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<SEC-DOCUMENT>0000912057-01-506569.txt : 20010409
<SEC-HEADER>0000912057-01-506569.hdr.sgml : 20010409
ACCESSION NUMBER: 0000912057-01-506569
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010402
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: EAST WEST BANCORP INC
CENTRAL INDEX KEY: 0001069157
STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022]
IRS NUMBER: 954703316
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 000-24939
FILM NUMBER: 1592299
BUSINESS ADDRESS:
STREET 1: 415 HUNTINGTON DRIVE
CITY: SAN MARINO
STATE: CA
ZIP: 91108
BUSINESS PHONE: 6267995700
MAIL ADDRESS:
STREET 1: EAST WEST BANCORP INC
STREET 2: 415 HUNTINGTON DRIVE
CITY: SAN MARINO
STATE: CA
ZIP: 91108
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>a2043239z10-k405.txt
<DESCRIPTION>10-K405
<TEXT>
<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
MARK ONE
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ________________ TO ________________.
COMMISSION FILE NUMBER 000-24939
--------------------------
EAST WEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 95-4703316
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
415 HUNTINGTON DRIVE, SAN MARINO, 91108
CALIFORNIA (Zip Code)
(Address of principal executive
offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (626) 799-5700
--------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.001 Par Value
(Title of class)
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant=s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. /X/
As of February 28, 2001, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $524,580,225.
Number of shares of common stock of the registrant outstanding as of
February 28, 2001: 23,149,264 shares
The following documents are incorporated by reference herein:
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<CAPTION>
PART OF FORM 10-K
DOCUMENT INCORPORATED INTO WHICH INCORPORATED
- --------------------- -----------------------
<S> <C>
2000 Annual Report.......................................... Parts II and IV
Definitive Proxy Statement for the Annual Meeting of
Stockholders which will be filed within 120 days of the
fiscal year ended December 31, 2000....................... Part III
</TABLE>
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
PART I................................................................. 3
Item 1. Business........................................... 3
Item 2. Properties......................................... 15
Item 3. Legal Proceedings.................................. 16
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 17
Item 4A. Executive Officers of the Registrant............... 17
PART II................................................................ 18
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 18
Item 6. Selected Financial Data............................ 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results
of Operations..................................... 20
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................................... 43
Item 8. Financial Statements and Supplementary Data........ 43
Item 9. Changes in and Disagreements with Accountants on
Accounting and
Financial Disclosure.............................. 43
PART III............................................................... 44
Item 10. Directors and Executive Officers of the
Registrant................................................ 44
Item 11. Executive Compensation............................ 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 44
Item 13. Certain Relationships and Related Transactions.... 44
PART IV................................................................ 45
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................... 45
SIGNATURES............................................................. 87
</TABLE>
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PART I
ITEM 1. BUSINESS
ORGANIZATION
East West Bancorp, Inc. (the "Company") is a Delaware corporation
incorporated on August 26, 1998 pursuant to a Plan of Reorganization and
Agreement of Merger to be the holding company for East West Bank (the "Bank").
The Company became the holding company for the Bank as of December 30, 1998, and
is subject to the Bank Holding Company Act of 1956, as amended.
The principal office of the Company is located at 415 Huntington Drive, San
Marino, California 91108, and its telephone number is (626) 799-5700.
The Company has four wholly-owned subsidiaries, East West Bank, East West
Capital Trust I, East West Captial Trust II and Risk Services, Inc. (dba East
West Insurance Agency). The Bank's deposits are insured by the Savings
Association Insurance Fund ("SAIF"), as administered by the Federal Deposit
Insurance Corporation ("FDIC"), up to applicable limits. The Bank is not a
member of the Federal Reserve System. The Bank was the third largest commercial
bank headquartered in Los Angeles, California as of December 31, 2000, and one
of the largest banks in the United States that focuses on the Chinese-American
community. Until June 12, 1998, the Bank was privately owned. At that time, the
former shareholders sold all of their interests in the Bank to approximately 160
institutional and accredited investors in a private placement transaction. On
February 8, 1999, the Company commenced trading on the Nasdaq National Market
under the ticker symbol EWBC.
The Bank was chartered by the Federal Home Loan Bank Board in June 1972, as
the first federally-chartered savings institution focused primarily on the
Chinese-American community, and opened for business at its first office in the
Chinatown district of Los Angeles in January 1973. Until the early 1990's, the
Bank conducted a traditional savings and loan business by making predominately
long-term, single-family residential and commercial and multi-family real estate
loans with interest rates tied to the Eleventh District Cost of Funds Index
("COFI"). These loans were made principally within the ethnic Chinese market in
Southern California and were funded primarily with retail savings deposits and
advances from the Federal Home Loan Bank ("FHLB") of San Francisco. Currently,
the Bank specializes in lending for commercial, construction, and residential
real estate projects and financing international trade for California companies.
