

)

19,568

 

(11,078

)

Other securities

 

4,503

 

(2

)

 

 

4,503

 

(2

)

Total investment securities available-for-sale

 

$

1,108,347

 

$

(63,558

)

$

359,776

 

$

(44,188

)

$

1,468,123

 

$

(107,746

)

 

Unrealized Losses

 

The majority of the unrealized losses related to securities that have been in a continuous loss position for less than twelve months is related to investment grade corporate debt securities. As of March 31, 2012, the Company had $1.09 billion in investment grade corporate debt securities available-for-sale, representing 40% of the total investment securities available-for-sale portfolio.

 

As of March 31, 2012, there were 23 individual securities that have been in a continuous unrealized loss position for twelve months or more. These securities are comprised of 5 positions in trust preferred securities with a total fair value of $9.4 million and 18 investment grade corporate debt securities with a fair value of $357.4 million. As of March 31, 2012, there were also 61 securities, not including the 23 securities above, which have been in a continuous unrealized loss position for less than twelve months. The securities in an unrealized loss position for less than twelve months include 47 investment grade corporate debt securities, 6 residential mortgage-backed securities, 6 government agency securities, and 2 non-investment grade corporate debt security. The unrealized losses on these securities are primarily attributed to the sovereign debt crisis in Europe, which has impacted both European and U.S. institutions. The issuers of these securities have not, to our knowledge, established any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. The Company does not intend to sell these securities and it is not more likely than not that the company will be required to sell these securities before recovery of their current amortized cost basis. As such, the Company does not deem these securities, other than those previously stated, to be other-than-temporarily impaired as of March 31, 2012.

 

Corporate Debt Securities

 

The unrealized losses related to securities that have been in a continuous loss position of twelve months or longer are related to 5 positions in trust preferred debt securities and 18 investment grade corporate debt securities. As of March 31, 2012, these 5 positions in trust preferred securities had an estimated fair value of $9.4 million, representing less than 1% of the total investment securities available-for-sale portfolio. As of March 31, 2012, these non-investment grade trust preferred debt securities had gross unrealized losses amounting to $10.7 million, or 53% of the total amortized cost basis of these securities, comprised of $5.6 million in unrealized losses on securities that are not other-than-temporarily impaired and $5.1 million in noncredit-related impairment losses on securities that are other-than-temporarily impaired as of March 31, 2012 pursuant to the provisions of ASC 320-10-65. We recorded an impairment loss of $99 thousand on our portfolio of pooled trust preferred securities during the first three months of 2012 for additional increases to the amount related to the credit loss for which an other-than-temporary impairment was previously recognized.

 

27



 

The scheduled maturities of investment securities at March 31, 2012 are presented as follows:

 

 

 

Amortized

 

Estimated

 

 

 

Cost

 

Fair Value

 

 

 

(In thousands)

 

Due within one year

 

$

625,794

 

$

621,332

 

Due after one year through five years

 

252,183

 

248,610

 

Due after five years through ten years

 

880,483

 

829,519

 

Due after ten years

 

979,227

 

1,007,259

 

Total investment securities available-for-sale

 

$

2,737,687

 

$

2,706,720

 

 

NOTE 6 — DERIVATIVE FINANCIAL INSTRUMENTS

 

The following table summarizes the fair value and balance sheet classification of derivative instruments as of March 31, 2012 and December 31, 2011. The notional amount of the contract is not recorded on the condensed consolidated balance sheets, but is used as the basis for determining the amount of interest payments to be exchanged between the counterparties. If the counterparty fails to perform, the Company’s counterparty credit risk is equal to the amount reported as a derivative asset. The valuation methodology of derivative instruments is disclosed in Note 3 to the Company’s condensed consolidated financial statements presented elsewhere in this report.

 

 

 

Fair Values of Derivative Instruments

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Notional

 

Derivative

 

Derivative

 

Notional

 

Derivative

 

Derivative

 

 

 

Amount

 

Assets (1)

 

Liabilities (1)

 

Amount

 

Assets (1)

 

Liabilities (1)

 

 

 

 

(In thousands)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps on certificates of deposit—fair value

 

$

200,000

 

$

766

 

$

1,109

 

$

200,000

 

$

998

 

$

639

 

Total derivatives designated as hedging instruments

 

$

200,000

 

$

766

 

$

1,109

 

$

200,000

 

$

998

 

$

639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity swap agreements

 

$

22,709

 

$

204

 

$

204

 

$

22,709

 

$

202

 

$

204

 

Foreign exchange options

 

85,614

 

4,695

 

2,918

 

85,614

 

3,899

 

2,430

 

Interest rate swaps

 

533,735

 

17,666

 

17,999

 

485,196

 

19,476

 

19,924

 

Short-term foreign exchange contracts

 

200,898

 

2,045

 

1,561

 

210,295

 

1,403

 

967

 

Short-term call option

 

150,000

 

 

1,500

 

 

 

 

Total derivatives not designated as hedging instruments

 

$

992,956

 

$

24,610

 

$

24,182

 

$

803,814

 

$

24,980

 

$

23,525

 

 


 

(1)                Derivative assets, which are a component of other assets, include the estimated  settlement of the derivative asset position. Derivative liabilities, which are a component of other liabilities and deposits, include the estimated settlement of the derivative liability position.

 

Derivatives Designated as Hedging Instruments

 

Interest Rate Swaps on Certificates of Deposit— The Company is exposed to changes in the fair value of certain of its fixed-rate certificates of deposit due to changes in the benchmark interest rate, LIBOR. During 2011, the Company entered into four $50.0 million receive-fixed, pay-variable interest rate swaps with major brokerage firms as fair value hedges of four $50.0 million fixed-rate certificates of deposit with the same maturity dates. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of March 31, 2012 and December 31, 2011 the total notional amount of the interest rate swaps on the certificates of deposit was $200.0 million and $200.0 million, respectively. The fair value of the interest rate swaps amounted to a $766 thousand asset and $1.1 million liability, respectively, as of March 31, 2012.

 

28



 

The fair value of the interest rate swaps amounted to a $998 thousand asset and $639 thousand liability, respectively, as of December 31, 2011.  During the three months ended March 31, 2012, the Company recognized an increase of $848 thousand in expense related to hedge ineffectiveness. The Company also recognized a net reduction to interest expense of $1.5 million for the three months ended March 31, 2012 related to net settlements on the derivatives.

 

Derivatives Not Designated as Hedging Instruments

 

Equity Swap Agreements—In December 2007, the Company entered into two equity swap agreements with a major investment brokerage firm to economically hedge against market fluctuations in a promotional equity index certificate of deposit product offered to bank customers which has a term of 5 years and pays interest based on the performance of the HSCEI. Under ASC 815, a certificate of deposit that pays interest based on changes in an equity index is a hybrid instrument with an embedded derivative (i.e. equity call option) that must be accounted for separately from the host contract (i.e. the certificate of deposit). In accordance with ASC 815, both the embedded equity call options on the certificates of deposit and the freestanding equity swap agreements are marked-to-market each reporting period with resulting changes in fair value recorded in the condensed consolidated statements of income. As of March 31, 2012 and December 31, 2011, the notional amounts of the equity swap agreements totaled $22.7 million and $22.7 million, respectively.

 

The fair values of the equity swap agreements and embedded derivative liability for these derivative contracts amounted to $204 thousand asset and $204 thousand liability, respectively, as of March 31, 2012, compared to $202 thousand asset and $204 thousand liability, respectively, as of December 31, 2011.

 

Foreign Exchange Options—During 2010, the Company entered into foreign exchange option contracts with major brokerage firms to economically hedge against currency exchange rate fluctuations in a certificate of deposit product available to bank customers. This product, which has a term of 5 years, pays interest based on the performance of the Chinese currency Renminbi (“RMB”) relative to the U.S. Dollar. Under ASC 815, a certificate of deposit that pays interest based on changes in currency exchange rates is a hybrid instrument with an embedded derivative that must be accounted for separately from the host contract (i.e. the certificate of deposit). In accordance with ASC 815, both the embedded derivative instruments and the freestanding foreign exchange option contracts are marked-to-market each reporting period with resulting changes in fair value reported in the condensed consolidated statements of income.

 

As of March 31, 2012 and December 31, 2011, the notional amount of the foreign exchange options totaled $85.6 million and $85.6 million, respectively. The fair values of the foreign exchange options and embedded derivative liability for these contracts amounted to a $4.7 million asset and a $2.9 million liability, respectively, as of March 31, 2012. The fair values of the foreign exchange options and embedded derivative liability for these contracts amounted to a $3.9 million asset and $2.4 million liability, respectively, as of December 31, 2011.

 

Short-term Call Option—In March 2012, the Company sold a call option to a major investment brokerage firm to buy $150.0 million of student loans with an expiration date of May 15, 2012. Due to the short-term nature of the option, its carrying value of $1.5 million liability approximates its fair value at March 31, 2012. As disclosed in Note 14 to the Company’s condensed consolidated financial statements, in April 2012, the investment brokerage firm exercised the option and the Company entered into a transaction to sell the student loans.

 

Interest Rate Swaps—Since the fourth quarter of 2010, the Company has entered into pay-fixed, receive-variable swap contracts with institutional counterparties to economically hedge against interest rate swap products offered to bank customers. This product allows borrowers to lock in attractive intermediate and long-term interest rates by entering into a pay-fixed, receive-variable swap contract with the Company, resulting in the customer obtaining a synthetic fixed rate loan.

 

29



 

The Company does not assume any interest rate risk since the swap agreements mirror each other. As of March 31, 2012 and December 31, 2011 the notional amount of the interest rate swaps with the institutional counterparties totaled $533.7 million and $485.2 million, respectively. The interest rate swap agreements are marked-to-market each reporting period with resulting changes in fair value reported in the condensed consolidated statements of income.

 

The fair values of the interest rate swap contracts with the institutional counterparty and the bank customers amounted to a $17.7 million asset and $18.0 million liability, respectively, as of March 31, 2012. The fair values of the interest rate swap contracts with the institutional counterparty and the bank customers amounted to a $19.5 million asset and $19.9 million liability, respectively, as of December 31, 2011.

 

Short-term Foreign Exchange Contracts—The Company also enters into short-term forward foreign exchange contracts on a regular basis to economically hedge against foreign exchange rate fluctuations. As of March 31, 2012 and December 31, 2011 the notional amount of the foreign exchange contracts totaled $200.9 million and $210.3 million, respectively. The fair values of the foreign exchange contracts amounted to a $2.0 million asset and $1.6 million liability, respectively, as of March 31, 2012. The fair values of the foreign exchange contracts amounted to a $1.4 million asset and $967 thousand liability, respectively, as of December 31, 2011.

 

The table below presents the effect of the Company’s derivative financial instruments on the condensed consolidated statements of income for the three months ended March 31, 2012 and 2011:

 

 

 

 

 

Three Months Ended

 

 

 

Location in

 

March 31,

 

 

 

Condensed Consolidated

 

 

 

 

 

 

 

Statements of Income

 

2012

 

2011

 

 

 

 

 

 

(In thousands)

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Interest rate swaps on certificates
of deposit—fair value

 

 

 

 

 

 

 

 

Interest expense

 

$

703

 

$

 

 

 

 

Total net income

 

$

703

 

$

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Equity swap agreements

 

Noninterest expense

 

$

2

 

$

2

 

Foreign exchange options

 

Noninterest income

 

253

 

(109

)

Foreign exchange options

 

Noninterest expense

 

55

 

18

 

Interest rate swaps

 

Noninterest income

 

115

 

(60

)

Short-term foreign exchange contracts

 

Noninterest income

 

48

 

8

 

Short-term call option

 

 

 

 

 

 

 

Total net income (expense)

 

$

473

 

$

(141

)

 

Credit Risk-Related Contingent FeaturesThe Company has agreements with some of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

 

The Company also has agreements with some of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. Similarly, the Company could be required to settle its obligations under certain of its agreements if the Company was issued a notice of prompt corrective action.

 

30



 

As of March 31, 2012, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $16.8 million. If the Company had breached any of these provisions at March 31, 2012, it could have been required to settle its obligations under the agreements at the termination value.

 

NOTE 7 — COVERED ASSETS AND FDIC INDEMNIFICATION ASSET

 

Covered Assets

 

Covered assets consist of loans receivable and OREO that were acquired in the Washington First International Bank (“WFIB”) Acquisition on June 11, 2010 and in the United Commercial Bank (“UCB”) Acquisition on November 6, 2009 for which the Company entered into shared-loss agreements (the “shared-loss agreements”) with the FDIC. The shared-loss agreements covered over 99% of the loans originated by WFIB and all of the loans originated by UCB, excluding the loans originated by UCB in China under its United Commercial Bank China (Limited) subsidiary. The Company shares in the losses, which began with the first dollar of loss incurred, on covered assets under the shared-loss agreements.

 

Pursuant to the terms of the shared-loss agreements, the FDIC is obligated to reimburse the Company 80% of eligible losses for both WFIB and UCB with respect to covered assets. For the UCB covered assets, the FDIC will reimburse the Company for 95% of eligible losses in excess of $2.05 billion. The Company has a corresponding obligation to reimburse the FDIC for 80% or 95%, as applicable, of eligible recoveries with respect to covered assets. The commercial loan shared-loss agreement and single-family residential mortgage loan shared-loss agreement are in effect for 5 years and 10 years, respectively, from the acquisition date and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition date.

 

Forty-five days following the 10th anniversary of the respective acquisition date, the Company will be required to pay to the FDIC a calculated amount, based on the specific thresholds of losses not being reached. The calculation of this potential liability as stated in the shared-loss agreements is 50% of the excess, if any of (i) 20% of the Intrinsic Loss Estimate and (ii) the sum of (A) 25% of the asset discount plus (B) 25% of the Cumulative Shared-Loss Payments plus (C) the Cumulative Servicing Amount if net losses on covered loans subject to the stated threshold is not reached. As of March 31, 2012 and December 31, 2011, the Company’s estimate for this liability for WFIB and UCB was $13.5 million and $10.7 million, respectively.

 

At each date of acquisition, we accounted for the loan portfolio acquired from the respective bank at fair value. This represents the discounted value of the expected cash flows from the portfolio. In estimating the nonaccretable difference, we (a) calculated the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”) and (b) estimated the amount and timing of undiscounted expected principal and interest payments (the “undiscounted expected cash flows”). In the determination of contractual cash flows and cash flows expected to be collected, we assume no prepayment on the ASC 310-30 nonaccrual loan pools as we do not anticipate any significant prepayments on credit impaired loans. For the ASC 310-30 accrual loans for single-family, multifamily and commercial real estate, we used a third party vendor to obtain prepayment speeds in order to be consistent with market participant’s information. The third party vendor is recognized in the mortgage-industry for the delivery of prepayment and default models for the secondary market to identify loan level prepayment, delinquency, default, and loss propensities. The prepayment rates for the construction, land, and commercial and consumer pools have historically been low and so we applied the prepayment assumptions of our current portfolio using our internal modeling. The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference represents our estimate of the credit losses expected and was considered in determining the fair value of the loans as of the acquisition date.

 

31



 

The amount by which the undiscounted expected cash flows exceed the estimated fair value (the “accretable yield”) is accreted into interest income over the life of the loans. The Company has elected to account for all covered loans acquired in the FDIC-assisted acquisitions under ASC 310-30.

 

The carrying amounts and the composition of the covered loans as of March 31, 2012 and December 31, 2011 are as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

(In thousands)

 

Real estate loans:

 

 

 

 

 

Residential single-family

 

$

418,968

 

$

442,732

 

Residential multifamily

 

882,656

 

918,941

 

Commercial and industrial real estate

 

1,692,719

 

1,773,760

 

Construction and land

 

576,689

 

653,045

 

 

Total real estate loans

 

3,571,032

 

3,788,478

 

Other loans:

 

 

 

 

 

Commercial business

 

735,479

 

831,762

 

Other consumer

 

96,597

 

 

97,844

 

Total other loans

 

832,076

 

 

929,606

 

Total principal balance

 

 

 

4,403,108

 

4,718,084

 

Covered discount

 

(711,142

)

(788,295

)

 

Net valuation of loans

 

 

3,691,966

 

3,929,789

 

Allowance on covered loans

 

(8,268

)

(6,647

)

 

Total covered loans, net

 

 

$

3,683,698

 

$

3,923,142

 

 

Credit Quality Indicators— At each respective acquisition date the covered loans were grouped into pools of loans with similar characteristics and risk factors per ASC 310-30. The pools were first developed based on loan categories and performance status. As of March 31, 2012, UCB covered loans represent approximately 94% of total covered loans. For the UCB acquisition, the loans were further segregated among the former UCB domestic, Hong Kong, and China portfolios, representing the three general geographic regions. In addition, the Company evaluated the make-up of geographic regions within the construction, land, and multi-family loan portfolios and further segregated these pools into distressed and non-distressed regions based on our historical experience of real estate loans within the non-covered portfolio. As of the date of acquisition 64% of the UCB portfolio was located in California, 10% was located in Hong Kong and 11% was located in New York. This assessment was factored into the day one valuation and discount applied to the loans. As such, geographic concentration risk is considered in the covered loan discount. As of March 31, 2012, credit related to the covered loans has not deteriorated beyond the fair value at acquisition date.

 

Loans are risk rated based on analysis of the current state of the borrower’s credit quality. The analysis of credit quality includes review of all sources of repayment, the borrower’s current financial and liquidity status, and all other relevant information. The Company utilizes an eight grade risk rating system, where a higher grade represents a higher level of credit risk. The eight grade risk rating system can be generally classified by the following categories: Pass or Watch, Special Mention, Substandard, Doubtful, and Loss. The risk ratings reflect the relative strength of the sources of repayment. Refer to Note 8 for full discussion of risk ratings.

 

After a year of historical performance of the covered loans acquired through the UCB acquisition, the Company reduced the nonaccretable difference due to the performance of the portfolio and expectation for the inherent losses in the portfolio in the fourth quarter of 2010. By lowering the nonaccretable discount, the overall accretable yield will increase thus increasing the interest income recognized over the remaining life of the loans. This reduction was primarily calculated based on the risk ratings of the loans.

 

32



 

If credit deteriorates beyond the respective acquisition date fair value amount of the covered loans under ASC 310-30, such deterioration will be reserved for and a provision for credit losses will be charged to earnings with a partially offsetting noninterest income item reflected in the increase to the FDIC indemnification asset or receivable. As of March 31, 2012, there is no allowance for the covered loans accounted for under ASC 310-30 related to deterioration as the credit has not deteriorated beyond fair value at acquisition date.

 

As of the acquisition date, WFIB’s and UCB’s loan portfolios included unfunded commitments for commercial lines of credit, construction draws and other lending activity. The total commitment outstanding as of the acquisition date is covered under the shared-loss agreements. However, any additional advances on these loans subsequent to acquisition date are not accounted for under ASC 310-30. Included in the table below are $537.2 million of additional advances under the shared-loss agreements which are not accounted for under ASC 310-30. The Bank has considered these additional advances on commitments covered under the shared-loss agreements in the allowance for loan losses calculation. These additional advances are within our loan segments as follows: $346.2 million of commercial and industrial loans, $145.1 million of commercial real estate loans, $33.7 million of consumer loans and $12.2 million of residential loans. As of March 31, 2012, $8.3 million, or 3.7%, of the total allowance is allocated to these additional advances on loans covered under the shared-loss agreements. This $8.3 million in allowance is allocated within our loan segments as follows: $5.2 million for commercial real estate loans, $2.8 million for commercial and industrial loans, $182 thousand for consumer loans and $133 thousand for residential loans.

 

The tables below present the covered loan portfolio by credit quality indicator as of March 31, 2012 and December 31, 2011.

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

Pass/Watch

 

Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

(In thousands)

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

Residential single-family

 

$

405,077

 

$

1,487

 

$

12,404

 

$

 

$

418,968

 

Residential multifamily

 

751,603

 

24,128

 

106,925

 

 

882,656

 

Commercial and industrial real estate

 

1,203,273

 

7,735

 

474,076

 

7,635

 

1,692,719

 

Construction and land

 

234,406

 

41,714

 

297,895

 

2,674

 

576,689

 

Total real estate loans

 

2,594,359

 

75,064

 

891,300

 

10,309

 

 

3,571,032

 

Other loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

531,311

 

40,713

 

161,529

 

1,926

 

735,479

 

Other consumer

 

94,240

 

 

2,357

 

 

96,597

 

Total other loans

 

625,551

 

40,713

 

163,886

 

1,926

 

 

832,076

 

Total principal balance

 

$

3,219,910

 

$

115,777

 

$

1,055,186

 

$

12,235

 

 

$

4,403,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

Pass/Watch

 

Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

(In thousands)

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

Residential single-family

 

$

427,918

 

$

1,085

 

$

13,729

 

$

 

$

442,732

 

Residential multifamily

 

779,694

 

26,124

 

113,123

 

 

918,941

 

Commercial and industrial real estate

 

1,249,781

 

43,810

 

472,003

 

8,166

 

1,773,760

 

Construction and land

 

242,996

 

40,859

 

362,958

 

6,232

 

653,045

 

Total real estate loans

 

2,700,389

 

111,878

 

961,813

 

14,398

 

 

3,788,478

 

Other loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

643,117

 

34,707

 

149,253

 

4,685

 

831,762

 

Other consumer

 

96,342

 

 

1,502

 

 

97,844

 

Total other loans

 

739,459

 

34,707

 

150,755

 

4,685

 

 

929,606

 

Total principal balance

 

$

3,439,848

 

$

146,585

 

$

1,112,568

 

$

19,083

 

 

$

4,718,084

 

 

As of March 31, 2012 and December 31, 2011, $193.1 million and $194.5 million, respectively, of the ASC 310-30 credit impaired loans were considered to be nonaccrual loans.

 

33



 

The following table sets forth information regarding covered nonperforming assets as of the dates indicated:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

(In thousands)

 

Covered nonaccrual loans(1) (2)

 

$

193,088

 

$

194,506

 

Covered loans past due 90 days or more but not on nonaccrual

 

 

 

Total nonperforming loans

 

193,088

 

194,506

 

Other real estate owned covered, net

 

55,586

 

63,624

 

Total covered nonperforming assets

 

$

248,674

 

$

258,130

 

 


(1)                Covered nonaccrual loans meet the criteria for nonaccrual but have a yield accreted through interest income under ASC 310-30.

(2)                Represents principal balance net of discount.

 

As of March 31, 2012, we had 83 covered OREO properties with a combined aggregate carrying value of $55.6 million. Approximately 63% and 20% of covered OREO properties as of March 31, 2012 were located in California and Washington, respectively. As of December 31, 2011, we had 82 covered OREO properties with an aggregate carrying value of $63.6 million. During the first three months of 2012, 26 properties with an aggregate carrying value of $13.2 million were added through foreclosure. The aggregate carrying value at March 31, 2012 includes $6.5 million in net write-downs on covered OREO. During the first three months of 2012, we sold 25 covered OREO properties for total proceeds of $16.1 million resulting in a total net gain on sale of $1.4 million.

 

Changes in the accretable yield for the covered loans are as follows for the periods shown:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Balance at beginning of period

 

  $

785,165

 

  $

1,153,272

 

Additions

 

 

 

Accretion

 

(25,606

)

(58,680

)

Changes in expected cash flows

 

(62,893

)

(26,476

)

Balance at end of period

 

  $

696,666

 

  $

1,068,116

 

 

The excess of cash flows expected to be collected over the initial fair value of acquired loans is referred to as the accretable yield and is accreted into interest income over the estimated life of the acquired loans using the effective yield method. The accretable yield will change due to:

 

·                   estimate of the remaining life of acquired loans which may change the amount of future interest income;

 

·                   estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference); and

 

·                   indices for acquired loans with variable rates of interest.

 

From December 31, 2011 to March 31, 2012, excluding scheduled principal payments, a total of $219.6 million of loans were removed from the covered loans accounted under ASC 310-30 due to loans being paid in full, sold, transferred to covered OREO or charged-off. Interest income was adjusted by $4.1 million related to payoffs and removals offset by charge-offs.

 

34



 

From December 31, 2010 to March 31, 2011, excluding scheduled principal payments, a total of $242.1 million of loans were removed from the covered loans accounted under ASC 310-30 due to loans being paid in full, sold, transferred to covered OREO or charged-off. Interest income was adjusted by $29.0 million related to payoffs and removals offset by charge-offs.

 

FDIC Indemnification Asset

 

Due to the fourth quarter 2010 reduction of the nonaccretable difference on the UCB covered loan portfolio, the expected reimbursement from the FDIC under the loss-sharing agreement decreased. As such, the Company is amortizing the difference between the recorded amount of the FDIC indemnification asset and the expected reimbursement from the FDIC over the life of the indemnification asset, in line with the improved accretable yield as discussed above. For the three months ended March 31, 2012, the Company recorded $10.1 million of amortization against income, compared to $18.3 million of amortization for the three months ended March 31, 2011. For the three months ended March 31, 2012, the Company also recorded a $41.0 million reduction to the FDIC indemnification asset resulting from paydowns, payoffs, loan sales and charge-offs.

 

The table below shows FDIC indemnification asset activity for the periods shown:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

(In thousands)

 

Balance at beginning of period

 

$

511,135

 

$

792,133

 

(Amortization) Accretion

 

(10,071

)

(18,277

)

Reductions (1)

 

(40,968

)

(56,596

)

Estimate of FDIC repayment (2)

 

(2,831

)

 

Balance at end of period

 

$

457,265

 

 

$

717,260

 

 


(1)                Reductions relate to cash flows received from principal amortization, partial prepayments, loan payoffs and loan sales.

(2)             This represents the change in the calculated estimate the company will be required to pay the FDIC at the end of the FDIC loss share agreements, due to lower thresholds of losses.

 

FDIC Receivable

 

As of March 31, 2012, the FDIC loss-sharing receivable was $85.7 million as compared to $76.6 million as of December 31, 2011. This receivable represents 80% of reimbursable amounts from the FDIC that have not yet been received. These reimbursable amounts include net charge-offs, loan-related expenses and OREO-related expenses. 100% of the loan-related and OREO expenses are recorded as noninterest expense, 80% of any reimbursable expense is recorded as noninterest income, netting to the 20% of actual expense paid by the Company. The FDIC also shares in 80% of recoveries received. Thus, the FDIC receivable is reduced when we receive payment from the FDIC as well as when recoveries occur. The FDIC loss-sharing receivable is included in other assets on the Condensed Consolidated Balance Sheet.

 

35



 

NOTE 8 — NON-COVERED LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The following is a summary of loans receivable, excluding covered loans (“non-covered loans”) for the periods indicated:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Residential:

 

 

 

 

 

Single-family

 

$

1,953,123

 

$

1,796,635

 

Multifamily

 

916,753

 

933,168

 

Total residential

 

2,869,876

 

2,729,803

 

 

 

 

 

 

 

 

Commercial Real Estate (“CRE”):

 

 

 

 

 

Income producing

 

3,454,641

 

3,487,866

 

Construction

 

152,579

 

171,410

 

Land

 

169,654

 

173,089

 

Total CRE

 

 

3,776,874

 

3,832,365

 

 

 

 

 

 

 

Commercial and Industrial (“C&I”):

 

 

 

 

 

Commercial business

 

2,785,971

 

2,655,917

 

Trade finance

 

452,634

 

486,555

 

Total C&I

 

 

3,238,605

 

3,142,472

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

Student loans

 

341,966

 

306,325

 

Other consumer

 

270,792

 

277,461

 

Total consumer

 

612,758

 

583,786

 

Total gross loans receivable, excluding covered loans

 

 

10,498,113

 

10,288,426

 

Unearned fees, premiums, and discounts, net

 

(19,034

)

(16,762

)

Allowance for loan losses, excluding covered loans

 

(214,253

)

(209,876

)

Loans receivable, excluding covered loans, net

 

$

10,264,826

 

$

10,061,788

 

 

Accrued interest on covered and non-covered loans receivable amounted to $72.5 million and $68.5 million at March 31, 2012 and December 31, 2011, respectively.

 

At March 31, 2012 and December 31, 2011, covered and non-covered loans receivable totaling $8.70 billion and $8.65 billion, respectively, were pledged to secure borrowings from the FHLB and the Federal Reserve Bank.

 

The Bank offers both fixed and adjustable rate (“ARM”) first mortgage loans secured by one-to-four unit residential properties located in its primary lending areas. The Bank originated $220.4 million and $136.5 million in new residential single-family loans during the three months ended March 31, 2012 and 2011, respectively.

 

The Bank also offers both fixed and ARM residential multifamily loan programs. For the three months ended March 31, 2012 and 2011, the Bank originated $17.2 million and $15.4 million, respectively, in multifamily residential loans. The Bank primarily offers ARM multifamily loan programs that have six-month, three-year, or five-year initial fixed periods. The Bank considers all of the single-family and multifamily loans originated to be prime loans and the underwriting criteria include minimum FICO scores, maximum loan-to-value ratios and minimum debt coverage ratios, as applicable. The Bank has single-family loans with interest-only features which represent less than 1% and 1% of total single-family loans at March 31, 2012 and December 31, 2011, respectively. Additionally, the Bank owns residential loans that were purchased several years ago that permit different repayment options. For these loans, there is the potential for negative amortization if the borrower so chooses. These residential loans that permit different repayment options represented less than 1%, and 1%, of total residential loans at March 31, 2012 and December 31, 2011, respectively.

 

36



 

None of these loans were negatively amortizing as of March 31, 2012 and December 31, 2011.

 

In addition to residential lending, the Bank’s lending activities also include commercial real estate, commercial and industrial, and consumer lending. Our CRE lending activities include loans to finance income producing properties and also construction and land loans. Our C&I lending activities include commercial business financing for small and middle-market businesses in a wide spectrum of industries. Included in commercial business loans are loans for working capital, accounts receivable lines, inventory lines, small business administration loans, and lease financing. We also offer a variety of international trade finance services and products, including letters of credit, revolving lines of credit, import loans, bankers’ acceptances, working capital lines, domestic purchase financing, and pre-export financing. Consumer loans are primarily comprised of fully guaranteed student loans, home equity lines of credit, and auto loans.

 

All of the loans that the Bank originates are subject to its underwriting guidelines and loan origination standards. Management believes that the Bank’s underwriting criteria and procedures adequately consider the unique risks which may come from these products. The Bank conducts a variety of quality control procedures and periodic audits to ensure compliance with its origination standards, including criteria for lending and legal requirements.

 

Credit Risk and Concentrations—The real estate market in California, including the areas of Los Angeles, Riverside, San Bernardino, and Orange counties, where a majority of the Company’s loan customers are based, has been negatively impacted over the past few years. As of March 31, 2012, the Company had $3.78 billion in non-covered commercial real estate loans and $2.87 billion in non-covered residential loans, of which approximately 92% are secured by real properties located in California. Potential further deterioration in the real estate market generally and residential building in particular could result in additional loan charge-offs and provisions for loan losses in the future, which could have a material adverse effect on the Company’s financial condition, net income and capital. In addition, although most of the Company’s trade finance activities are related to trade with Asian countries, the majority of our loans are made to companies domiciled in the United States. A substantial portion of this business involves California based customers engaged in import and export activities. We also offer export-import financing to various domestic and foreign customers; the export loans are guaranteed by the Export-Import Bank of the United States.

 

Purchased Loans—During the first three months of 2012, the Company purchased loans with an unpaid principal balance of $139.1 million and a carrying amount of $132.2 million. 98% of these loans are student loans which are guaranteed by the U.S. Department of Education and pose limited credit risk.

 

Loans Held for Sale—Loans held for sale totaled $280.8 million and $278.6 million as of March 31, 2012 and December 31, 2011, respectively. Loans held for sale are recorded at the lower of cost or fair market value. Fair market value, if lower than cost, is determined based on valuations obtained from market participants or the value of the underlying collateral. As of March 31, 2012, approximately 95% of these loans were student loans, the majority of which are guaranteed by the U.S. Department of Education. During the first three months of 2012, in total, loans receivable of $40.8 million were reclassified to loans held for sale. Some of these loans were purchased by the Company with the intent to be held for investment; however, subsequent to their purchase, the Company’s intent for these loans changed and they were consequently reclassified to loans held for sale. Proceeds from sales of loans held for sale were $52.6 million in the first three months of 2012, resulting in net gains on sale of $4.6 million. Proceeds from sales of loans held for sale were $150.5 million in March 2011 with $4.3 million net gains on sale.

 

Credit Quality Indicators—Loans are risk rated based on analysis of the current state of the borrower’s credit quality. The analysis of credit quality includes review of all sources of repayment, the borrower’s current financial and liquidity status, and all other relevant information. The Company utilizes an eight grade risk rating system, where a higher grade represents a higher level of credit risk.

 

37



 

The eight grade risk rating system can be generally classified by the following categories: Pass or Watch, Special Mention, Substandard, Doubtful, and Loss. The risk ratings reflect the relative strength of the sources of repayment.

 

Pass or Watch loans are generally considered to have sufficient sources of repayment in order to repay the loan in full in accordance with all terms and conditions. These borrowers may have some credit risk that requires monitoring, but full repayment is expected. Special Mention loans are considered to have potential weaknesses that warrant closer attention by management. Special Mention is considered a transitory grade and, generally, the Company does not grade a loan as Special Mention for longer than six months. If any potential weaknesses are resolved, the loan is upgraded to a Pass or Watch grade. If negative trends in the borrower’s financial status or other information is presented that indicates the repayment sources may become inadequate, the loan is downgraded to a Substandard grade. Substandard loans are considered to have well-defined weaknesses that jeopardize the full and timely repayment of the loan. Substandard loans have a distinct possibility of loss if the deficiencies are not corrected. Additionally, when management has assessed a potential for loss but a distinct possibility of loss is not recognizable, the loan is still classified as Substandard. Doubtful loans have insufficient sources of repayment and a high probability of loss. Loss loans are considered to be uncollectible and of such little value that they are no longer considered bankable assets. These internal risk ratings are reviewed routinely and adjusted due to changes in borrower status and likelihood of loan repayment. The tables below present the non-covered loan portfolio by credit quality indicator as of March 31, 2012 and December 31, 2011. There were no Loss grade loans as of March 31, 2012 and December 31, 2011.

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

Pass/Watch

 

Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

(In thousands)

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

Single-family

 

$

1,926,705

 

$

10,905

 

$

15,513

 

$

 

$

1,953,123

 

Multifamily

 

798,348

 

23,930

 

94,475

 

 

916,753

 

CRE:

 

 

 

 

 

 

 

 

 

 

 

Income producing

 

3,204,450

 

43,052

 

207,139

 

 

3,454,641

 

Construction

 

110,094

 

 

42,485

 

 

152,579

 

Land

 

123,089

 

7,909

 

38,656

 

 

169,654

 

C&I:

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

2,621,289

 

81,050

 

83,632

 

 

2,785,971

 

Trade finance

 

435,020

 

6,168

 

11,446

 

 

452,634

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Student loans

 

341,134

 

50

 

782

 

 

341,966

 

Other consumer

 

266,379

 

170

 

4,243

 

 

270,792

 

Total

 

$

9,826,508

 

$

173,234

 

$

498,371

 

$

 

$

10,498,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

Pass/Watch

 

Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

(In thousands)

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

Single-family

 

$

1,768,149

 

$

11,239

 

$

17,247

 

$

 

$

1,796,635

 

Multifamily

 

810,458

 

25,531

 

97,179

 

 

933,168

 

CRE:

 

 

 

 

 

 

 

 

 

 

 

Income producing

 

3,211,386

 

63,066

 

213,414

 

 

3,487,866

 

Construction

 

109,184

 

 

62,226

 

 

171,410

 

Land

 

125,534

 

7,954

 

39,601

 

 

173,089

 

C&I:

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

2,492,904

 

62,409

 

100,357

 

247

 

2,655,917

 

Trade finance

 

467,822

 

7,161

 

11,572

 

 

486,555

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Student loans

 

305,880

 

188

 

257

 

 

306,325

 

Other consumer

 

273,692

 

 

3,769

 

 

277,461

 

Total

 

$

9,565,009

 

$

177,548

 

$

545,622

 

$

247

 

$

10,288,426

 

 

38



 

Nonaccrual and Past Due Loans—Loans are tracked by the number of days borrower payments are past due. The tables below present an aging analysis of nonaccrual loans, past due non-covered loans and loans held for sale, segregated by class of loans, as of March 31, 2012 and December 31, 2011:

 

 

 

Accruing

 

Accruing

 

Total

 

Nonaccrual

 

Nonaccrual

 

Total

 

 

 

 

 

 

 

Loans

 

Loans

 

Accruing

 

Loans Less

 

Loans

 

Nonaccrual

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Past Due

 

Than 90 Days

 

90 or More

 

Past Due

 

Current

 

 

 

 

 

Past Due

 

Past Due

 

Loans

 

Past Due

 

Days Past Due

 

Loans

 

Loans

 

Total

 

 

 

(In thousands)

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single-family

 

$

3,786

 

$

216

 

$

4,002

 

$

 

$

3,735

 

$

3,735

 

$

1,945,386

 

$

1,953,123

 

Multifamily

 

4,281

 

4,849

 

9,130

 

10,399

 

8,067

 

18,466

 

889,157

 

916,753

 

CRE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income producing

 

14,696

 

2,734

 

17,430

 

3,450

 

29,962

 

33,412

 

3,403,799

 

3,454,641

 

Construction

 

 

 

 

 

25,832

 

25,832

 

126,747

 

152,579

 

Land

 

12,750

 

579

 

13,329

 

530

 

8,477

 

9,007

 

147,318

 

169,654

 

C&I:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

14,692

 

543

 

15,235

 

4,082

 

6,806

 

10,888

 

2,759,848

 

2,785,971

 

Trade finance

 

 

 

 

 

2,042

 

2,042

 

450,592

 

452,634

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Student loans

 

157

 

50

 

207

 

 

782

 

782

 

340,977

 

341,966

 

Other consumer

 

1,246

 

170

 

1,416

 

 

2,392

 

2,392

 

266,984

 

270,792

 

Loans held for sale

 

 

 

 

 

14,242

 

14,242

 

266,588

 

280,830

 

Total

 

$

51,608

 

$

9,141

 

$

60,749

 

$

18,461

 

$

102,337

 

$

120,798

 

$

10,597,396

 

10,778,943

 

Unearned fees, premiums and discounts, net

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,034

)

Total recorded investment in non-covered loans and loans held for sale

 

 

 

 

 

 

 

 

 

 

 

$

10,759,909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing

 

Accruing

 

Total

 

Nonaccrual

 

Nonaccrual

 

Total

 

 

 

 

 

 

 

Loans

 

Loans

 

Accruing

 

Loans Less

 

Loans

 

Nonaccrual

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Past Due

 

Than 90 Days

 

90 or More

 

Past Due

 

Current

 

 

 

 

 

Past Due

 

Past Due

 

Loans

 

Past Due

 

Days Past Due

 

Loans

 

Loans

 

Total

 

 

 

(In thousands)

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single-family

 

$

6,991

 

$

1,198

 

$

8,189

 

$

 

$

3,569

 

$

3,569

 

$

1,784,877

 

$

1,796,635

 

Multifamily

 

6,366

 

745

 

7,111

 

6,889

 

11,306

 

18,195

 

907,862

 

933,168

 

CRE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income producing

 

18,179

 

1,549

 

19,728

 

6,885

 

25,690

 

32,575

 

3,435,563

 

3,487,866

 

Construction

 

 

 

 

26,482

 

14,688

 

41,170

 

130,240

 

171,410

 

Land

 

 

573

 

573

 

1,136

 

9,589

 

10,725

 

161,791

 

173,089

 

C&I:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

342

 

2,957

 

3,299

 

4,394

 

6,843

 

11,237

 

2,641,381

 

2,655,917

 

Trade finance

 

 

 

 

 

 

 

486,555

 

486,555

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Student loans

 

109

 

188

 

297

 

 

257

 

257

 

305,771

 

306,325

 

Other consumer

 

1,130

 

 

1,130

 

 

2,249

 

2,249

 

274,082

 

277,461

 

Loans held for sale

 

 

 

 

 

25,655

 

25,655

 

252,948

 

278,603

 

Total

 

$

33,117

 

$

7,210

 

$

40,327

 

$

45,786

 

$

99,846

 

$

145,632

 

$

10,381,070

 

10,567,029

 

Unearned fees, premiums and discounts, net

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,762

)

Total recorded investment in non-covered loans and loans held for sale

 

 

 

 

 

 

 

 

 

 

 

$

10,550,267

 

 

Generally, loans 90 or more days past due are placed on nonaccrual status, at which point interest accrual is discontinued and all unpaid accrued interest is reversed against interest income. Additionally, loans that are not 90 or more days past due but have identified deficiencies, including delinquent TDR loans, are also placed on nonaccrual status. Nonaccrual loans totaled $120.8 million and $145.6 million at March 31, 2012 and December 31, 2011, respectively. Loans not 90 or more days past due totaled $18.5 million and $45.8 million as of March 31, 2012 and December 31, 2011, respectively, and were included in non-covered nonaccrual loans.