The Bank has emphasized commercial lending since its conversion to a
state-chartered commercial bank on July 31, 1995.
As of December 31, 2000, the Bank had three wholly-owned subsidiaries. The
first subsidiary, E-W Services, Inc., is a California corporation organized by
the Bank in 1977. E-W Services, Inc. holds property used by the Bank in its
operations. At December 31, 2000, the Bank's total investment in
E-W Services, Inc. was $10.5 million. The second subsidiary, East-West
Investments, Inc., is a California corporation organized by the Bank in 1972.
East-West Investments, Inc. primarily acts as a trustee in connection with real
estate secured loans. At December 31, 2000, the Bank's total investment in
East-West Investments, Inc. was $82,000. The third subsidiary, EWSC Holdings,
LLC, is a California limited liability company organized by the Bank in 2000.
EWSC Holdings, LLC owns 100% of the voting shares of East West Securities
Company, Inc. (the "Fund"). At December 31, 2000, the Bank's total investment in
EWSC Holdings, LLC was $811.9 million.
The Fund was incorporated under the general laws of the State of Maryland on
July 13, 2000 as a closed-end, non-diversified management investment company
registered under the Investment Company Act of 1940, as amended. The formation
of the Fund provides the Bank with the flexibility to raise additional capital
in a tax efficient manner for future business opportunities if desired. At
December 31, 2000, the Fund was the sole member in six limited liability
companies--EW Assets, LLC, EW Assets 2, LLC, EW Assets 3, LLC, EW Assets 4, LLC,
EW Assets 5, LLC and EW Assets 6, LLC. These companies invest primarily in loans
and money market deposit accounts.
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On May 28, 1999, the Bank completed its acquisition of First Central Bank,
N.A. for an aggregate cash price of $13.5 million. First Central Bank had three
branches in Southern California--one branch located in the Chinatown sector of
Los Angeles, one branch in Monterey Park and one branch in Cerritos. The Bank
acquired approximately $55.0 million in loans and assumed approximately
$92.6 million in deposits.
On January 18, 2000, the Bank completed its acquisition of American
International Bank for an aggregate cash price of $33.1 million. American
International Bank had eight branches in Southern California. The Bank acquired
approximately $107.9 million in loans and assumed approximately $170.8 million
in deposits.
In March 2000 and July 2000, the Company established East West Capital
Trust I and East West Capital Trust II (the "Trusts"), respectively, as wholly
owned subsidiaries. East West Capital Trust I and East West Capital Trust II are
statutory business trusts. In two separate private placement transactions, the
Trusts issued $10.8 million of 10.875% capital securities and $10.0 million of
10.945% capital securiites representing undivided preferred beneficial interests
in the assets of the Trusts. The Company is the owner of all the beneficial
interests represented by the common securities of the Trusts. The purpose of
issuing the capital securities was to provide the Company with a cost-effective
means of obtaining Tier I Capital for regulatory purposes.
On August 22, 2000, the Company completed the acquisition of its other
wholly owned subsidiary, Risk Services, Inc. (the "Agency"), in a stock swap
transaction. In exchange for all of the outstanding stock of the Agency, the
Company issued a total of 103,291 new shares of East West Bancorp, Inc. common
stock, par value of $.001. The total cash value of the shares issued was
approximately $1.7 million. Risk Services, Inc., with assets of approximately
$789 thousand as of the acquisition date, is an unrelated agent providing
business and consumer insurance services to the Southern California market. The
Agency continues to run its operations autonomously from the operations of the
Company.
On January 16, 2001, the Bank completed the acquisition of Prime Bank for a
combination of shares and cash valued at $16.6 million. Prime Bank was a
one-branch commercial bank located in the Century City area of Los Angeles. The
Bank acquired approximately $45.0 million in loans and assumed approximately
$98.1 million in deposits.
BANKING SERVICES
Through its network of 30 retail branches, the Bank provides a wide range of
personal and commercial banking services to small and medium-sized businesses,
business executives, professionals, and other individuals. The Bank offers
multilingual services to all of its customers in English, Cantonese, Mandarin
and Spanish. The Bank offers a variety of deposit products which includes the
traditional range of personal and business checking and savings accounts, time
deposits and individual retirement accounts, travelers' checks, safe deposit
boxes, and Master Card and Visa merchant deposit services.