 

39



 

The following is a summary of interest income foregone on nonaccrual loans:

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

(In thousands)

 

Interest income that would have been recognized had nonaccrual loans performed in accordance with their original terms

 

$

1,730

 

$

2,765

 

Less: Interest income recognized on nonaccrual loans on a cash basis

 

(701

)

(807

)

Interest income foregone on nonaccrual loans

 

$

1,029

 

$

1,958

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings—A troubled debt restructuring (“TDR”) is a modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including a below-market change in the stated interest rate, reduction in the loan balance or accrued interest, extension of the maturity date with a stated interest rate lower than the current market rate or note splits referred to as A/B notes. In A/B note restructurings, the original note is bifurcated into two notes where the A note represents the portion of the original loan which allows for acceptable loan-to-value and debt coverage on the collateral and is expected to be collected in full and the B note represents the portion of the original loan where there is a shortfall in value and is fully charged-off.  The A/B note balance is comprised of the A note balances only.  A notes are not disclosed as TDRs in years after the restructuring if the restructuring agreement specifies an interest rate equal to or greater than the rate that the Bank was willing to accept at the time of the restructuring for a new loan with comparable risk and the loan is not impaired based on the terms specified by the restructuring agreement.

 

TDRs may be designated as performing or nonperforming. A TDR may be designated as performing if the loan has demonstrated sustained performance under the modified terms. The period of sustained performance may include the periods prior to modification if prior performance met or exceeded the modified terms. For nonperforming restructured loans, the loan will remain on nonaccrual status until the borrower demonstrates a sustained period of performance, generally six consecutive months of payments. The Company had $28.3 million and $99.6 million in total performing restructured loans as of March 31, 2012 and December 31, 2011, respectively. Nonperforming restructured loans were $27.8 million and $38.9 million at March 31, 2012 and December 31, 2011, respectively. Included as TDRs were $5.8 million and $22.8 million of performing A/B notes as of March 31, 2012 and December 31, 2011, respectively.  All TDRs are included in the balance of impaired loans.

 

The following table provides information on loans modified as of March 31, 2012 that were modified as TDRs during the three months ended March 31, 2012:

 

40



 

 

 

Loans Modified as TDRs During the

 

 

 

Three Months Ended March 31, 2012

 

 

 

 

 

Pre-Modification

 

Post-Modification

 

 

 

 

 

Number

 

Outstanding

 

Outstanding

 

 

 

 

 

of

 

Recorded

 

Recorded

 

Financial

 

 

 

Contracts

 

Investment

 

Investment (1)

 

Impact (2)

 

 

 

(Dollars in thousands)

 

Residential:

 

 

 

 

 

 

 

 

 

Single-family

 

1

 

$

302

 

$

206

 

$

95

 

Multifamily

 

1

 

$

399

 

$

390

 

$

 

CRE:

 

 

 

 

 

 

 

 

 

Income producing

 

4

 

$

4,103

 

$

3,683

 

$

561

 

Construction

 

 

$

 

$

 

$

 

Land

 

1

 

$

432

 

$

70

 

$

77

 

C&I:

 

 

 

 

 

 

 

 

 

Commercial business

 

6

 

$

2,525

 

$

2,489

 

$

297

 

Trade finance

 

 

$

 

$

 

$

 

Consumer:

 

 

 

 

 

 

 

 

 

Student loans

 

 

$

 

$

 

$

 

Other consumer

 

 

$

 

$

 

$

 

 


(1)        Includes subsequent payments after modification and reflects the balance as of March 31, 2012.

(2)        The financial impact includes chargeoffs and specific reserves recorded at modification date.

 

Potential TDRs are individually evaluated and the type of restructuring is selected based on the loan type and the circumstances of the borrower’s financial difficulty in order to maximize the bank’s recovery. As of March 31, 2012, modifications of residential TDRs, including single and multi-family loans, primarily included principal and interest deferments and A/B note splits. A/B note splits result in a partial chargeoff or loss for the bank at the modification date. For the three months ended March 31, 2012 residential TDRs modified using principal and interest deferment and/or A/B note splits totaled $596 thousand, as of March 31, 2012. Commercial real estate TDRs, including income producing, construction and land loans, were primarily modified through A/B note splits, maturity extensions, forbearance payments, principal and interest deferment and/or non-market interest rate changes with an impact of a partial chargeoff or loss for the bank and reduction of interest collected over the life of the loan. Commercial real estate TDRs modified through A/B note splits and/or maturity extensions totaled $1.7 million as of March 31, 2012. Commercial real estate TDRs modified through forbearance payments, principal and interest deferment and/or non-market interest changes totaled $2.0 million as of March 31, 2012. Commercial and industrial TDRs, including commercial business and trade finance loans, were restructured in various ways, including forbearance payments, principal deferment and/or maturity extensions with an impact of both a reduction of interest collected over the life of the loan and/or an extended time period for collection of principal and interest, for a total of $2.5 million as of March 31, 2012. Performing TDRs at March 31, 2012 were comprised of $6.4 million in residential loans, $19.5 million in commercial real estate loans and $2.4 million in commercial and industrial loans. Performing TDRs at December 31, 2011 were comprised of $19.1 million in residential loans, $60.2 million in commercial real estate loans and $20.3 million in commercial and industrial loans. Nonperforming TDRs at March 31, 2012 were comprised of $6.8 million in residential loans, $19.2 million in commercial real estate loans and $1.8 million in commercial and industrial loans. Nonperforming TDRs at December 31, 2011 were comprised of $2.7 million in residential loans, $34.6 million in commercial real estate loans and $1.6 million in commercial and industrial loans.

 

Subsequent to restructuring, a TDR that becomes delinquent, generally beyond 30 days for commercial and industrial, and commercial real estate and consumer loans, and beyond 90 days for residential loans, becomes nonaccrual and is considered to have defaulted. The following table provides information for loans modified as TDRs within the previous 12 months that have subsequently defaulted as of March 31, 2012 for the three months ended March 31, 2012.

 

41



 

 

 

Loans Modified as TDRs during the Prior 12

 

 

 

Months, that Subsequently Defaulted During the

 

 

 

Three Months Ended March 31, 2012

 

 

 

Number of

 

Recorded

 

 

 

Contracts

 

Investment

 

 

 

(Dollars in thousands)

 

Residential:

 

 

 

 

 

Single-family

 

 

$

 

Multifamily

 

2

 

$

1,109

 

CRE:

 

 

 

 

 

Income producing

 

 

$

 

Construction

 

1

 

$

1,509

 

Land

 

 

$

 

C&I:

 

 

 

 

 

Commercial business

 

2

 

$

227

 

Trade finance

 

 

$

 

Consumer:

 

 

 

 

 

Student loans

 

 

$

 

Other consumer

 

 

$

 

 

All TDRs are included in the impaired loan quarterly valuation allowance process.  See the sections below Impaired Loans and Allowance for Loan Losses for the complete discussion. All portfolio segments of TDRs are reviewed for necessary specific reserves in the same manner as impaired loans of the same portfolio segment which have not been identified as TDRs. The modification of the terms of each TDR is considered in the current impairment analysis of the respective TDR. For all portfolio segments of delinquent TDRs and when the restructured loan is less than the recorded investment in the loan, the deficiency is charged-off against the allowance for loan losses. If the loan is a performing TDR the deficiency is included in the specific allowance, as appropriate. As of March 31, 2012, the allowance for loan losses associated with TDRs was $3.3 million for performing TDRs and $1.0 million for nonperforming TDRs. As of December 31, 2011, the allowance for loan losses associated with TDRs was $10.5 million for performing TDRs and $139 thousand for nonperforming TDRs.

 

Impaired Loans—A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all scheduled payments of principal or interest due according to the original contractual terms of the loan agreement. Impaired loans include non-covered loans held for investment on nonaccrual status, regardless of the collateral coverage, and loans modified in a TDR.

 

The Bank’s loans are grouped into heterogeneous and homogeneous (mostly consumer loans) categories. Classified loans (graded Substandard or Doubtful) in the heterogeneous category are selected and evaluated for impairment on an individual basis. The Bank considers loans individually reviewed to be impaired if, based on current information and events, it is probable the Bank will not be able to collect all amounts due according to the original contractual terms of the loan agreement. For loans determined to be impaired, the bank utilizes the most applicable asset valuation method for the loan from the following valuation methods: fair value of collateral less costs to sell, present value of expected future cash flows, or the loan’s observable market price. When the value of an impaired loan is less than the recorded investment in the loan and the loan is classified as nonperforming, the deficiency is charged-off against the allowance for loan losses.

 

At March 31, 2012 and December 31, 2011, impaired loans totaled $134.9 million and $219.6 million, respectively. Impaired non-covered loans as of March 31, 2012 and December 31, 2011 are set forth in the following tables. The interest income recognized on impaired loans, excluding performing TDRs, is recognized on a cash basis when received.

 

42



 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months

 

 

 

 

 

Recorded

 

Recorded

 

 

 

 

 

ended March 31, 2012

 

 

 

Unpaid

 

Investment

 

Investment

 

Total

 

 

 

Average

 

Interest   

 

 

 

Principal

 

With No

 

With

 

Recorded

 

Related

 

Recorded

 

Income   

 

 

 

Balance

 

Allowance

 

Allowance

 

Investment

 

Allowance

 

Investment

 

Recognized (1)

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

As of and for the three months ended March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single-family

 

$

5,428

 

$

4,571

 

$

 

$

4,571

 

$

 

$

5,186

 

$

 

Multifamily

 

26,651

 

22,016

 

2,025

 

24,041

 

683

 

24,441

 

107

 

CRE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income producing

 

51,633

 

37,275

 

5,274

 

42,549

 

1,050

 

44,072

 

255

 

Construction

 

34,819

 

27,581

 

472

 

28,053

 

220

 

28,447

 

153

 

Land

 

19,527

 

9,001

 

8,139

 

17,140

 

2,030

 

17,486

 

41

 

C&I:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

17,861

 

10,494

 

2,790

 

13,284

 

1,969

 

13,999

 

145

 

Trade finance

 

2,042

 

2,042

 

 

2,042

 

 

2,083

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Student loans

 

782

 

782

 

 

782

 

 

782

 

 

Other consumer

 

2,449

 

2,392

 

 

2,392

 

 

2,418

 

 

Total

 

$

161,192

 

$

116,154

 

$

18,700

 

$

134,854

 

$

5,952

 

$

138,914

 

$

701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year

 

 

 

 

 

Recorded

 

Recorded

 

 

 

 

 

ended December 31, 2011

 

 

 

Unpaid

 

Investment

 

Investment

 

Total

 

 

 

Average

 

Interest   

 

 

 

Principal

 

With No

 

With

 

Recorded

 

Related

 

Recorded

 

Income   

 

 

 

Balance

 

Allowance

 

Allowance

 

Investment

 

Allowance

 

Investment

 

Recognized (1)

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

As of and for the year ended December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single-family

 

$

10,248

 

$

6,578

 

$

2,535

 

$

9,113

 

$

1,131

 

$

9,408

 

$

65

 

Multifamily

 

37,450

 

28,272

 

3,520

 

31,792

 

1,124

 

35,855

 

473

 

CRE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income producing

 

69,664

 

55,701

 

7,941

 

63,642

 

1,187

 

68,087

 

1,030

 

Construction

 

75,714

 

45,413

 

1,067

 

46,480

 

815

 

64,398

 

1,099

 

Land

 

40,615

 

25,806

 

8,692

 

34,498

 

3,949

 

36,002

 

341

 

C&I:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

38,857

 

20,772

 

6,650

 

27,422

 

4,835

 

32,033

 

484

 

Trade finance

 

4,127

 

4,127

 

 

4,127

 

 

4,127

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Student loans

 

257

 

257

 

 

257

 

 

257

 

 

Other consumer

 

2,249

 

2,249

 

 

2,249

 

 

2,251

 

27

 

Total

 

$

279,181

 

$

189,175

 

$

30,405

 

$

219,580

 

$

13,041

 

$

252,418

 

$

3,519

 

 


(1)                Excludes interest from performing TDRs.

 

Allowance for Loan Losses

 

The allowance consists of specific reserves and a general reserve. The Bank’s loans fall into heterogeneous and homogeneous (mostly consumer loans) categories. Impaired loans in the heterogeneous category are subject to specific reserves. Loans in the homogeneous category, as well as non-impaired loans in the heterogeneous category, are evaluated as part of the general reserve. The general reserve is calculated by utilizing both quantitative and qualitative factors. There are different qualitative risks for the loans in each portfolio segment. As of March 31, 2012, the Residential and CRE segments’ predominant risk characteristic is the collateral and the geographic location of the property collateralizing the loan. The risk is qualitatively assessed based on the change in the real estate market in those geographic areas. The C&I segment’s predominant risk characteristics are global cash flows of the guarantors and businesses we lend to and economic and market conditions. Consumer loans, excluding the student loan portfolio guaranteed by the U.S. Department of Education, are largely comprised of home equity lines of credit, for which the predominant risk characteristic is the real estate collateral securing the loan.

 

Our methodology to determine the overall appropriateness of the allowance is based on a classification migration model and qualitative considerations. The migration analysis examines pools of loans having similar characteristics and analyzes their loss rates over a historical period. We utilize historical loss factors derived from trends and losses associated with each pool over a specified period of time. Based on this process, we assign loss factors to each loan grade within each pool of loans.

 

43



 

Loss rates derived by the migration model are based predominantly on historical loss trends that may not be entirely indicative of the actual or inherent loss potential. As such, we utilize qualitative and environmental factors as adjusting mechanisms to supplement the historical results of the classification migration model. Qualitative considerations include, but are not limited to, prevailing economic or market conditions, relative risk profiles of various loan segments, volume concentrations, growth trends, delinquency and nonaccrual status, problem loan trends, and geographic concentrations. Qualitative and environmental factors are reflected as percentage adjustments and are added to the historical loss rates derived from the classified asset migration model to determine the appropriate allowance amount for each loan pool.

 

Covered LoansAs of the respective acquisition dates, WFIB’s and UCB’s loan portfolios included unfunded commitments for commercial lines of credit, construction draws and other lending activity. The total commitment outstanding as of the respective acquisition dates is covered under the shared-loss agreements. However, any additional advances on these loans subsequent to acquisition date are not accounted for under ASC 310-30. As additional advances on these commitments have occurred, the Bank has considered these amounts in the allowance for loan losses calculation. As of March 31, 2012 and December 31, 2011, $8.3 million, or 3.7% and $6.6 million, or 3.1%, respectively, of the total allowance is allocated to the allowance for loan losses on covered loans. The covered loans acquired are, and will continue to be, subject to the Bank’s internal and external credit review and monitoring. Credit deterioration, if any, beyond the respective acquisition date fair value amounts of the covered loans under ASC 310-30 will be separately measured and accounted for under ASC 310-30. If required, the establishment of an allowance for covered loans accounted for under ASC 310-30 will result in a charge to earnings with a partially offsetting noninterest income item reflected in the increase to the FDIC indemnification asset or receivable. As of March 31, 2012 and December 31, 2011, there is no allowance for the covered loans accounted for under ASC 310-30 due to deterioration of credit quality.

 

The Company recorded $18.1 million in loan loss provisions for the three months ended March 31, 2012, as compared to $26.5 million for the three months ended March 31, 2011. It is the Company’s policy to promptly charge-off the amount of impairment on a loan which represents the difference in the outstanding loan balance and the fair value of the collateral or discounted cash flow. Recoveries are recorded when payment is received on loans that were previously charged-off through the allowance for loan losses. For the three months ended March 31, 2012, the Company recorded $10.3 million in net charge-offs in comparison to $34.2 million for the three months ended March 31, 2011. The following tables detail activity in the allowance for loan losses, for both non-covered and covered loans, by portfolio segment for the three months ended March 31, 2012 and the year ended December 31, 2011. Allocation of a portion of the allowance to one segment of the loan portfolio does not preclude its availability to absorb losses in other segments.

 

44



 

 

 

 

 

 

 

 

 

 

 

Covered Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subject to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for

 

 

 

 

 

 

 

Residential

 

CRE

 

C&I

 

Consumer

 

Loan Losses (1)

 

Unallocated

 

Total

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

52,180

 

$

66,457

 

$

87,020

 

$

4,219

 

$

6,647

 

$

 

$

216,523

 

Provision for loan losses

 

1,103

 

12,465

 

1,315

 

(182

)

1,621

 

1,778

 

18,100

 

Allowance for unfunded loan commitments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and letters of credit

 

 

 

 

 

 

(1,778

)

(1,778

)

Charge-offs

 

(3,031

)

(10,707

)

(2,887

)

(163

)

 

 

(16,788

)

Recoveries

 

941

 

2,775

 

2,665

 

83

 

 

 

6,464

 

Net charge-offs

 

(2,090

)

(7,932

)

(222

)

(80

)

 

 

(10,324

)

Ending balance

 

$

51,193

 

$

70,990

 

$

88,113

 

$

3,957

 

$

8,268

 

$

 

$

222,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

683

 

$

3,300

 

$

1,969

 

$

 

$

 

$

 

$

5,952

 

Loans collectively evaluated for impairment

 

50,510

 

67,690

 

86,144

 

3,957

 

8,268

 

 

216,569

 

Loans acquired with deteriorated credit quality(2)

 

 

 

 

 

 

 

 

Ending balance

 

$

51,193

 

$

70,990

 

$

88,113

 

$

3,957

 

$

8,268

 

$

 

$

222,521

 

 

 

 

 

 

 

 

 

 

 

 

Covered Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subject to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for

 

 

 

 

 

 

 

Residential

 

CRE

 

C&I

 

Consumer

 

Loan Losses (1)

 

Unallocated

 

Total

 

 

 

(In thousands)

 

Year ended December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

49,491

 

$

117,752

 

$

59,737

 

$

3,428

 

$

4,225

 

$

 

$

234,633

 

Provision for loan losses

 

15,416

 

22,817

 

50,848

 

2,455

 

2,422

 

1,048

 

95,006

 

Allowance for unfunded loan commitments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and letters of credit

 

 

 

 

 

 

(1,048

)

(1,048

)

Charge-offs

 

(13,323

)

(78,803

)

(30,606

)

(1,959

)

 

 

(124,691

)

Recoveries

 

596

 

4,691

 

7,041

 

295

 

 

 

12,623

 

Net charge-offs

 

(12,727

)

(74,112

)

(23,565

)

(1,664

)

 

 

(112,068

)

Ending balance

 

$

52,180

 

$

66,457

 

$

87,020

 

$

4,219

 

$

6,647

 

$

 

$

216,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

2,255

 

$

5,951

 

$

4,835

 

$

 

$

 

$

 

$

13,041

 

Loans collectively evaluated for impairment

 

49,925

 

60,506

 

82,185

 

4,219

 

6,647

 

 

203,482

 

Loans acquired with deteriorated credit quality (2)

 

 

 

 

 

 

 

 

Ending balance

 

$

52,180

 

$

66,457

 

$

87,020

 

$

4,219

 

$

6,647

 

$

 

$

216,523

 

 


(1)            This allowance is related to drawdowns on commitments that were in existence as of the acquisition dates of WFIB and UCB and, therefore, are covered under the shared-loss agreements with the FDIC. Allowance on these subsequent drawdowns is accounted for as part of the allowance for loan losses.

 

(2)                The Company has elected to account for all covered loans acquired in the FDIC-assisted acquisitions under ASC 310-30.

 

The Company’s recorded investment in total loans receivable as of March 31, 2012 and December 31, 2011 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology is as follows:

 

 

 

 

 

 

 

 

 

 

 

Covered Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

Subject to

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for

 

 

 

 

 

Residential

 

CRE

 

C&I

 

Consumer

 

Loan Losses

 

Total

 

 

 

(In thousands)

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

28,611

 

$

87,742

 

$

15,325

 

$

2,392

 

$

 

$

134,070

 

Loans collectively evaluated for impairment

 

2,841,265

 

3,689,132

 

3,223,281

 

610,365

 

537,244

 

10,901,287

 

Loans acquired with deteriorated credit quality (1)

 

1,262,390

 

2,176,843

 

363,311

 

63,320

 

 

3,865,864

 

Ending balance

 

$

4,132,266

 

$

5,953,717

 

$

3,601,917

 

$

676,077

 

$

537,244

 

$

14,901,221

 

 

 

 

 

 

 

 

 

 

 

 

 

Covered Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

Subject to

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for

 

 

 

 

 

Residential

 

CRE

 

C&I

 

Consumer

 

Loan Losses

 

Total

 

 

 

(In thousands)

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

43,395

 

$

143,631

 

$

31,338

 

$

2,249

 

$

 

$

220,613

 

Loans collectively evaluated for impairment

 

2,686,408

 

3,688,734

 

3,111,135

 

581,536

 

583,804

 

10,651,617

 

Loans acquired with deteriorated credit quality (1)

 

1,331,615

 

2,322,062

 

413,479

 

67,124

 

 

4,134,280

 

Ending balance

 

$

4,061,418

 

$

6,154,427

 

$

3,555,952

 

$

650,909

 

$

583,804

 

$

15,006,510

 

 


(1)            The Company has elected to account for all covered loans acquired in the FDIC-assisted acquisitions under ASC 310-30. The total principal balance is presented and excludes the purchase discount and any additional advances subsequent to acquisition date.

 

45



 

Allowance for Unfunded Loan Commitments, Off-Balance Sheet Credit Exposures and Recourse Provisions—The allowance for unfunded loan commitments, off-balance sheet credit exposures, and recourse provisions is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to these unfunded credit facilities. The determination of the adequacy of the allowance is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. As of March 31, 2012 and December 31, 2011, the allowance for unfunded loan commitments, off-balance sheet credit exposures, and recourse provisions amounted to $12.8 million and $11.0 million, respectively. Net adjustments to the allowance for unfunded loan commitments, off-balance sheet credit exposures, and recourse provisions are included in the provision for loan losses.

 

Loans serviced for others amounted to $1.99 billion and $2.10 billion at March 31, 2012 and December 31, 2011, respectively. These represent loans that have either been sold or securitized for which the Bank continues to provide servicing or has limited recourse. The majority of these loans are residential and CRE at March 31, 2012 and December 31, 2011. Of the total allowance for unfunded loan commitments, off-balance sheet credit exposures, and recourse provisions, $6.0 million and $4.4 million pertain to these loans as of March 31, 2012 and December 31, 2011, respectively. These loans are maintained off-balance sheet and are not included in the loans receivable balance.

 

NOTE 9 — PREMISES AND EQUIPMENT

 

At March 31, 2012, total premises and equipment was $178.9 million with accumulated depreciation and amortization of $62.6 million and a net value of $116.3 million. At December 31, 2011, total premises and equipment was $178.6 million with accumulated depreciation and amortization of $59.7 million and a net value of $118.9 million.

 

Capitalized assets are depreciated or amortized on a straight-line basis in accordance with the estimated useful life for each fixed asset class. The estimated useful life for furniture and fixtures is seven years, office equipment is for five years, and twenty-five years for buildings and improvements. Leasehold improvements are amortized over the shorter of the term of the lease or useful life.

 

NOTE 10 — GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill

 

The carrying amount of goodwill remained at $337.4 million as of March 31, 2012 and December 31, 2011. Goodwill is tested for impairment on an annual basis as of December 31, or more frequently as events occur, or as current circumstances and conditions warrant. The Company records impairment write-downs as charges to noninterest expense and adjustments to the carrying value of goodwill. Subsequent reversals of goodwill impairment are prohibited.

 

As of March 31, 2012, the Company’s market capitalization based on total outstanding common and preferred shares was $3.49 billion and its total stockholders’ equity was $2.28 billion. The Company performed its annual impairment test as of December 31, 2011 to determine whether and to what extent, if any, recorded goodwill was impaired. The analysis compared the fair value of each of the reporting units, including goodwill, to the respective carrying amounts. If the carrying amount of the reporting unit, including goodwill, exceeds the fair value of that reporting unit, then further testing for goodwill impairment is performed.

 

46



 

Premiums on Acquired Deposits

 

The Company also has premiums on acquired deposits, which represent the intangible value of depositor relationships resulting from deposit liabilities assumed in various acquisitions. These intangibles are tested for impairment on an annual basis, or more frequently as events occur, or as current circumstances and conditions warrant. As of March 31, 2012 and December 31, 2011, the gross carrying amount of premiums on acquired deposits totaled $115.2 million and $117.6 million, respectively, and the related accumulated amortization totaled $50.9 million and $50.4 million, respectively. The decrease in the gross carrying value is due to the full amortization and removal of a specific premium acquired on deposits.

 

The Company amortizes premiums on acquired deposits based on the projected useful lives of the related deposits. Amortization expense of premiums on acquired deposits was $2.9 million and $3.2 million for the three months ended March 31, 2012 and 2011, respectively.

 

The following table provides the estimated future amortization expense of premiums on acquired deposits for the succeeding five years and thereafter:

 

 

 

Amount

 

 

(In thousands)

Estimated Amortization Expense of Premiums on Acquired Deposits

 

 

Nine Months Ending December 31, 2012

 

  $

8,033

Year Ending December 31, 2013

 

9,364

Year Ending December 31, 2014

 

8,454

Year Ending December 31, 2015

 

7,543

Year Ending December 31, 2016

 

6,634

Thereafter

 

24,289

Total

 

  $

64,317

 

NOTE 11 — COMMITMENTS AND CONTINGENCIES

 

Credit Extensions—In the normal course of business, the Company has various outstanding commitments to extend credit that are not reflected in the accompanying condensed consolidated financial statements. As of March 31, 2012 and December 31, 2011, undisbursed loan commitments amounted to $2.34 billion and $2.19 billion, respectively. Commercial and standby letters of credit amounted to $1.88 billion and $1.64 billion as of March 31, 2012 and December 31, 2011, respectively.

 

Guarantees—From time to time, the Company sells or securitizes loans with recourse in the ordinary course of business. For loans that have been sold or securitized with recourse, the recourse component is considered a guarantee. When the Company sells or securitizes a loan with recourse, it commits to stand ready to perform if the loan defaults and to make payments to remedy the default. As of March 31, 2012, total loans sold or securitized with recourse amounted to $561.2 million and were comprised of $53.3 million in single-family loans with full recourse and $507.9 million in multifamily loans with limited recourse. In comparison, total loans sold or securitized with recourse amounted to $589.9 million at December 31, 2011 comprised of $54.5 million in single-family loans with full recourse and $535.4 million in multifamily loans with limited recourse. The recourse provision on multifamily loans varies by loan sale and is limited to 4% of the top loss on the underlying loans. The Company’s recourse reserve related to loan sales and securitizations totaled $6.0 million as of March 31, 2012 and $4.4 million as of December 31, 2011, and is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. Despite the challenging conditions in the real estate market, the Company continues to experience minimal losses from the single-family and multifamily loan portfolios.

 

47



 

The Company also sells or securitizes loans without recourse that may have to be subsequently repurchased if a defect that occurred during the loan origination process results in a violation of a representation or warranty made in connection with the securitization or sale of the loan. When a loan sold or securitized to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred and if such defects give rise to a violation of a representation or warranty made to the investor in connection with the sale or securitization. If such a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no such defects, the Company has no commitment to repurchase the loan. As of March 31, 2012 and December 31, 2011, the amount of loans sold without recourse totaled $1.16 billion and $1.23 billion, respectively. Total loans securitized without recourse amounted to $266.3 million and $273.7 million, respectively, at March 31, 2012 and December 31, 2011. The loans sold or securitized without recourse represent the unpaid principal balance of the Company’s loans serviced for others portfolio.

 

Litigation—Neither the Company nor the Bank is involved in any material legal proceedings at March 31, 2012. The Bank, from time to time, is a party to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. After taking into consideration information furnished by counsel to the Company and the Bank, management believes that the resolution of such issues will not have a material adverse impact on the financial position, results of operations, or liquidity of the Company or the Bank.

 

Other Commitments— The Company has commitments to invest in affordable housing funds, and other investments qualifying for community reinvestment tax credits.  These commitments are payable on demand.  As of March 31, 2012 and December 31, 2011 these commitments were $87.4 million and $86.0 million, respectively. These commitments are recorded in other liabilities in the Condensed Consolidated Balance Sheet.

 

NOTE 12 — STOCKHOLDERS’ EQUITY

 

Series A Preferred Stock Offering—In April 2008, the Company issued 200,000 shares of 8% Non-Cumulative Perpetual Convertible Preferred Stock, Series A (“Series A”), with a liquidation preference of $1,000 per share. The Company received $194.1 million of additional Tier 1 qualifying capital, after deducting stock issuance costs. The holders of the Series A preferred stock have the right at any time to convert each share of Series A preferred shares into 64.9942 shares of the Company’s common stock, plus cash in lieu of fractional shares. This represents an initial conversion price of approximately $15.39 per share of common stock or a 22.5% conversion premium based on the closing price of the Company’s common stock on April 23, 2008 of $12.56 per share. On or after May 1, 2013, the Company will have the right, under certain circumstances, to cause the Series A preferred shares to be converted into shares of the Company’s common stock. Dividends on the Series A preferred shares, if declared, will accrue and be payable quarterly in arrears at a rate per annum equal to 8% on the liquidation preference of $1,000 per share. The proceeds from this offering were used to augment the Company’s liquidity and capital positions and reduce its borrowings. As of March 31, 2012, 85,710 shares were outstanding.

 

Warrants – During 2008, in conjunction with the Series B preferred stock offering, the Company issued to the U.S. Treasury warrants with an initial price of $15.15 per share of common stock for which the warrants may be exercised, with an allocated fair value of $25.2 million. The warrants could be exercised at any time on or before December 5, 2018. On January 26, 2011 the Company repurchased the 1,517,555 warrants outstanding for $14.5 million.

 

48



 

Stock Repurchase Program—On January 19, 2012, the Company’s Board of Directors authorized a stock repurchase program to buy back up to $200.0 million of the Company’s common stock. During the first quarter of 2012, the Company repurchased 4,554,827 shares at a weighted average cost of $22.14 per share.  The Company did not repurchase any shares during the three months ended March 31, 2011.

 

Quarterly Dividends—On January 19, 2012, the Company’s Board of Directors declared first quarter preferred stock cash dividends of $20.00 per share on its Series A preferred stock payable on or about February 1, 2012 to shareholders on record on January 15, 2012. Total cash dividends paid in conjunction with the Company’s Series A preferred stock amounted to $1.7 million during the three months ended March 31, 2012.

 

On January 19, 2012, the Company’s Board of Directors also declared quarterly common stock cash dividends of $0.10 per share payable on or about February 24, 2012 to shareholders on record on February 10, 2012. Cash dividends totaling $14.8 million were paid to the Company’s common shareholders during the three months ended March 31, 2012.

 

Earnings Per Share (“EPS”)—The number of shares outstanding at March 31, 2012 was 144,870,621. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of shares outstanding during the period. Diluted EPS is calculated on the basis of the weighted average number of shares outstanding during the period plus restricted stock awards and shares issuable upon the assumed exercise of outstanding convertible preferred stock, stock options, and stock warrants, unless they have an antidilutive effect.

 

The following table sets forth earnings per share calculations for the three months ended March 31, 2012 and 2011:

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

Net Income

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

Available to

 

Number

 

Per

 

Available to

 

Number

 

Per

 

 

 

Common

 

of

 

Share

 

Common

 

of

 

Share

 

 

 

Stockholders

 

Shares

 

Amounts

 

Stockholders

 

Shares

 

Amounts

 

 

 

 

 

 

 

(In thousands, except per share data)

 

Net income

 

  $

68,083

 

 

 

 

 

  $

56,071

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

(1,714

)

 

 

 

 

(1,715

)

 

 

 

 

Basic EPS – income available to common stockholders

 

  $

66,369

 

145,347

 

$

0.46

 

  $

54,356

 

146,837

 

$

0.37

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

48

 

 

 

 

120

 

 

 

Restricted stock awards

 

103

 

1,030

 

 

 

7

 

675

 

 

 

Convertible preferred stock

 

1,714

 

5,571

 

 

 

1,715

 

5,571

 

 

 

Stock warrants

 

 

 

 

 

 

131

 

 

 

Diluted EPS – income available to common stockholders

 

  $

68,186

 

 

151,996

 

$

0.45

 

  $

56,078

 

153,334

 

$

0.37

 

 

The following outstanding stock options, and restricted stock awards for the three months ended March 31, 2012 and 2011, respectively, were excluded from the computation of diluted EPS because including them would have had an antidilutive effect.

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

(In thousands)

 

Stock options

 

396

 

911

 

Restricted stock awards

 

3

 

118

 

 

49



 

Accumulated Other Comprehensive Income—As of March 31, 2012, total accumulated other comprehensive income was ($16.9) million which includes the following components: net unrealized loss on securities available for sale of ($17.8) million and foreign exchange translation adjustment of $918 thousand.  As of March 31, 2011, total accumulated other comprehensive loss was ($10.2) million which includes the following components: net unrealized loss on securities available for sale of ($10.9) million and foreign exchange translation adjustment of $781 thousand.

 

Activity in accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2012 and 2011, was as follows:

 

 

 

Unrealized gain (loss) on

 

 

 

 

 

 

 

investment securities

 

Foreign currency

 

 

 

 

 

available-for-sale

 

translation adjustments

 

Total

 

 

 

(In thousands)

 

Balance, December 31, 2010

 

$

(13,927

)

$

1,513

 

$

(12,414

)

Period Change

 

2,991

 

(732

)

2,259

 

Balance, March 31, 2011

 

$

(10,936

)

$

781

 

$

(10,155

)

Balance, December 31, 2011

 

$

(34,848

)

$

908

 

$

(33,940

)

Period Change

 

17,052

 

10

 

17,062

 

Balance, March 31, 2012

 

$

(17,796

)

$

918

 

$

(16,878

)

 

The following table sets forth the tax effects allocated to each component of other comprehensive income for the three months ended March 31, 2012 and 2011:

 

 

 

 

 

Tax

 

 

 

 

 

Before-Tax

 

(Expense)

 

Net-of-Tax

 

 

 

Amount

 

or Benefit

 

Amount

 

 

 

(In thousands)

 

Three months ended March 31, 2012

 

 

 

 

 

 

 

Unrealized gain on investment securities available-for-sale:

 

 

 

 

 

 

 

Unrealized gains on holding gains arising during period

 

$

28,640

 

  $

(12,029

)

  $

16,611

 

Less: reclassification adjustment for losses/(gains) included in income

 

5,826

 

(2,447

)

3,379

 

Net unrealized gains

 

34,466

 

(14,476

)

19,990

 

Noncredit-related impairment loss on securities

 

(5,066

)

2,128

 

(2,938

)

Foreign currency translation adjustments

 

17

 

(7

)

10

 

Other comprehensive income

 

$

29,417

 

  $

(12,355

)

  $

17,062

 

 

 

 

 

 

 

 

Tax

 

 

 

 

 

 

 

Before-Tax

 

 

(Expense)

 

 

Net-of-Tax

 

 

 

 

Amount

 

 

or Benefit

 

 

Amount

 

 

 

(In thousands)

 

Three months ended March 31, 2011

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investment securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

Unrealized gains on holding gains arising during period

 

$

4,022

 

  $

(1,689

)

  $

2,333

 

Less: reclassification adjustment for losses/(gains) included in income

 

 

6,225

 

 

(2,614

)

 

3,611

 

Net unrealized gains

 

 

10,247

 

 

(4,303

)

 

5,944

 

Noncredit-related impairment loss on securities

 

 

(5,091

)

 

2,138

 

 

(2,953

)

Foreign currency translation adjustments

 

 

(1,262

)

 

530

 

 

(732

)

Other comprehensive income

 

$

3,894

 

  $

(1,635

)

  $

2,259

 

 

 

50



 

NOTE 13 — BUSINESS SEGMENTS

 

The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank and the Company overall. We have identified three operating segments for purposes of management reporting: 1) Retail Banking; 2) Commercial Banking; and 3) Other. These three business divisions meet the criteria of an operating segment: the segment engages in business activities from which it earns revenues and incurs expenses, and whose operating results are regularly reviewed by the Company’s chief operating decision-maker to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available.

 

The Retail Banking segment focuses primarily on retail operations through the Bank’s branch network. The Commercial Banking segment, which includes commercial real estate, primarily generates commercial loans through the efforts of the commercial lending offices located in the Bank’s northern and southern California production offices. Furthermore, the Company’s Commercial Banking segment also offers a wide variety of international finance and trade services and products. The remaining centralized functions, including treasury activities and eliminations of intersegment amounts, have been aggregated and included in the Other segment, which provides broad administrative support to the two core segments.

 

The Company’s funds transfer pricing assumptions are intended to promote core deposit growth and to reflect the current risk profiles of various loan categories within the credit portfolio. Transfer pricing assumptions and methodologies are reviewed at least annually to ensure that the Company’s process is reflective of current market conditions. The transfer pricing process is formulated with the goal of incenting loan and deposit growth that is consistent with the Company’s overall growth objectives as well as to provide a reasonable and consistent basis for the measurement of the Company’s business segments and product net interest margins. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Operating segment results are based on the Company’s internal management reporting process, which reflects assignments and allocations of capital, certain operating and administrative costs, and the provision for loan losses. Net interest income is based on the Company’s internal funds transfer pricing system, which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and noninterest expense, including depreciation and amortization, directly attributable to a segment are assigned to that business. Indirect costs, including overhead expense, are allocated to the segments based on several factors, including, but not limited to, full-time equivalent employees, loan volume, and deposit volume. The provision for credit losses is allocated based on actual charge-offs for the period as well as average loan balances for each segment during the period. The Company evaluates overall performance based on profit or loss from operations before income taxes excluding nonrecurring gains and losses.

 

Changes in our management structure or reporting methodologies may result in changes in the measurement of operating segment results. Results for prior periods are generally restated for comparability for changes in management structure or reporting methodologies unless it is not deemed practicable to do so.