The Bank's lending activities include residential and commercial real
estate, construction, commercial, trade finance, account receivables, inventory
and working capital loans. The Bank provides commercial loans to small and
medium-sized businesses with annual revenues that generally range from several
million to $200 million. In addition, the Bank provides short-term trade finance
facilities for terms of less than one year primarily to U.S. importers and
manufacturers doing business in the Asia Pacific region. Management believes
that these activities have not been adversely affected to a significant degree
by the economic crisis in Asia of the last several years. The Bank's commercial
borrowers are engaged in a wide variety of manufacturing, wholesale trade, and
service businesses.
Management has identified four principal operating segments within the
Company: retail banking, commercial lending, treasury, and residential lending.
Although all four operating segments offer
4
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financial products and services, they are managed separately based on each
segment's strategic focus. While the retail banking segment focuses primarily on
retail operations through the Company's branch network, certain designated
branches have responsibility for generating commercial deposits and loans. The
commercial lending segment primarily generates commercial loans and deposits
through the efforts of commercial lending officers located in the Company's
northern and southern California production offices. The treasury department's
primary focus is managing the Company's investments, liquidity, and interest
rate risk; while the residential lending segment is mainly responsible for the
Company's portfolio of single family and multifamily loans.
MARKET AREA AND COMPETITION
The Bank concentrates on marketing its services in the Los Angeles
metropolitan area, Orange County, the San Francisco Bay area, and the Silicon
Valley area in Santa Clara County, with a particular focus on regions with a
high concentration of ethnic Chinese. The ethnic Chinese markets within the
Bank's primary market area have experienced rapid growth in recent periods.
Based on information provided by the California State Department of Finance,
there were an estimated 4.2 million Asians and Pacific Islanders residing in
California as of March 2000. As California continues to gain momentum as the hub
of the Pacific Rim, the Bank provides important competitive advantages to its
customers participating in the Asia Pacific marketplace. Management believes the
Bank's customers benefit from its understanding of Asian markets and cultures,
its corporate and organizational ties throughout Asia, as well as its
international banking products and services. Management believes that this
approach, combined with the extensive ties of its management and Board of
Directors to the growing Asian and ethnic Chinese communities, provides the Bank
with an advantage in competing for customers in its market area.
The banking and financial services industry in California generally, and in
the Bank's market areas specifically, are highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. In addition, recent federal
legislation may have the effect of further increasing the pace of consolidation
within the financial services industry. See "Economic Conditions, Government
Policies, Legislation and Regulation."
The Bank competes for loans, deposits, and customers with other commercial
banks, savings and loan associations, securities and brokerage companies,
mortgage companies, insurance companies, finance companies, money market funds,
credit unions, and other nonbank financial service providers. Some of these
competitors are larger in total assets and capitalization, have greater access
to capital markets and offer a broader range of financial services than the
Bank. The Bank has 30 offices located in the following counties: Los Angeles,
Orange, San Francisco and Santa Clara. Neither the deposits nor loans of the
offices of the Bank exceed 1% of the deposits or loans of all financial services
companies located in the counties in which the Bank operates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133, as amended by SFAS
No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--AN AMENDMENT OF FASB STATEMENT NO. 133, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
Gains or losses resulting from changes in the values of those derivatives would
be accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in
5
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fair value or cash flows. Implementation of SFAS No. 133 became effective for
the Company on January 1, 2001. The adoption of this standard did not have a
material impact on the Company's results of operations or financial position.
In December 1999, the Securities and Exchange Commission (the "Commission")
issued Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS, which summarizes the Commission's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Under the provisions of SAB No. 101, if a transaction is within the
scope of existing specific authoritative literature that provides revenue
recognition guidance, such literature should be applied. SAB No. 101 is intended
to provide additional or more consistent guidance only in the absence of
authoritative literature addressing a specific arrangement or a specific
industry as it relates to revenue recognition. It is the view of the Commission
that revenue is generally realized or realizable and earned when all of the
following criteria are met: (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred or services have been rendered, (3) the seller's price
to the buyer is fixed or determinable, and (4) collectibility is reasonably
assured. Management does not believe that the bulletin has a material impact on
the Company's results of operations or financial position.
In September 2000, the FASB issued SFAS No. 140, ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES--A
REPLACEMENT TO FASB STATEMENT NO. 125. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but carries over most of
SFAS 125's provisions without reconsideration. SFAS No. 140 provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. These standards are based on consistent
application of a "financial-components approach" that focuses on control. Under
this approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement also provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. SFAS No. 140 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. This Statement is also effective for recognition
and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. Management does not believe that the adoption of this
standard will have a material impact on the Company's results of operations or
financial position when adopted.