 

The following tables present the operating results and other key financial measures for the individual operating segments for the three months ended March 31, 2012 and 2011:

 

51



 

 

 

Three Months Ended March 31, 2012

 

 

 

Retail

 

 

Commercial

 

 

 

 

 

 

 

 

 

Banking

 

 

Lending

 

 

Other

 

 

Total

 

 

 

 

 

 

 

(In thousands)

 

Interest income

 

$

86,252

 

 

  $

142,966

 

 

  $

24,832

 

 

  $

254,050

 

Charge for funds used

 

(22,260

)

 

(29,749

)

 

8,920

 

 

(43,089

)

Interest spread on funds used

 

63,992

 

 

113,217

 

 

33,752

 

 

210,961

 

Interest expense

 

(15,548

)

 

(7,066

)

 

(12,518

)

 

(35,132

)

Credit on funds provided

 

35,040

 

 

3,124

 

 

4,925

 

 

43,089

 

Interest spread on funds provided

 

19,492

 

 

(3,942

)

 

(7,593

)

 

7,957

 

Net interest income

 

$

83,484

 

 

  $

109,275

 

 

  $

26,159

 

 

  $

218,918

 

Provision for loan losses

 

$

6,914

 

 

  $

11,186

 

 

  $

 

 

  $

18,100

 

Depreciation, amortization and accretion

 

11,933

 

 

17,133

 

 

9,603

 

 

38,669

 

Goodwill

 

320,566

 

 

16,872

 

 

 

 

337,438

 

Segment pre-tax profit

 

21,759

 

 

60,428

 

 

25,608

 

 

107,795

 

Segment assets

 

6,638,241

 

 

10,079,411

 

 

5,032,130

 

 

21,749,782

 

 

 

 

Three Months Ended March 31, 2011

 

 

 

Retail

 

 

Commercial

 

 

 

 

 

 

 

 

 

Banking

 

 

Lending

 

 

Other

 

 

Total

 

 

 

 

 

 

 

(In thousands)

 

Interest income

 

$

87,790

 

 

  $

145,335

 

 

  $

21,210

 

 

  $

254,335

 

Charge for funds used

 

(25,588

)

 

(40,197

)

 

760

 

 

(65,025

)

Interest spread on funds used

 

62,202

 

 

105,138

 

 

21,970

 

 

189,310

 

Interest expense

 

(22,571

)

 

(5,985

)

 

(16,945

)

 

(45,501

)

Credit on funds provided

 

57,345

 

 

3,478

 

 

4,202

 

 

65,025

 

Interest spread on funds provided

 

34,774

 

 

(2,507

)

 

(12,743

)

 

19,524

 

Net interest income

 

$

96,976

 

 

  $

102,631

 

 

  $

9,227

 

 

  $

208,834

 

Provision for loan losses

 

$

7,156

 

 

  $

19,350

 

 

  $

 

 

  $

26,506

 

Depreciation, amortization and accretion

 

14,700

 

 

27,101

 

 

3,265

 

 

45,066

 

Goodwill

 

320,566

 

 

16,872

 

 

 

 

337,438

 

Segment pre-tax (loss) profit

 

29,533

 

 

52,236

 

 

4,811

 

 

86,580

 

Segment assets

 

6,248,628

 

 

9,952,048

 

 

4,946,350

 

 

21,147,026

 

 

NOTE 14 — SUBSEQUENT EVENTS

 

Dividend Payout

 

In April 2012, the Company declared the payment of second quarter dividends of $20.00 per share on the Company’s Series A preferred stock. The dividend is payable on or about May 1, 2012 to shareholders of record as of April 15, 2012. Additionally, the Company declared a quarterly dividend of $0.10 per share on the Company’s common stock payable on or about May 24, 2012 to shareholders of record as of May 10, 2012.

 

Loan Sale

 

On April 13, 2012, a major investment brokerage firm exercised its option and the Company entered into a loan sale transaction, selling approximately $150.0 million of student loans with a related gain of $5.1 million. These loans were held for sale as of March 31, 2012.

 

Stock Repurchase

 

Subsequent to March 31, 2012, the Company repurchased approximately $13.7 million worth of common stock, pursuant to the Stock Repurchase Plan approved in January 2012.

 

52



 

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of East West Bancorp, Inc. and its subsidiaries. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011, and the condensed consolidated financial statements and accompanying notes presented elsewhere in this report.

 

Critical Accounting Policies

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry. The financial information contained within these statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions, and other subjective assessments. In addition, certain accounting policies require significant judgment in applying complex accounting principles to individual transactions to determine the most appropriate treatment. We have established procedures and processes to facilitate making the judgments necessary to prepare financial statements.

 

The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables most important in the estimation process. We have used the best information available to make the estimations necessary to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables could change future valuations and impact the results of operations.

 

·                                          fair valuation of financial instruments;

 

·                                          investment securities;

 

·                                          acquired loans;

 

·                                          covered loans;

 

·                                          covered other real estate owned;

 

·                                          FDIC indemnification asset;

 

·                                          allowance for loan losses;

 

·                                          other real estate owned;

 

·                                          loan, OREO, and note sales;

 

·                                          goodwill impairment; and

 

·                                          share-based compensation.

 

Our significant accounting policies are described in greater detail in our 2011 Annual Report on Form 10-K in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 to the Consolidated Financial Statements, “Significant Accounting Policies,” which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

53



 

Overview

 

For the first quarter of 2012, net income was $68.1 million or $0.45 per dilutive share. Net income grew 3% or $1.9 million from the fourth quarter of 2011 and 21% or $12.0 million from the first quarter of 2011. Earnings per dilutive share grew 5% or $0.02 from the fourth quarter of 2011 and 22% or $0.08 from the first quarter of 2011.

 

At March 31, 2012, total assets equaled $21.7 billion compared to $22.0 billion at December 31, 2011. Average earning assets decreased $93.5 million to $19.5 billion for the first quarter of 2012, compared to the prior quarter. The decrease in total assets and average earning assets was primarily attributable to a decrease in investment securities which decreased $365.9 million during the first quarter of 2012, largely resulting from the sale of $259.4 million of investment securities. This decrease in investment securities was partially offset by growth in the non-covered loan portfolio and an increase in cash and cash equivalents.

 

Total loans receivable at March 31, 2012 equaled $14.5 billion, unchanged from December 31, 2011. During the first quarter non-covered loan balances increased 2% or $211.9 million to $10.8 billion at March 31, 2012. The increase in noncovered loans during the first quarter was driven by growth in single family loans, commercial and trade finance loans, and consumer loans which increased 9% or $156.5 million, 3% or $96.1 million, and 5% or $29.0 million, respectively.

 

Covered loans totaled $3.7 billion as of March 31, 2012, a decrease of $239.4 million or 6% from December 31, 2011. The decrease in the covered loan portfolio was primarily due to payoffs and paydown activity, as well as charge-offs.

 

During the first quarter, the Company reduced both the balance of time deposits by 5% and also the average cost of time deposits, which decreased from 1.01% in the fourth quarter of 2011 to 0.88% in the first quarter of 2012. In addition, the average rate for other interest-bearing deposits also declined during the first quarter of 2012, resulting in an overall reduction in the cost of deposits of 8 basis points to 0.47% from 0.55% in the prior quarter.

 

Credit Quality

 

East West significantly reduced both net charge-offs and nonperforming assets.  Total net charge-offs decreased to $10.3 million for the first quarter of 2012, a decrease of 53% or $11.5 million from the previous quarter and a decrease of 70% or $23.9 million compared to the prior year. The total nonperforming assets excluding covered assets, to total assets ratio was under 1.00% for the tenth consecutive quarter with nonperforming assets of $167.1 million or 0.77% of total assets at March 31, 2012.

 

East West continues to maintain a strong allowance for non-covered loan losses at $214.3 million or 2.04% of non-covered loans receivable at March 31, 2012. This compares to an allowance for non-covered loan losses of $209.9 million or 2.04% of non-covered loans at December 31, 2011.

 

Capital Strength

 

Our capital ratios remain strong. As of March 31, 2012, our Tier 1 leverage capital ratio totaled 9.5%, our Tier 1 risk-based capital ratio totaled 15.1% and our total risk-based capital ratio totaled 16.7%. East West exceeds well capitalized requirements for all regulatory guidelines by $900 million or more.

 

54



 

During the first quarter of 2012, the Company repurchased 4.6 million shares of common stock at an average cost of $22.14 per share, or $100.9 million in total. Under the repurchase program authorized by the Company’s Board of Directors earlier in the year, management has the authority to repurchase up to a total of $200.0 million of the Company’s common stock.

 

The Company has declared second quarter dividends on the common stock and Series A Preferred Stock. The common stock cash dividend of $0.10 is payable on or about May 24, 2012 to shareholders of record on May 10, 2012. The dividend on the Series A Preferred Stock of $20.00 per share is payable on May 1, 2012 to shareholders of record on April 15, 2012.

 

Results of Operations

 

Net income for the first quarter of 2012 totaled $68.1 million, compared with $56.1 million for the first quarter of 2011. Diluted earnings per share was $0.45 and $0.37 for the first quarters of 2012 and 2011, respectively. Our annualized return on average total assets increased to 1.26% for the quarter ended March 31, 2012, from 1.07% for the same period in 2011. The annualized return on average common stockholders’ equity increased to 12.01% for the first quarter of 2012, compared with 10.50% for the first quarter of 2011.

 

Components of Net Income

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

(In millions)

 

Net interest income

 

  $

218.9

 

  $

208.8

 

Provision for loan losses

 

(18.1

)

(26.5

)

Noninterest income

 

21.7

 

11.0

 

Noninterest expense

 

(114.7

)

(106.7

)

Provision for income taxes

 

(39.7

)

(30.5

)

Net income

 

  $

68.1

 

  $

56.1

 

 

 

 

 

 

 

Annualized return on average total assets

 

1.26

%

1.07

%

 

 

 

 

 

 

Annualized return on average common equity

 

12.01

%

10.50

%

 

 

 

 

 

 

Annualized return on average total equity

 

11.88

%

10.42

%

 

Net Interest Income

 

Our primary source of revenue is net interest income which is the difference between interest earned on loans, investment securities, and other earning assets less the interest expense on deposits, borrowings, and other interest-bearing liabilities. Net interest income for the first quarter of 2012 totaled $218.9 million, a 5% increase over net interest income of $208.8 million for the same period in 2011.

 

Net interest margin, defined as net interest income divided by average earning assets, decreased by 1 basis point to 4.51% during the first quarter of 2012, from 4.52% during the first quarter of 2011. During 2012 and 2011, our covered loan yield was positively impacted by the accretion from the covered  loans under ASC 310-30. The slight decrease in net interest margin during the first quarter of 2012 resulted primarily from lower yields earned on non-covered loans which were offset by lower costs of deposits and other interest-bearing liabilities.

 

55



 

The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average rates by asset and liability component for the three months ended March 31, 2012 and 2011:

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

Average

 

 

 

 

Average

 

Average

 

 

 

Average

 

 

 

Balance

 

 

Interest

 

 

Rate (1)

 

Balance

 

 

Interest

 

 

Rate (1)

 

 

 

(Dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due from banks and short-term investments

 

$

1,048,672

 

 

$

6,532

 

 

2.51

%

$

995,484

 

 

$

2,740

 

 

1.12

%

Securities purchased under resale agreements

 

794,791

 

 

4,314

 

 

2.18

%

898,122

 

 

4,270

 

 

1.90

%

Investment securities available-for-sale (3) (4)

 

2,962,521

 

 

21,232

 

 

2.88

%

2,818,703

 

 

18,857

 

 

2.68

%

Loans receivable (2)(3)

 

10,680,212

 

 

125,675

 

 

4.73

%

9,123,181

 

 

114,911

 

 

5.11

%

Loans receivable – covered(2)

 

3,853,488

 

 

95,364

 

 

9.95

%

4,695,964

 

 

112,615

 

 

9.73

%

FHLB and FRB stock

 

183,362

 

 

933

 

 

2.05

%

209,598

 

 

942

 

 

1.80

%

Total interest-earning assets

 

19,523,046

 

 

254,050

 

 

5.23

%

18,741,052

 

 

254,335

 

 

5.50

%

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

270,875

 

 

 

 

 

 

 

272,112

 

 

 

 

 

 

 

Allowance for loan losses

 

(223,181

)

 

 

 

 

 

 

(236,196

)

 

 

 

 

 

 

Other assets

 

2,119,713

 

 

 

 

 

 

 

2,117,814

 

 

 

 

 

 

 

Total assets

 

$

21,690,453

 

 

 

 

 

 

 

$

20,894,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking accounts

 

$

962,967

 

 

$

688

 

 

0.29

%

$

771,626

 

 

$

648

 

 

0.34

%

Money market accounts

 

4,665,731

 

 

4,001

 

 

0.34

%

4,386,100

 

 

5,975

 

 

0.55

%

Savings deposits

 

1,183,325

 

 

582

 

 

0.20

%

971,313

 

 

732

 

 

0.31

%

Time deposits

 

6,845,350

 

 

14,893

 

 

0.88

%

7,139,530

 

 

18,627

 

 

1.06

%

Federal funds purchased

 

8,932

 

 

2

 

 

0.11

%

232

 

 

 

 

0.00

%

FHLB advances

 

431,776

 

 

2,142

 

 

1.99

%

1,014,009

 

 

5,778

 

 

2.31

%

Securities sold under repurchase agreements

 

1,006,816

 

 

11,722

 

 

4.68

%

1,080,240

 

 

12,017

 

 

4.45

%

Long-term debt

 

212,178

 

 

1,102

 

 

2.09

%

235,570

 

 

1,571

 

 

2.67

%

Other borrowings

 

 

 

 

 

0.00

%

10,980

 

 

153

 

 

5.57

%

Total interest-bearing liabilities

 

15,317,075

 

 

35,132

 

 

0.92

%

15,609,600

 

 

45,501

 

 

1.18

%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

3,546,201

 

 

 

 

 

 

 

2,708,842

 

 

 

 

 

 

 

Other liabilities

 

521,461

 

 

 

 

 

 

 

422,880

 

 

 

 

 

 

 

Stockholders’ equity

 

2,305,716

 

 

 

 

 

 

 

2,153,460

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

21,690,453

 

 

 

 

 

 

 

$

20,894,782

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

4.31

%

 

 

 

 

 

 

4.32

%

Net interest income and net interest margin

 

 

 

 

$

218,918

 

 

4.51

%

 

 

 

$

208,834

 

 

4.52

%

 


(1)        Annualized.

(2)        Average balances include nonperforming loans.

(3)        Includes (amortization) of premiums and accretion of discounts on investment securities and loans receivable totaling $(2.7) million and $2.4 million for the three months ended March 31, 2012 and 2011, respectively. Also includes the net (amortization) of deferred loans fees totaling ($3.4) million and ($2.6) million for the three months ended March 31, 2012 and 2011, respectively.

(4)        Average balances exclude unrealized gains or losses on available-for-sale securities.

 

Analysis of Changes in Net Interest Income

 

Changes in our net interest income are a function of changes in rates and volumes of both interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in interest income and interest expense for the periods indicated. The total change for each category of interest-earning assets and interest-bearing liabilities 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.

 

56



 

 

 

Three Months Ended March 31,

 

 

 

2012 vs. 2011

 

 

 

Total

 

Changes Due to

 

 

 

Change

 

Volume (1)

 

Rate (1)

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

INTEREST-EARNING ASSETS:

 

 

 

 

 

 

 

Due from banks and short-term investments

 

$

3,792

 

$

154

 

$

3,638

 

Securities purchased under resale agreements

 

44

 

(522

)

566

 

Investment securities available-for-sale

 

2,375

 

991

 

1,384

 

Loans receivable

 

10,764

 

18,681

 

(7,917

)

Loans receivable – covered

 

(17,251

)

(20,752

)

3,501

 

FHLB and FRB stock

 

(9

)

(125

)

116

 

Total interest and dividend income

 

$

(285

)

$

(1,573

)

$

1,288

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

Checking accounts

 

$

40

 

$

146

 

$

(106

)

Money market accounts

 

(1,974

)

360

 

(2,334

)

Savings deposits

 

(150

)

138

 

(288

)

Time deposits

 

(3,734

)

(742

)

(2,992

)

Federal funds purchased

 

2

 

2

 

 

FHLB advances

 

(3,636

)

(2,958

)

(678

)

Securities sold under repurchase agreements

 

(295

)

(839

)

544

 

Long-term debt

 

(469

)

(145

)

(324

)

Other borrowings

 

(153

)

(76

)

(77

)

Total interest expense

 

$

(10,369

)

$

(4,114

)

$

(6,255

)

CHANGE IN NET INTEREST INCOME

 

$

10,084

 

$

2,541

 

$

7,543

 

 


(1)        Changes in interest income/expense not arising from volume or rate variances are allocated proportionately to rate and volume.

 

Provision for Loan Losses

 

We recorded $18.1 million in provision for loan losses during the first quarter of 2012. In comparison we recorded $26.5 million in provisions for loan losses during the first quarter of 2011. The Company recorded $10.3 million in net charge-offs during the first quarter of 2012, compared to $34.2 million in net charge-offs recorded during the first quarter of 2011. Provision for loan losses has declined for several quarters as a result of credit quality improvement.

 

Provisions for loan losses are charged to income to bring the allowance for credit losses as well as the allowance for unfunded loan commitments, off-balance sheet credit exposures, and recourse provisions to a level deemed appropriate by the Company based on the factors discussed under the “Allowance for Loan Losses” section of this report.

 

57



 

Noninterest Income

 

The following table sets forth the various components of noninterest income for the periods indicated:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

(In millions)

 

Impairment loss on investment securities

 

 

 

 

 

recognized in earnings

 

$

(0.1

)

$

(0.5

)

Decrease in FDIC indemnification asset and receivable

 

(5.4

)

(17.4

)

Branch fees

 

8.3

 

7.7

 

Net gain on sales of investment securities

 

0.5

 

2.5

 

Letters of credit fees

 

4.3

 

3.0

 

Foreign exchange income

 

1.8

 

1.9

 

Ancillary loan fees

 

2.0

 

2.0

 

Income from life insurance policies

 

1.0

 

1.0

 

Net gain on sales of loans

 

5.2

 

7.4

 

Other operating income

 

4.1

 

3.4

 

 

 

 

 

 

 

Total

 

$

21.7

 

$

11.0

 

 

Noninterest income includes revenues earned from sources other than interest income. These sources include service charges and fees on deposit accounts, fees and commissions generated from trade finance activities, foreign exchange activities and the issuance of letters of credit, ancillary fees on loans, net gains on sales of loans, investment securities available-for-sale and other assets, impairment losses on investment securities, (decrease)/increase in the FDIC indemnification asset and receivable, income from life insurance policies, and other noninterest-related revenues.

 

We recorded noninterest income of $21.7 million for the three months ended March 31, 2012, an increase of $10.7 million, compared to noninterest income of $11.0 million recorded for the same period in 2011. The increase in noninterest income for the three months ended March 31, 2012 is primarily due to a smaller decrease in FDIC indemnification asset and receivable and an increase in letters of credit fees, partially offset by decreases in net gain on sales of loans and net gain on sales of investment securities.

 

For the three months ended March 31, 2012, the net decrease in the FDIC indemnification asset and receivable recorded in noninterest income was $5.4 million. The quarter-to-date decrease in the FDIC indemnification asset resulted from loan disposal activity, recoveries and amortization was partially offset by a quarter-to-date increase in the FDIC receivable due to reimbursable expense claims. During the first three months of 2012 we incurred $15.2 million in expenses on covered loans and other real estate owned, 80% or $12.1 million of which is reimbursable from the FDIC.

 

Letters of credit fee income for the three months ended March 31, 2012 and 2011 was $4.3 million and $3.0 million, respectively. The increase as compared to 2011 results from an increased volume in trade finance loans.

 

For the three months ended March 31, 2012 and 2011, the net gain on sale of investment securities totaled $0.5 million and $2.5 million, respectively.  Proceeds from the sale of investment securities provide additional liquidity to purchase other investment securities, to fund loan originations, and to pay down borrowings.

 

For the three months ended March 31, 2012, the net gain on sales of loans was $5.2 million compared to $7.4 million for the three months ended March 31, 2011. From time to time, the Company buys and sells loans within the loans held for sale portfolio to take advantage of market opportunities.

 

58



 

Noninterest Expense

 

The following table sets forth the various components of noninterest expense for the periods indicated:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

(In millions)

 

 

 

 

 

Compensation and employee benefits

 

$

46.4

 

$

38.3

 

Occupancy and equipment expense

 

13.5

 

12.6

 

Amortization of investments in affordable housing partnerships

 

4.5

 

4.5

 

Amortization of premiums on deposits acquired

 

2.9

 

3.2

 

Deposit insurance premiums and regulatory assessments

 

4.0

 

7.2

 

Loan-related expenses

 

4.5

 

3.1

 

Other real estate owned expense

 

10.9

 

10.7

 

Legal expense

 

7.2

 

4.1

 

Prepayment penalty for FHLB advances and other borrowings

 

1.3

 

4.0

 

Data processing

 

2.5

 

2.6

 

Deposit-related expenses

 

1.4

 

1.2

 

Consulting expense

 

1.5

 

1.6

 

Other operating expenses

 

14.2

 

13.7

 

 

 

 

 

 

 

Total noninterest expense

 

$

114.8

 

$

106.8

 

 

 

 

 

 

 

Efficiency Ratio(1)

 

44.07

%

43.14

%

 


(1)        Represents noninterest expense, excluding the amortization of intangibles, amortization and impairment loss of premiums on deposits acquired, amortization of investments in affordable housing partnerships and prepayment penalties for FHLB advances, divided by the aggregate of net interest income before provision for loan losses and noninterest income, excluding items that are non-recurring in nature.

 

Noninterest expense, which is comprised primarily of compensation and employee benefits, occupancy and other operating expenses, increased $8.0 million, or 7%, to $114.8 million during the first quarter of 2012, compared to $106.8 million for the same quarter in 2011.

 

Compensation and employee benefits increased $8.1 million, or 21%, to $46.4 million for the three months ended March 31, 2012, compared to $38.3 million for the same period in 2011. This increase in compensation and employee benefits was primarily due to a reduced offset to compensation expense from deferred loan costs due to a decrease in origination volume and also an increase in payroll taxes.

 

Legal expense also increased to $7.2 million in the first quarter of 2012, compared to $4.1 million in the first quarter of 2011.  The increase was primarily due to expenses related to covered assets for which the expenses are 80% reimbursable by the FDIC.  Loan related expenses remained fairly stable, increasing $1.4 million to $4.5 million during the three months ended March 31, 2012 compared to $3.1 million for the three months ended March 31, 2011.

 

Deposit insurance premiums and regulatory assessments decreased $3.2 million, or 44%, to $4.0 million for the three months ended March 31, 2012, compared to $7.2 million during the same period in 2011. The decrease in deposit insurance premiums and regulatory assessments for the three months ended March 31, 2012 is primarily due to a decrease in the assessment base.

 

During the three months ended March 31, 2012, FHLB advances of $20.0 million were prepaid with a related $1.3 million in prepayment penalties compared to $216.9 million of FHLB advance prepayments with a related $4.0 million in prepayment penalties for the three months ended March 31, 2011.

 

59



 

Our efficiency ratio increased slightly to 44.07% for the three months ended March 31, 2012, compared to 43.14% for the corresponding period in 2011.

 

 

Income Taxes

 

The provision for income taxes was $39.7 million for the first quarter of 2012, representing an effective tax rate of 36.8%, compared to $30.5 million for the same period in 2011, representing an effective tax rate of 35.2%. Included in the income tax recognized during the first quarter of 2012 and 2011 are $3.7 million and $4.1 million, respectively, in federal tax credits generated from our investments in affordable housing partnerships.

 

Management regularly reviews the Company’s tax positions and deferred tax assets. Factors considered in this analysis include future reversals of existing temporary differences, future taxable income exclusive of reversing differences, taxable income in prior carryback years, and tax planning strategies. The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted rates expected to be in effect when such amounts are realized and settled. As of March 31, 2012, the Company had a net deferred tax asset of $209.4 million.

 

A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is established, when necessary, to reduce the deferred tax assets to the amount that is more likely than not to be realized. Management has concluded that it is more likely than not that all of the benefit of the deferred tax assets will be realized, with the exception of the deferred tax assets related to certain state net operating losses. Accordingly, a valuation allowance has been recorded for these amounts.

 

The Company believes that adequate provisions have been made for all income tax uncertainties consistent with the standards of ASC 740-10.

 

Operating Segment Results

 

The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank and the Company overall. We have identified three operating segments for purposes of management reporting: 1) Retail Banking; 2) Commercial Banking; and 3) Other.

 

For more information about our segments, including information about the underlying accounting and reporting process, please see Note 13 to the Company’s condensed consolidated financial statements presented elsewhere in this report.

 

Retail Banking

 

The Retail Banking segment reported pretax income of $21.8 million for the three months ended March 31, 2012, compared to a pretax income of $29.5 million for the same period in 2011. The decrease in pretax income for this segment during the first quarter of 2012 is driven by a decrease in net interest income of $13.5 million offset by an increase in noninterest income.

 

60



 

Noninterest income for this segment increase $5.2 million to $11.8 million for the three months ended March 31, 2012, compared to $6.6 million recorded during the same period in 2011. The increase in noninterest income for the first quarter of 2012 is primarily due to a smaller decrease in FDIC indemnification asset and receivable offset by a smaller gain on sale of loans.

 

Commercial Banking

 

The Commercial Banking segment reported pretax income of $60.4 million for the three months ended March 31, 2012, compared to $52.2 million for the same period in 2011. The increase in pretax income for this segment during the first quarter of 2012 is driven by a decrease in the loan loss provision.

 

Net interest income for this segment increased $6.7 million to $109.3 million during the first quarter of 2012, compared to $102.6 million for the same period in 2011. The increase in net interest income for this segment is due to lower cost of funds and the low interest rate environment.

 

Noninterest income for this segment increased $5.6 million to $7.2 million during the first quarter of 2011, compared to income of $1.6 million for the same period in 2011. The increase in noninterest income for this segment is primarily due to a smaller decrease in the FDIC indemnification asset.

 

Noninterest expense for this segment increased $11.9 million to $42.1 million during the first quarter of 2012, compared to $30.2 million for the same period in 2011. The increase in noninterest expense is primarily due to increases in compensation and employee benefits, legal and loan related expenses.

 

Other

 

The Other segment reported pretax income of $25.6 million for the three months ended March 31, 2012, compared to $4.8 million recorded in the same period of 2011. The increase in pretax income for this segment during the first quarter of 2012 is driven by increase in net interest income.

 

Net interest income for this segment increased $17.0 million to $26.2 million during the first quarter of 2012, compared to $9.2 million for the same period in 2011. The increase in net interest income is primarily due to an increase in investment income and a reduction in the  cost of funds.

 

Noninterest expense for this segment decreased $4.1 million to $17.6 million for the three months ended March 31, 2012, compared to $21.7 million during the same period in 2011. The decrease is primarily due to reductions in compensation and employee benefits.

 

Balance Sheet Analysis

 

Total assets decreased $218.9 million, or 1.0%, to $21.75 billion as of March 31, 2012, compared to $21.97 billion as of December 31, 2011. The decrease is primarily attributed to a decrease in investment securities of $365.9 million, largely resulting from a sale of $259.4 million of investment securities in the first quarter of 2012 and a decrease in net covered loans of $239.4 million. This decrease is partially offset by growth in the net non-covered loans held for investment of $203.0 million and an increase in cash and cash equivalents of $204.7 million.

 

Securities Purchased Under Resale Agreements

 

We purchase securities under resale agreements (“resale agreements”) with terms that range from one day to several years. Total resale agreements decreased $136.4 million, or 17.3%, to $650.0 million as of March 31, 2012, compared with $786.4 million as of December 31, 2011.

 

61



 

Purchases of resale agreements are overcollateralized to ensure against unfavorable market price movements. We monitor the market value of the underlying securities that collateralize the related receivable on resale agreements, including accrued interest. In the event that the fair market value of the securities decreases below the carrying amount of the related repurchase agreement, our counterparty is required to designate an equivalent value of additional securities. The counterparties to these agreements are nationally recognized investment banking firms that meet credit eligibility criteria and with whom a master repurchase agreement has been duly executed.

 

Investment Securities

 

Income from investing activities provides a significant portion of our total income. We aim to maintain an investment portfolio with an adequate mix of fixed-rate and adjustable-rate securities with relatively short maturities to minimize overall interest rate risk. Our investment securities portfolio primarily consists of U.S. Treasury securities, U.S. Government agency securities, U.S. Government sponsored enterprise debt securities, U.S. Government sponsored enterprise and other mortgage-backed securities, municipal securities, and corporate debt securities. Investments classified as available-for-sale are carried at their estimated fair values with the corresponding changes in fair values recorded in accumulated other comprehensive income, as a component of stockholders’ equity. All investment securities have been classified as available-for-sale as of March 31, 2012 and December 31, 2011.

 

Total investment securities available-for-sale decreased 12% to $2.71 billion as of March 31, 2012, compared with $3.07 billion at December 31, 2011. As of March 31, 2012, the investment portfolio had a net unrealized loss of $31.0 million as compared to a net unrealized loss of $60.4 million as of December 31, 2011. Within the portfolio, all categories by security type were in a net unrealized gain position except for corporate debt. Total repayments/maturities and proceeds from sales of investment securities amounted to $138.7 million and $260.3 million, respectively, during the three months ended March 31, 2012. Proceeds from repayments, maturities, sales, and redemptions were applied towards additional investment securities purchases totaling $8.0 million. We recorded net gains on sales of investment securities totaling $483 thousand and $2.5 million during the first quarter of 2012 and 2011, respectively. At March 31, 2012, investment securities available-for-sale with a par value of $1.84 billion were pledged to secure public deposits, FHLB advances, repurchase agreements, the FRB discount window, and for other purposes required or permitted by law.

 

We perform regular impairment analyses on the investment securities. If we determine that a decline in fair value is other-than-temporary, the credit-related impairment loss is recognized in current earnings. The noncredit-related impairment losses are charged to other comprehensive income which is the portion of the loss attributed to market rates or other factors non-credit related. Other-than-temporary declines in fair value are assessed based on factors including the duration the security has been in a continuous unrealized loss position, the severity of the decline in value, the rating of the security, the probability that we will be unable to collect all amounts due, and our ability and intent to not sell the security before recovery of its amortized cost basis. For securities that are determined to not have other-than-temporary declines in value, we have both the ability and the intent to hold these securities and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost basis.

 

The following table sets forth certain information regarding the fair value of our investment securities available-for-sale, as well as the weighted average yields, and contractual maturity distribution, excluding periodic principal payments, of our available-for-sale portfolio at March 31, 2012.

 

62



 

 

 

 

 

 

 

After One

 

After Five

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within

 

But Within

 

But Within

 

After

 

Indeterminate

 

 

 

 

 

 

 

One Year

 

Five Years

 

Ten Years

 

Ten Years

 

Maturity

 

Total

 

 

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

 

 

(Dollars in thousands)

 

As of March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

 

%

$

20,618

 

2.11

%

$

 

%

$

 

%

$

 

%

$

20,618

 

2.11

%

U.S. Government agency and U.S. Government sponsored enterprise debt securities

 

507,008

 

1.81

%

7,314

 

2.09

%

 

%

 

%

 

%

514,322

 

1.81

%

U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage-backed securities

 

3

 

%

730

 

3.23

%

34,007

 

3.95

%

14,643

 

3.81

%

 

%

49,383

 

3.90

%

Residential mortgage-backed securities

 

3,586

 

%

1,176

 

4.20

%

14,195

 

1.47

%

905,674

 

2.91

%

 

%

924,631

 

2.87

%

Municipal securities

 

15,120

 

5.62

%

14,864

 

2.39

%

36,809

 

3.30

%

15,979

 

5.09

%

 

%

82,772

 

3.87

%

Corporate debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade

 

74,535

 

3.52

%

203,908

 

3.00

%

744,507

 

3.64

%

67,659

 

5.53

%

 

%

1,090,609

 

3.63

%

Non-investment grade

 

10,618

 

2.70

%

 

%

 

%

3,304

 

5.36

%

 

%

13,922

 

3.60

%

Other securities

 

10,463

 

0.54

%

 

%

 

%

 

%

 

%

10,463

 

0.54

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment securities available-for-sale

 

$

621,333

 

 

 

$

248,610

 

 

 

$

829,518

 

 

 

$

1,007,259

 

 

 

$

 

 

 

$

2,706,720

 

 

 

 

For complete discussion and disclosure see Note 5 to the Company’s condensed consolidated financial statements presented elsewhere in this report.

 

Covered Assets

 

Covered assets consist of loans receivable and OREO that were acquired in the WFIB Acquisition on June 11, 2010 and in the UCB Acquisition on November 6, 2009 for which the Company entered into shared-loss agreements with the FDIC. The shared-loss agreements covered over 99% of the loans originated by WFIB and all of the loans originated by UCB, excluding the loans originated by UCB in China under its United Commercial Bank China (Limited) subsidiary. The Company shares in the losses, which began with the first dollar of loss incurred, on the loan pools (including single-family residential mortgage loans, commercial loans, foreclosed loan collateral, and other real estate owned), covered (“covered assets”) under the shared-loss agreements.

 

Pursuant to the terms of the shared-loss agreements, the FDIC is obligated to reimburse the Company 80% of eligible losses for both WFIB and UCB with respect to covered assets. For the UCB covered assets, the FDIC will reimburse the Company for 95% of eligible losses in excess of $2.05 billion with respect to covered assets. The Company has a corresponding obligation to reimburse the FDIC for 80% or 95%, as applicable, of eligible recoveries with respect to covered assets. For both acquisitions the shared-loss agreements for commercial and single-family residential mortgage loans are in effect for 5 years and 10 years, respectively, from the acquisition date and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition date.

 

63



 

The following table sets forth the composition of the covered loan portfolio as of the dates indicated:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

Residential single-family

 

$

418,968

 

9.5

%

$

442,732

 

9.4

%

Residential multifamily

 

882,656

 

20.0

%

918,941

 

19.5

%

Commercial and industrial real estate

 

1,692,719

 

38.5

%

1,773,760

 

37.6

%

Construction and land

 

576,689

 

13.1

%

653,045

 

13.8

%

 

 

 

 

 

 

 

 

 

 

Total real estate loans

 

3,571,032

 

81.1

%

3,788,478

 

80.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other loans:

 

 

 

 

 

 

 

 

 

Commercial business

 

735,479

 

16.7

%

831,762

 

17.6

%

Other consumer

 

96,597

 

2.2

%

97,844

 

2.1

%

Total other loans

 

832,076

 

18.9

%

929,606

 

19.7

%

Total principal balance

 

4,403,108

 

100.0

%

4,718,084

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Covered discount

 

(711,142

)

 

 

(788,295

)

 

 

Allowance on covered loans

 

(8,268

)

 

 

(6,647

)

 

 

Total covered loans, net

 

$

3,683,698

 

 

 

$

3,923,142

 

 

 

 

FDIC Indemnification Asset

 

For the three months ended March 31, 2012 and 2011, the Company recorded $10.1 million and $18.3 million, respectively, of amortization in line with the improved accretable yield as discussed in Note 7 presented elsewhere in this report. Additionally, the Company recorded a $41.0 million and $56.6 million reduction for the three months ended March 31, 2012 and 2011, respectively, to the FDIC indemnification asset and recorded the adjustment to noninterest income (loss).

 

FDIC Receivable

 

As of March 31, 2012, the FDIC loss-sharing receivable was $85.7 million as compared to $76.6 million as of December 31, 2011. This receivable represents 80% of reimbursable amounts from the FDIC that have not yet been received. These reimbursable amounts include charge-offs, loan-related expenses, and OREO-related expenses. The 80% of any reimbursable expense is recorded as noninterest income. 100% of the loan-related and OREO expenses are recorded as noninterest expense, netting to the 20% of actual expense paid by the Company. The FDIC shares in 80% of recoveries received. Thus, the FDIC receivable is reduced when we receive payment from the FDIC as well as when recoveries occur.

 

For complete discussion and disclosure of covered assets, FDIC indemnification asset and FDIC receivable see Note 7 to the Company’s condensed consolidated financial statements presented elsewhere in this report.

 

Non-Covered Loans

 

We offer a broad range of products designed to meet the credit needs of our borrowers. Our lending activities consist of residential single-family loans, residential multifamily loans, income producing commercial real estate loans, land loans, construction loans, commercial business loans, trade finance loans, and student and other consumer loans. Net non-covered loans receivable, including loans held for sale, increased $205.3 million, or 2%, to $10.55 billion at March 31, 2012, relative to December 31, 2011. During the first quarter of 2012, proceeds from sales of loans held for sale were $52.6 million resulting in net gains on sale of $4.6 million.

 

64



 

The following table sets forth the composition of the loan portfolio as of the dates indicated:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

 

 

 

 

(Dollars in thousands)

 

Residential:

 

 

 

 

 

 

 

 

 

Single-family

 

$

1,953,123

 

18.6

%

$

1,796,635

 

17.5

%

Multifamily

 

916,753

 

8.7

%

933,168

 

9.1

%

 

 

 

 

 

 

 

 

 

 

Total residential

 

2,869,876

 

27.3

%

2,729,803

 

26.6

%

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate (“CRE”):

 

 

 

 

 

 

 

 

 

Income producing

 

3,454,641

 

32.9

%

3,487,866

 

33.8

%

Construction

 

152,579

 

1.5

%

171,410

 

1.7

%

Land

 

169,654

 

1.6

%

173,089

 

1.7

%

 

 

 

 

 

 

 

 

 

 

Total CRE

 

3,776,874

 

36.0

%

3,832,365

 

37.2

%

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial (“C&I”):

 

 

 

 

 

 

 

 

 

Commercial business

 

2,785,971

 

26.5

%

2,655,917

 

25.8

%

Trade finance

 

452,634

 

4.3

%

486,555

 

4.7

%

 

 

 

 

 

 

 

 

 

 

Total C&I

 

3,238,605

 

30.8

%

3,142,472

 

30.5

%

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

Student loans

 

341,966

 

3.3

%

306,325

 

3.0

%

Other consumer

 

270,792

 

2.6

%

277,461

 

2.7

%

 

 

 

 

 

 

 

 

 

 

Total consumer

 

612,758

 

5.9

%

583,786

 

5.7

%

 

 

 

 

 

 

 

 

 

 

Total gross loans

 

10,498,113

 

100.0

%

10,288,426

 

100.0

%

 

 

 

 

 

 

 

 

 

 

Unearned fees, premiums, and discounts, net

 

(19,034

)

 

 

(16,762

)

 

 

Allowance for loan losses

 

(214,253

)

 

 

(209,876

)

 

 

Loans held for sale

 

280,830

 

 

 

278,603

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable, net

 

$

10,545,656

 

 

 

$

10,340,391

 

 

 

 

The Company routinely sells problem loans as part of the overall management of its nonperforming assets. The Company also identifies opportunities to sell certain portfolios when the pricing is attractive to provide additional noninterest income. The Company sells these loans out of the loans held for sale portfolio.

 

Non-Covered Nonperforming Assets

 

Generally, the Company’s policy is to place a loan on nonaccrual status if principal or interest payments are past due in excess of 90 days or the full collection of principal or interest becomes uncertain, regardless of the length of past due status. When a loan reaches nonaccrual status, any interest accrued on the loan is reversed and charged against current income. In general, subsequent payments received are applied to the outstanding principal balance of the loan. Nonaccrual loans that demonstrate a satisfactory payment trend for several months are returned to full accrual status subject to management’s assessment of the full collectability of the loan.

 

Non-covered nonperforming assets are comprised of nonaccrual loans, accruing loans past due 90 days or more, and non-covered other real estate owned, net. Non-covered nonperforming assets totaled $167.1 million, or 0.77% of total assets, at March 31, 2012 and $175.0 million, or 0.80% of total assets, at December 31, 2011. Nonaccrual loans amounted to $120.8 million at March 31, 2012, compared with $145.6 million at December 31, 2011. During the first quarter of 2012, we took actions to reduce our exposure to problem assets. In conjunction with these efforts, we sold $7.1 million in non-covered OREO properties during the first quarter of 2012 for a net loss of $114 thousand. Also during the first quarter of 2012 we sold notes with a carrying value of $5.8 million for cash proceeds of $5.3 million, the remaining difference between the carrying value and the sale amount was charged against the allowance for loan losses.

 

65



 

Net charge-offs for non-covered nonperforming loans were $10.3 million for the three months ended March 31, 2012. For non-covered OREO properties, write-downs of $855 thousand were recorded for the three months ended March 31, 2012.

 

Loans totaling $29.5 million were placed on nonaccrual status during the first quarter of 2012.  Loans totaling $18.5 million which were not 90 days past due as of March 31, 2012, were included in nonaccrual loans as of March 31, 2012. Additions to nonaccrual loans during the first quarter of 2012 were offset by $16.8 million in gross charge-offs, $8.6 million in payoffs and principal paydowns, $24.4 million in loans that were transferred to other real estate owned, and $4.5 million in loans brought current. Additions to nonaccrual loans during the first quarter of 2012 were comprised of $13.5 million in residential loans, $10.8 million in commercial real estate loans, $4.2 million in commercial and industrial loans, and $1.0 million in consumer loans.

 

The Company had $28.3 million and $99.6 million in total performing troubled debt restructured loans as of March 31, 2012 and December 31, 2011, respectively. Nonperforming TDR loans were $27.8 million and $38.9 million at March 31, 2012 and December 31, 2011, respectively, and are included in nonaccrual loans. Included in the total TDR loans were $5.8 million and $22.8 million of performing A/B notes as of March 31, 2012 and December 31, 2011, respectively.  In A/B note restructurings, the original note is bifurcated into two notes where the A note represents the portion of the original loan which allows for acceptable loan-to-value and debt coverage on the collateral and is expected to be collected in full and the B note represents the portion of the original loan where there is a shortfall in value and is fully charged off.  The A/B note is comprised of A note balances only.  A notes are not disclosed as TDRs in years after the restructuring if the restructuring agreement specifies an interest rate equal to or greater than the rate that the Bank was willing to accept at the time of the restructuring for a new loan with comparable risk and the loan is not impaired based on the terms specified by the restructuring agreement.  As of March 31, 2012, TDR loans were comprised of $836 thousand in single-family loans, $12.4 million in multifamily loans, $26.1 million in commercial real estate loans, $3.8 million in CRE construction loans, $8.8 million in CRE land loans and $4.2 million in commercial business loans.

 

Non-covered other real estate owned includes properties acquired through foreclosure or through full or partial satisfaction of loans. At March 31, 2012, total non-covered OREO was $46.3 million, compared to $29.3 million at December 31, 2011. During the first three months of 2012, the Company had an addition of $25.0 million to OREO due to foreclosures. Additionally, the Company recorded $855 thousand in write-downs. During this period, the Company also had a total of $7.0 million in total proceeds for OREO properties sold resulting in a total net loss on sale of $114 thousand and charges against the allowance for loans losses totaling $28 thousand. As previously mentioned, losses on sales of OREO properties that are sold shortly after they are received in a foreclosure are charged against the allowance for loan losses. During the first three months of 2011, the Company sold a total of $12.6 million in OREO properties for a total net loss on sale of $510 thousand and charges against the allowance for loan losses totaling $5 thousand.

 

66



 

The following table sets forth information regarding nonaccrual loans, loans 90 or more days past due but not on nonaccrual, restructured loans and non-covered other real estate owned as of the dates indicated:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Nonaccrual loans

 

$

120,798

 

$

145,632

 

Loans 90 or more days past due but not on nonaccrual

 

 

 

Total nonperforming loans

 

120,798

 

145,632

 

Non-covered other real estate owned, net

 

46,343

 

29,350

 

Total nonperforming assets

 

$

167,141

 

$

174,982

 

 

 

 

 

 

 

Performing restructured loans

 

$

28,297

 

$

99,603

 

 

 

 

 

 

 

Total nonperforming assets to total assets

 

0.77

%

0.80

%

 

 

 

 

 

 

Allowance for non-covered loan losses to nonperforming loans

 

177.36

%

144.11

%

 

 

 

 

 

 

Nonperforming loans to total gross non-covered loans

 

1.12

%

1.38

%

 

We evaluate loan impairment according to the provisions of ASC 310-10-35, Receivables—Overall – Subsequent Measurement. Under ASC 310-10-35, loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan and the loan is classified as nonperforming, the deficiency is charged-off against the allowance for loan losses.  Also, in accordance with ASC 310-10-35, loans that are considered impaired are specifically excluded from the quarterly migration analysis when determining the amount of the general valuation allowance for loan losses required for the period.

 

At March 31, 2012, the Company’s total recorded investment in impaired loans was $134.9 million, compared with $219.6 million at December 31, 2011. All nonaccrual and doubtful loans held for investment are included in impaired loans. Impaired loans at March 31, 2012 are comprised of single-family loans totaling $4.6 million, multifamily loans totaling $24.1 million, income producing commercial real estate loans totaling $42.5 million, CRE construction loans totaling $28.1 million, CRE land loans totaling $17.1 million, commercial business loans totaling $15.3 million, and other consumer loans totaling $3.2 million. As of March 31, 2012, the allowance for loan losses included $6.0 million for impaired loans with a total recorded balance of $18.7 million. As of December 31, 2011, the allowance for loan losses included $13.0 million for impaired loans with a total recorded balance of $30.4 million.

 

67



 

The following table sets forth information regarding impaired loans as of the dates indicated:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

Single-family

 

$

4,571

 

3.4

%

$

9,113

 

4.1

%

Multifamily

 

24,041

 

17.8

%

31,792

 

14.5

%

 

 

 

 

 

 

 

 

 

 

Total residential impaired loans

 

$

28,612

 

21.2

%

$

40,905

 

18.6

%

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate (“CRE”):

 

 

 

 

 

 

 

 

 

Income producing

 

$

42,549

 

31.6

%

$

63,642

 

29.0

%

Construction

 

28,053

 

20.8

%

46,480

 

21.2

%

Land

 

17,140

 

12.7

%

34,498

 

15.7

%

 

 

 

 

 

 

 

 

 

 

Total CRE impaired loans

 

$

87,742

 

65.1

%

$

144,620

 

65.9

%

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial (“C&I”):

 

 

 

 

 

 

 

 

 

Commercial business

 

$

13,284

 

9.8

%

$

27,422

 

12.5

%

Trade finance

 

2,042

 

1.5

%

4,127

 

1.9

%

 

 

 

 

 

 

 

 

 

 

Total C&I impaired loans

 

$

15,326

 

11.3

%

$

31,549

 

14.4

%

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

Student loans

 

$

782

 

0.6

%

$

257

 

0.1

%

Other consumer

 

2,392

 

1.8

%

2,249

 

1.0

%

 

 

 

 

 

 

 

 

 

 

Total consumer impaired loans

 

$

3,174

 

2.4

%

$

2,506

 

1.1

%

 

 

 

 

 

 

 

 

 

 

Total gross impaired loans

 

$

134,854

 

100.0

%

$

219,580

 

 

100.0

%

 

The average recorded investment in impaired loans at March 31, 2012 and December 31, 2011 totaled $138.9 million and $252.4 million, respectively. During the three months ended March 31, 2012 and 2011, gross interest income that would have been recorded on nonaccrual loans had they performed in accordance with their original terms totaled $1.7 million and $2.8 million, respectively.  Of these amounts, actual interest recognized on impaired loans, on a cash basis, was $701 thousand and $807 thousand for the three months ended March 31, 2012 and 2011, respectively.

 

Allowance for Loan Losses

 

We are committed to maintaining the allowance for loan losses at a level that is commensurate with the estimated inherent loss in the loan portfolio. In addition to regular quarterly reviews of the adequacy of the allowance for loan losses, we perform an ongoing assessment of the risks inherent in the loan portfolio. While we believe that the allowance for loan losses is appropriate at March 31, 2012, future additions to the allowance will be subject to a continuing evaluation of 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 increased or decreased by the amount of net recoveries or charge-offs, respectively, during the period. At March 31, 2012, the allowance for loan losses amounted to $222.5 million which includes $8.3 million allocated to covered loans. At December 31, 2011, the allowance for loan losses amounted to $216.5 million which includes $6.6 million allocated to covered loans. At March 31, 2012, the allowance for loan losses on non-covered loans amounted $214.3 million, or 2.16% of total non-covered loans receivable, compared with $209.9 million or 2.15% of total non-covered loans receivable at December 31, 2011 and $220.4 million or 2.62% of total non-covered loans receivable at March 31, 2011. The $6.0 million increase in the allowance for loan losses at March 31, 2012, from year-end 2011, primarily reflects $18.1 million in additional loss provisions, less $10.3 million in net charge-offs recorded during the first three months of 2012. Credit quality continues to improve as non-accrual loans and net charge-offs have both decreased as compared to the fourth quarter of 2011 and the first quarter 2011.

 

68



 

However, the allowance for loan losses continues to increase in relation to the new loan growth in the portfolio. As of March 31, 2012, the residential, the commercial and industrial and the consumer portfolio segments all increased as compared to December 31, 2012.

 

The allowance for unfunded loan commitments, off-balance sheet credit exposures, and recourse provisions is included in accrued expenses and other liabilities and amounted to $12.8 million at March 31, 2012, compared to $11.0 million at December 31, 2011. Net adjustments to the allowance for unfunded loan commitments, off-balance sheet credit exposures and recourse provisions are included in the provision for loan losses.

 

We recorded $18.1 million in loan loss provisions during the first quarter of 2012 as compared to $26.5 million in loan loss provisions during the first quarter of 2011.  During the first quarter of 2012, we recorded $10.3 million in net charge-offs representing 0.39% of average loans outstanding during the quarter, on an annualized basis. In comparison, we recorded net charge-offs totaling $34.2 million, or 1.50% of average non-covered loans outstanding, on an annualized basis, for the same period in 2011.

 

The following table summarizes activity in the allowance for loan losses for the three months ended March 31, 2012 and 2011:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Allowance balance, beginning of period

 

$

216,523

 

$

234,633

 

Allowance for unfunded loan commitments and letters of credit

 

(1,778

)

(758

)

Provision for loan losses

 

18,100

 

26,506

 

Gross charge-offs:

 

 

 

 

 

Residential

 

3,031

 

3,337

 

Commercial real estate

 

10,707

 

22,400

 

Commercial and industrial

 

2,887

 

10,718

 

Consumer

 

163

 

1,080

 

 

 

 

 

 

 

Total gross charge-offs

 

16,788

 

37,535

 

 

 

 

 

 

 

Gross recoveries:

 

 

 

 

 

Residential

 

941

 

231

 

Commercial real estate

 

2,775

 

973

 

Commercial and industrial

 

2,665

 

2,058

 

Consumer

 

83

 

53

 

 

 

 

 

 

 

Total gross recoveries

 

6,464

 

3,315

 

 

 

 

 

 

 

Net charge-offs

 

10,324

 

34,220

 

 

 

 

 

 

 

Allowance balance, end of period(1)

 

$

222,521

 

$

226,161

 

 

 

 

 

 

 

Average loans outstanding

 

$

10,680,212

 

$

9,123,181

 

 

 

 

 

 

 

Total gross loans outstanding, end of period

 

$

10,498,113

 

$

8,819,034

 

 

 

 

 

 

 

Annualized net charge-offs to average loans

 

0.39

%

1.50%

 

Allowance for non-covered loan losses to total gross non-covered loans held for investment at end of period

 

2.04

%

2.50%

 

 


(1)        Includes allowance for loan losses allocated to covered loans subject to general reserves.  Allowance for covered loans totaled $8.3 million and $5.8 million as of March 31, 2012 and March 31, 2011, respectively.

 

Our methodology to determine the overall appropriateness of the allowance is based on a loss migration model and qualitative considerations. The migration analysis looks at pools of loans having similar characteristics and analyzes their loss rates over a historical period. We utilize historical loss factors derived from trends and losses associated with each pool over a specified period of time.

 

69



 

Based on this process, we assign loss factors to each loan grade within each pool of loans. Loss rates derived by the migration model are based predominantly on historical loss trends that may not be indicative of the actual or inherent loss potential. As such, we utilize qualitative and environmental factors as adjusting mechanisms to supplement the historical results of the classification migration model. Qualitative considerations include, but are not limited to, prevailing economic or market conditions, relative risk profiles of various loan segments, volume concentrations, growth trends, delinquency and nonaccrual status, problem loan trends, and geographic concentrations. Qualitative and environmental factors are reflected as percent adjustments and are added to the historical loss rates derived from the classified asset migration model to determine the appropriate allowance amount for each loan pool.

 

The following table reflects the Company’s allocation of the allowance for loan losses by loan segment and the ratio of each loan segment to total loans as of the dates indicated:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Amount

 

%

 

Amount

 

%

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Residential

 

$

51,193

 

27.3

%

$

52,180

 

26.6

%

Commercial Real Estate

 

70,990

 

36.0

%

66,457

 

37.2

%

Commercial and Industrial

 

88,113

 

30.8

%

87,020

 

30.5

%

Consumer

 

3,957

 

5.9

%

4,219

 

5.7

%

Covered loans subject to allowance for loan losses

 

8,268

 

0.0

%

6,647

 

0.0

%

 

 

 

 

 

 

 

 

 

 

Total

 

$

222,521

 

100.0

%

$

216,523

 

100.0

%

 

Deposits

 

We offer a wide variety of deposit account products to both consumer and commercial customers. Total deposits decreased $114.4 million to $17.34 billion as of March 31, 2012 from $17.45 billion as of December 31, 2011. The decrease in total deposits was due to decrease of $370.7 million, or 5.2%, in time deposits, $10.2 million, or 0.2%, in money market accounts and $3.4 million, or 0.4% in interest-bearing checking deposits, which were offset by an increase in noninterest-bearing demand deposits of $197.3 million, or 5.6%, and saving accounts of $72.6 million, or 6.2%.

 

As of March 31, 2012, time deposits within the Certificate of Deposit Account Registry Service (“CDARS”) program amounted to $431.2 million, compared with $580.9 million as of December 31, 2011. The CDARS program allows customers with deposits in excess of FDIC-insured limits to obtain full coverage on time deposits through a network of banks within the CDARS program. Additionally, we partner with another financial institution to offer a retail sweep product for non-time deposit accounts to provide added deposit insurance coverage for deposits in excess of FDIC-insured limits. Deposits gathered through these programs are considered brokered deposits under regulatory reporting guidelines.

 

The following table sets forth the composition of the deposit portfolio as of the dates indicated:

 

 

 

March 31,

 

December 31,

 

Increase (Decrease)

 

 

 

2012

 

2011

 

Amount

 

Percentage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Core deposits:

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

3,690,131

 

$

3,492,795

 

$

197,336

 

5.6

%

Interest-bearing checking

 

967,772

 

971,179

 

(3,407

)

-0.4

%

Money market

 

4,668,156

 

4,678,409

 

(10,253

)

-0.2

%

Savings

 

1,237,190

 

1,164,618

 

72,572

 

6.2

%

 

 

 

 

 

 

 

 

 

 

Total core deposits

 

10,563,249

 

10,307,001

 

256,248

 

2.5

%

 

 

 

 

 

 

 

 

 

 

Time deposits

 

6,775,320

 

7,146,001

 

(370,681

)

-5.2

%

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

17,338,569

 

$

17,453,002

 

$

(114,433

)

-0.7

%

 

70


 


 

Borrowings

 

We utilize a combination of short-term and long-term borrowings to manage our liquidity position. FHLB advances decreased $60.5 million, or 13.3%, to $394.7 million as of March 31, 2012, compared to $455.3 million as of December 31, 2011. The decrease in FHLB advances is consistent with our overall strategy to improve our cost of funds. During the first three months of 2012, long-term FHLB advances totaling $20.0 million were prepaid, with additional prepayment penalties of $1.3 million. Also in the first quarter of 2012, the Company modified $300.0 million of fixed rate FHLB advances into adjustable rate, reducing the effective interest rate on these borrowings from 2.27% to 1.36%. The remainder of the decrease in FHLB advances is due to a $37.7 million modification cost incurred by the Company during the first quarter of 2012, that has been deferred and treated as a discount on the corresponding debt.

 

In addition to FHLB advances, we also utilize securities sold under repurchase agreements (“repurchase agreements”) to manage our liquidity position. Repurchase agreements totaled $1.00 billion and $1.02 billion as of March 31, 2012 and December 31, 2011, respectively. Included in these balances were $25.2 million in short-term repurchase agreements as of December 31, 2011. No short-term repurchase agreements were outstanding as of March 31, 2012. During the first quarter of 2012, the Company modified $200.0 million of long-term repurchase agreements, reducing the rate of these agreements by 86 basis points. Repurchase agreements are long-term with interest rates that are largely fixed ranging from 4.15% to 5.01%, as of March 31, 2012. The counterparties have the right to a quarterly call for many of the repurchase agreements. Repurchase agreements are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold. The collateral for these agreements consist of U.S. Government agency and U.S. Government sponsored enterprise debt and mortgage-backed securities.

 

Long-Term Debt

 

Long-term debt remained at $212.2 million as of March 31, 2012 and December 31, 2011. Long-term debt is comprised of subordinated debt, which qualifies as Tier II capital for regulatory purposes, and junior subordinated debt, which qualifies as Tier I capital for regulatory purposes, issued in connection with our various pooled trust preferred securities offerings. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, bank holding companies with more than $15 billion in total consolidated assets will no longer be able to include trust preferred securities as Tier I regulatory capital beginning in 2013 with phase-out complete by 2016.

 

71



 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

The following table presents, as of March 31, 2012, the Company’s significant fixed and determinable contractual obligations, within the categories described below, by payment date. With the exception of operating lease obligations, these contractual obligations are included in the condensed consolidated balance sheets. The payment amounts represent the amounts and interest contractually due to the recipient.

 

 

 

Payment Due by Period

 

 

 

Less than

 

 

 

 

 

After

 

Indeterminate

 

 

 

 

 

1 year

 

1-3 years

 

3-5 years

 

5 years

 

Maturity

 

Total

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

5,842,398

 

$

593,040

 

$

280,194

 

$

228,332

 

$

10,659,036

 

$

17,603,000

 

FHLB advances

 

6,050

 

12,101

 

116,215

 

307,291

 

 

441,657

 

Securities sold under repurchase agreements

 

45,855

 

91,710

 

811,168

 

292,226

 

 

1,240,959

 

Affordable housing/CRA investment commitments

 

 

 

 

 

87,379

 

87,379

 

Long-term debt obligations

 

4,144

 

8,287

 

81,394

 

191,670

 

 

285,495

 

Operating lease obligations (1)

 

21,521

 

36,208

 

21,696

 

22,990

 

 

102,415

 

Unrecognized tax benefits

 

2,878

 

2,019

 

794

 

 

 

5,691

 

Postretirement benefit obligations

 

269

 

856

 

982

 

17,488

 

 

19,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total contractual obligations

 

$

5,923,115

 

$

744,221

 

$

1,312,443

 

$

1,059,997

 

$

10,746,415

 

$

19,786,191

 

 


(1)        Represents the Company’s lease obligation for all non-owned premises.

 

72



 

As a financial service provider, we routinely enter into commitments to extend credit to customers, such as loan commitments, commercial letters of credit for foreign and domestic trade, standby letters of credit, and financial guarantees. Many of these commitments to extend credit may expire without being drawn upon. The same credit policies are used in extending these commitments as in extending loan facilities to customers. Under some of these contractual agreements, the Company may also have liabilities contingent upon the occurrence of certain events. A schedule of significant commitments to extend credit to our customers as of March 31, 2012 is as follows:

 

 

 

Commitments

 

 

 

Outstanding

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Undisbursed loan commitments

 

$

2,340,870

 

Standby letters of credit

 

1,798,851

 

Commercial letters of credit

 

80,060

 

 

Capital Resources

 

At March 31, 2012, stockholders’ equity totaled $2.28 billion, a 1.2% decrease from the year-end 2011 balance of $2.31 billion. The decrease is comprised of the following: (1) repurchase of treasury stock pursuant to the stock repurchase program totaling $101.0 million, representing 4,554,827 treasury stocks;  (2) accrual and payment of cash dividends on common and preferred stock totaling $16.5 million during the first three months of 2012; (3) reclassification adjustment for net loss on securities included in net income of $3.4 million; (4) noncredit-related impairment loss on investment securities amounting to $2.9 million, net of tax; and (5) purchase of treasury shares related to vested restricted stock amounting to $1.3 million, representing 60,073 shares. These transactions were offset by: (1) net income of $68.1 million recorded during the first three months of 2012; (2) additional unrealized gain on investments securities available-for-sale, net of tax, of $23.4 million; (3) stock compensation amounting to $3.6 million related to grants of restricted stock, restricted stock units and stock options; and (4) issuance of common stock totaling $1.5 million, representing 205,103 shares, pursuant to various stock plans and agreements.

 

Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs, and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of capital and the adequacy of capital.

 

Warrants

 

During 2008, in conjunction with the Series B preferred stock offering, the Company issued to the U.S. Treasury warrants with an initial price of $15.15 per share of common stock for which the warrants may be exercised, with an allocated fair value of $25.2 million. The warrants could be exercised at any time on or before December 5, 2018. On January 26, 2011, the Company repurchased the 1,517,555 warrants outstanding for $14.5 million. There are no warrants outstanding as of March 31, 2012 and December 31, 2011 respectively.

 

Risk-Based Capital

 

We are committed to maintaining capital at a level sufficient to assure our shareholders, our customers, and our regulators that our company and our bank subsidiary are financially sound. We are subject to risk-based capital regulations and capital adequacy guidelines adopted by the federal banking regulators. 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 these guidelines, institutions whose Tier I and total capital ratios meet or exceed 6.0% and 10.0%, respectively, may be deemed “well-capitalized.”

 

73



 

At March 31, 2012, the Bank’s Tier I and total capital ratios were 14.0% and 15.6%, respectively, compared to 14.7% and 16.3%, respectively, at December 31, 2011.

 

The following table compares East West Bancorp, Inc.’s and East West Bank’s capital ratios at March 31, 2012, to those required by regulatory agencies for capital adequacy and well-capitalized classification purposes:

 

 

 

 

 

 

 

Minimum

 

Well

 

 

 

East West

 

East West

 

Regulatory

 

Capitalized

 

 

 

Bancorp

 

Bank

 

Requirements

 

Requirements

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

16.7%

 

15.6%

 

8.0%

 

10.0%

 

Tier 1 Capital (to Risk-Weighted Assets)

 

15.1%

 

14.0%

 

4.0%

 

6.0%

 

Tier 1 Capital (to Average Assets)

 

9.5%

 

8.9%

 

4.0%

 

5.0%

 

 

ASSET LIABILITY AND MARKET RISK MANAGEMENT

 

Liquidity

 

Liquidity management involves our 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. Our 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.

 

Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and brokered deposits, federal funds facilities, repurchase agreement facilities, advances from the Federal Home Loan Bank of San Francisco, and issuances of long-term debt. These funding sources are augmented by payments of principal and interest on loans and securities. In addition, government programs, such as the FDIC’s Temporary Liquidity Guarantee Program, may influence deposit behavior. 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 first three months of 2012, we experienced net cash inflows from operating activities of $60.0 million, compared to net cash inflows of $158.3 million for the first three months of 2011.

 

Net cash inflows from investing activities totaled $424.3 million for the first three months of 2012 compared with net cash outflows of $354.1 million for the first three months of 2011. Net cash inflows from investing activities for the first three months of 2012 were due primarily from sales of investment securities, repayments, maturities and redemptions of investment securities available-for-sale and paydowns, maturities of securities purchased under resale agreements. Net cash outflows from investing activities for the first three months of 2011 were due primarily from purchases of investment securities, securities purchased under resale agreements and purchases of loans receivable.  These factors were partially offset by the repayments, maturities and redemptions of investment securities, proceeds from sales of investment securities and proceeds from sales of loans held for sale originated for investment.

 

We experienced net cash outflows from financing activities of $279.2 million during the first three months of 2012, primarily due to the decrease in deposits and repurchase of shares of treasury stock pursuant to the Stock Repurchase Plan. We experienced net cash inflows from financing activities of $355.9 million for the first three months of 2011 primarily due to the increase in deposits.

 

74



 

As a means of augmenting our liquidity, we have available a combination of borrowing sources  comprised of the Federal Reserve Bank’s discount window, FHLB advances, federal funds lines with various correspondent banks, and several master repurchase agreements with major brokerage companies. We believe our liquidity sources to be stable and adequate to meet our day-to-day cash flow requirements.

 

The liquidity of East West Bancorp, Inc. has historically been dependent on the payment of cash dividends by its subsidiary, East West Bank, subject to applicable statutes and regulations. For the three months ended March 31, 2012, total dividends paid by the Bank to the Company amounted to $250.0 million. For the three months ended March 31, 2011, total dividends paid by the Bank to the Company amounted to $50.0 million.

 

In April, 2012, the Company declared the payment of second quarter 2012 dividends of $20.00 per share on the Company’s Series A preferred stock. The dividend was payable on or about May 1, 2012 to shareholders of record as of April 15, 2012. Additionally, the Company declared a dividend of $0.10 per share on the Company’s common stock payable on or about May 24, 2012 to shareholders of record as of May 10, 2012.

 

Interest Rate Sensitivity Management

 

Our success is largely dependent upon our ability to manage interest rate risk, which is the impact of adverse fluctuations in interest rates on our net interest income and net portfolio value.

 

The fundamental objective of the asset liability management process is to manage our exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. Our strategy is formulated by the Asset/Liability Committee, which coordinates with the Board of Directors to monitor our overall asset and liability composition. The Committee meets regularly to evaluate, among other things, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses on the available-for-sale portfolio (including those attributable to hedging transactions, if any), purchase and securitization activity, and maturities of investments and borrowings.

 

Our 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. To minimize the adverse impact of changes in market interest rates, we simulate the effect of instantaneous interest rate changes on net interest income and net portfolio value on a quarterly basis. The table below shows the estimated impact of changes in interest rates on net interest income and market value of equity as of March 31, 2012 and December 31, 2011, assuming a non-parallel shift of 100 and 200 basis points in both directions:

 

 

 

Net Interest Income

 

Net Portfolio Value

 

 

 

Volatility (1)

 

Volatility (2)

 

Change in Interest Rates

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

(Basis Points)

 

2012

 

2011

 

2012

 

2011

 

+200

 

6.0

 %

 

6.2

 %

 

2.5

 %

 

2.4

 %

 

+100

 

2.8

 %

 

3.0

 %

 

0.4

 %

 

0.5

 %

 

-100

 

(0.7

)%

 

(0.9

)%

 

(5.7

)%

 

(5.9

)%

 

-200

 

(0.8

)%

 

(1.2

)%

 

(15.8

)%

 

(14.2

)%

 

 


(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 interest rate environment versus net portfolio value in the various rate scenarios.

 

75



 

All interest-earning assets, interest-bearing liabilities, and related derivative contracts are included in the interest rate sensitivity analysis at March 31, 2012 and December 31, 2011. In a declining rate environment, the interest rate floors on these loans contribute to the favorable impact on our net interest income. However, in a rising rate environment, these interest rate floors also serve to lessen the full benefit of higher interest rates. At March 31, 2012 and December 31, 2011, our estimated changes in net interest income and net portfolio value were within the ranges established by the Board of Directors.

 

Our primary analytical tool 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. As an enhancement to the primary simulation model, prepayment assumptions and market rates of interest provided by independent broker/dealer quotations, an independent pricing model and other available public sources are incorporated into the model. Adjustments are made to reflect the shift in the Treasury and other appropriate yield curves. The model also factors in projections of anticipated activity levels by product line and takes into account our increased ability to control rates offered on deposit products in comparison to our ability to control rates on adjustable-rate loans tied to the published indices.

 

The following table provides the outstanding principal balances and the weighted average interest rates of our financial instruments as of March 31, 2012. The information presented below is based on the repricing date for variable rate instruments and the expected maturity date for fixed rate instruments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

 

 

Expected Maturity or Reprising Date by Year

 

March 31,

 

 

 

Year 1

 

Year 2

 

Year 3

 

Year 4

 

Year 5

 

Thereafter

 

Total

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CD investments

 

$

523,752

 

$

 

$

250

 

$

 

$

 

$

 

$

524,002

 

$

524,408

 

Average yield (fixed rate)

 

4.14

%

 

4.00

%

 

 

 

4.14

%

 

 

Short-term investments(1)

 

$

1,017,195

 

$

 

$

 

$

 

$

 

$

 

$

1,017,195

 

$

1,017,195

 

Weighted average rate

 

0.35

%

 

 

 

 

 

0.35

%

 

 

Securities purchased under resale agreements

 

$

500,000

 

$

 

$

 

$

 

$

 

$

200,000

 

$

700,000

 

$

696,041

 

Weighted average rate

 

2.29

%

 

 

 

 

4.00

%

2.78

%

 

 

Investment securities

 

$

1,556,525

 

$

226,806

 

$

138,587

 

$

115,337

 

$

101,969

 

$

567,496

 

$

2,706,720

 

$

2,706,720

 

Weighted average rate

 

2.93

%

3.90

%

3.78

%

4.40

%

3.86

%

5.00

%

3.58

%

 

 

Total covered gross loans

 

$

3,554,056

 

$

395,858

 

$

186,106

 

$

102,902

 

$

62,222

 

$

123,430

 

$

4,424,574

 

$

4,254,766

 

Weighted average rate

 

4.82

%

6.08

%

6.22

%

6.04

%

5.95

%

6.31

%

5.08

%

 

 

Total non-covered gross loans

 

$

8,167,816

 

$

720,845

 

$

546,782

 

$

369,373

 

$

350,015

 

$

607,663

 

$

10,762,494

 

$

10,294,644

 

Weighted average rate

 

4.68

%

5.46

%

5.57

%

5.55

%

5.60

%

5.99

%

4.91

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking accounts

 

$

967,772

 

$

 

$

 

$

 

$

 

$

 

$

967,772

 

$

849,742

 

Weighted average rate

 

0.29

%

 

 

 

 

 

0.29

%

 

 

Money market accounts

 

$

4,668,156

 

$

 

$

 

$

 

$

 

$

 

$

4,668,156

 

$

4,529,243

 

Weighted average rate

 

0.36

%

 

 

 

 

 

0.36

%

 

 

Savings deposits

 

$

1,237,190

 

$

 

$

 

$

 

$

 

$

 

$

1,237,190

 

$

984,714

 

Weighted average rate

 

0.20

%

 

 

 

 

 

0.20

%

 

 

Time deposits

 

$

5,786,224

 

$

473,913

 

$

103,372

 

$

119,361

 

$

142,804

 

$

149,646

 

$

6,775,320

 

$

6,821,016

 

Weighted average rate

 

0.85

%

0.99

%

1.76

%

1.48

%

1.40

%

3.33

%

0.95

%

 

 

FHLB advances

 

$

300,000

 

$

 

$

 

$

 

$

105,000

 

$

 

$

405,000

 

$

420,758

 

Weighted average rate

 

0.62

%

 

 

 

3.99

%

 

1.49

%

 

 

Securities sold under repurchase agreements (fixed rate)

 

$

 

$

 

$

 

$

245,000

 

$

500,000

 

$

200,000

 

$

945,000

 

$

1,114,407

 

Weighted average rate

 

 

 

 

4.50

%

4.84

%

4.27

%

4.63

%

 

 

Securities sold under repurchase agreements (variable rate)

 

$

50,000

 

$

 

$

 

$

 

$

 

$

 

$

50,000

 

$

58,316

 

Weighted average rate

 

4.15

%

 

 

 

 

 

4.15

%

 

 

Subordinated notes (variable rate)

 

$

75,000

 

$

 

$

 

$

 

$

 

$

 

$

75,000

 

$

69,046

 

Weighted average rate

 

1.66

%

 

 

 

 

 

1.66

%

 

 

Junior subordinated debt (variable rate)

 

$

137,178

 

$

 

$

 

$

 

$

 

$

 

$

137,178

 

$

70,315

 

Weighted average rate

 

2.24

%

 

 

 

 

 

2.24

%

 

 

 


(1)        Includes interest-bearing non-time deposits in other banks.

 

(2)        Includes hybrid securities that have fixed interest rates for the first three or five years. Thereafter, interest rates become adjustable based on a predetermined index.

 

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 for deposits with no stated maturity dates. We utilize assumptions supported by documented analyses for the expected maturities of our loans and repricing of our deposits.

 

76



 

We also use prepayment projections for amortizing securities. The actual maturities of these instruments could vary significantly if future prepayments and repricing frequencies differ from our expectations based on historical experience.

 

The fair values of interest-bearing deposits in other banks are based on the discounted cash flow approach. The discount rate is derived from the Bank’s time deposit rate curve. The fair values of short-term investments generally approximate their book values due to their short maturities. For securities purchased under resale agreements, fair values are calculated by discounting future cash flows based on expected maturities or repricing dates utilizing estimated market discount rates and taking into consideration the call features of each instrument. The fair values of the investment securities are generally determined by reference to the average of at least two quoted market prices obtained from independent external brokers or prices obtained from independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, the Company has reviewed the methodologies used to develop the resulting fair values. For the pooled trust preferred securities, the fair value was derived based on a discounted cash flow analyses. The discount rate is derived from assumptions using an exit pricing approach related to the implied rate of return which have been adjusted for general changes in market rates, estimated changes in credit quality and liquidity risk premiums, and specific nonperformance and default experience in the collateral underlying the securities.

 

The fair value of deposits is determined based on the discounted cash flow approach. The discount rate is derived from the associated yield curve, plus spread, if any. For core deposits, the cash outflows are projected by the decay rate based on the Bank’s core deposit premium study. Cash flows for all non-time deposits are discounted using the LIBOR yield curve. For time deposits, the cash flows are based on the contractual runoff and are discounted by the Bank’s current offering rates, plus spread. For federal funds purchased, fair value approximates book value due to their short maturities. The fair value of FHLB term 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. Customer repurchase agreements, which have maturities ranging from one to three days, are presumed to have equal book and fair values because the interests rates paid on these instruments are based on prevailing market rates. The fair values of securities sold under repurchase agreements are calculated by discounting future cash flows based on expected maturities or repricing dates, utilizing estimated market discount rates and taking into consideration the call features of each instrument. For both subordinated and junior subordinated debt instruments, fair values are estimated by discounting cash flows through maturity based on current market rates the Bank would pay for new issuances.

 

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. We may elect to use derivative financial instruments as part of our asset and liability management strategy, with the overall goal of minimizing the impact of interest rate fluctuations on our net interest margin and stockholders’ equity.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For quantitative and qualitative disclosures regarding market risks in our portfolio, see, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset Liability and Market Risk Management” presented elsewhere in this report.

 

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ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As of March 31, 2012, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective as of March 31, 2012.

 

Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Internal Controls

 

During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

Neither the Company nor the Bank 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. After taking into consideration information furnished by counsel to the Company and the Bank, management believes that the resolution of such issues would not have a material adverse impact on the financial position, results of operations, or liquidity of the Company or the Bank.

 

ITEM 1A. RISK FACTORS

 

The Company’s 2011 Form 10-K contains disclosure regarding the risks and uncertainties related to the Company’s business under the heading “Item 1A. Risk Factors.” There are no material changes to our risk factors as presented in the Company’s Form 10-K.

 

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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

There were no unregistered sales of equity securities during the quarter ended March 31, 2012. The following summarizes share repurchase activities during the first quarter of 2012:

 

 

 

 

 

 

 

 

 

Approximate

 

 

 

 

 

 

 

Total Number

 

Dollar Value

 

 

 

 

 

 

 

of Shares

 

in Millions of

 

 

 

Total

 

 

 

Purchased as

 

Shares that May

 

 

 

Number

 

Average

 

Part of Publicly

 

Yet Be Purchased

 

 

 

of Shares

 

Price Paid

 

Announced Plans

 

Under the Plans

 

Period

 

Purchased (1)

 

per Share

 

or Programs

 

or Programs (2)

 

 

 

 

 

 

 

 

 

 

 

Period ended March 31, 2012

 

4,554,827

 

$

22.14

 

4,554,827

 

$

99.0

 

 


(1)        Excludes 60,073 in repurchased shares totaling $1.3 million due to forfeitures and vesting of restricted stock awards pursuant to the Company’s 1998 Stock Incentive Plan, as amended.

 

(2)        During the first quarter of 2012, the Company’s Board of Directors announced a repurchase program authorizing the repurchase of up to $200.0 million of its common stock. This repurchase program has no expiration date and, to date, 4,554,827 shares totaling $101.0 million have been purchased under this program.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.  OTHER INFORMATION

 

Not applicable.

 

79



 

ITEM 6.  EXHIBITS

 

(i)

 

Exhibit 10.1

Form of Amendment to Employment Agreement- Mr. Ng+ [Incorporated by reference from Registrant’s Current Report on Form 8-K filed with the Commission on April 10, 2012.]

 

 

 

 

(ii)

 

Exhibit 10.3

Form of Agreement Regarding Grants of Incentive Shares and Clawbacks - Mr. Ng+ [Incorporated by reference from Registrant’s Current Report on Form 8-K filed with the Commission on April 10, 2012.]

 

 

 

 

(iii)

 

Exhibit 10.3.1

Form of Agreement Regarding Grants of Incentive Shares and Clawbacks – Ms. Gouw+ [Incorporated by reference from Registrant’s Current Report on Form 8-K filed with the Commission on April 10, 2012.]

 

 

 

 

(iv)

 

Exhibit 10.3.2

Form of Agreement Regarding Grants of Incentive Shares and Clawbacks – Mr. Krause+ [Incorporated by reference from Registrant’s Current Report on Form 8-K filed with the Commission on April 10, 2012.]

 

 

 

 

(v)

 

Exhibit 10.3.3

Form of Agreement Regarding Grants of Incentive Shares and Clawbacks – Ms. Oh+ [Incorporated by reference from Registrant’s Current Report on Form 8-K filed with the Commission on April 10, 2012.]

 

 

 

 

(vi)

 

Exhibit 10.3.4

Form of Agreement Regarding Grants of Incentive Shares and Clawbacks – Mr. Schuler+ [Incorporated by reference from Registrant’s Current Report on Form 8-K filed with the Commission on April 10, 2012.]

 

 

 

 

(vii)

 

Exhibit 10.5

Form of Amendment to Employment Agreement- Mr. Krause+ [Incorporated by reference from Registrant’s Current Report on Form 8-K filed with the Commission on April 10, 2012.]

 

 

 

 

(viii)

 

Exhibit 10.9.1

Form of Amendment to Employment Agreement- Mr. Schuler+ [Incorporated by reference from Registrant’s Current Report on Form 8-K filed with the Commission on April 10, 2012.]

 

 

 

 

(ix)

 

Exhibit 31.1

Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

(x)

 

Exhibit 31.2

Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

(xi)

 

Exhibit 32.1

Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

(xii)

 

Exhibit 32.2

Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

(xiv)

 

101.SCH

XBRL Taxonomy Extension Schema

 

 

 

 

(xv)

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

 

 

 

 

(xvi)

 

101.LAB

XBRL Taxonomy Extension Label Linkbase

 

 

 

 

(xvii)

 

101.PRE

XBRL Extension Presentation Linkbase

 

 

 

 

(xviii)

 

101.DEF

XBRL Extension Definition Linkbase

 

80



 

All other material referenced in this report which is required to be filed as an exhibit hereto has previously been submitted.

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Dated:  May 9, 2012

 

 

 

EAST WEST BANCORP, INC.

 

 

 

By: /s/ IRENE H. OH   
Irene H. Oh
Executive Vice President and
Chief Financial Officer

 

81