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
The Bank's profitability, like most financial institutions, is primarily
dependent on interest rate differentials. In general, the difference between the
interest rates paid by the Bank on interest-bearing liabilities, such as
deposits and other borrowings, and the interest rates received by the Bank on
its interest-earning assets, such as loans extended to its clients and
securities held in its investment portfolio, comprise the major portion of the
Company's earnings. These rates are highly sensitive to many factors that are
beyond the control of the Company and the Bank, such as inflation, recession and
unemployment, and the impact which future changes in domestic and foreign
economic conditions might have on the Company and the Bank cannot be predicted.
The business of the Bank is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Federal Reserve Board. The Federal Reserve Board implements
national monetary policies (with objectives such as curbing inflation and
combating recession) through its open-market operations in U.S. Government
securities by adjusting the required level of reserves for depository
institutions subject to its reserve requirements and by varying the target
federal funds and discount rates applicable to borrowings by depository
institutions. The actions of the Federal Reserve Board in these areas influence
the growth of bank
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loans, investments and deposits and also affect interest rates earned on
interest-earning assets and paid on interest-bearing liabilities. The nature and
impact on the Company and the Bank of any future changes in monetary and fiscal
policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies, other financial institutions, and financial services providers are
frequently made in the U.S. Congress, in the state legislatures and before
various regulatory agencies.
GENERAL
Bank holding companies and banks are extensively regulated under both
federal and state law. This regulation is intended primarily for the protection
of depositors and the deposit insurance fund and not for the benefit of
stockholders of the Company or the Bank. Set forth below is a summary
description of the material laws and regulations which relate to the operations
of the Company and the Bank. The description is qualified in its entirety by
reference to the applicable laws and regulations.
In recent years, significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by Congress. Such
proposals include legislation to revise the Glass-Steagall Act and the BHC Act
and to expand permissible activities for banks. In November 1999, the
Gramm-Leach-Bliley Act (the "Financial Services Modernization Act") was passed
permitting the affiliation of banks, insurance underwriters and investment
banking firms. It also provided for possible future additional expansions of
permissible activities for banks. See "Financial Services Modernization
Legislation."
THE COMPANY
GENERAL. The Company, as a registered bank holding company, is subject to
regulation under the BHC Act. The Company is required to file with the Federal
Reserve Board quarterly, semi-annual, and annual reports and such additional
information as the Federal Reserve Board may require pursuant to the BHC Act.
The Federal Reserve Board may conduct examinations of the Company and its
subsidiaries.
The Federal Reserve Board may require that the Company terminate an activity
or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHC Act and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "--The Bank--Capital Standards."
The Company is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5% of the outstanding shares of any class
of voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve Board is also required
for the merger or consolidation of the Company and another bank holding company.
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The Company is prohibited by the BHC Act, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company may engage in any, or acquire
shares of companies engaged in, activities that are deemed by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both.
The Company is a bank holding company within the meaning of Section 3700 of
the California Financial Code. As such, the Company and its subsidiaries will be
subject to examination by, and may be required to file reports with, the
California Department of Financial Institutions ("DFI").
The Company's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As such, the Company is subject to the information, proxy solicitation,
insider trading, and other requirements and restrictions of the Exchange Act.
FINANCIAL SERVICES MODERNIZATION LEGISLATION
GENERAL. On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 or the Financial Services Modernization Act. The
Financial Services Modernization Act repeals the two affiliation provisions of
the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal
Reserve Member Banks with firms "engaged principally" in specified securities
activities; and Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person "primarily engaged"
in specified securities activities. In addition, the Financial Services
Modernization Act also contains provisions that expressly preempt any state law
restricting the establishment of financial affiliations, primarily related to
insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the BHC Act framework to permit a holding company system to engage in
a full range of financial activities through a new entity known as a Financial
Holding Company.
The law also:
- Broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies, and their financial subsidiaries;
- Provides an enhanced framework for protecting the privacy of consumer
information;
- Adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the Federal
Home Loan Bank system;
- Modifies the laws governing the implementation of the Community
Reinvestment Act; and
- Addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
8
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The Company and the Bank do not believe that the Financial Services
Modernization Act will have a material adverse effect on operations in the
near-term. However, to the extent that it permits banks, securities firms, and
insurance companies to affiliate, the financial services industry may experience
further consolidation. The Financial Services Modernization Act is intended to
grant to community banks certain powers as a matter of right that larger
institutions have accumulated on an ad hoc basis. Nevertheless, this act may
have the result of increasing the amount of competition that the Company and the
Bank face from larger institutions and other types of companies offering
financial products, many of which may have substantially more financial
resources than the Company and the Bank.
FINANCIAL HOLDING COMPANIES. Bank holding companies that elect to become a
financial holding company may affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature or are
incidental or complementary to activities that are financial in nature.
"Financial in nature" activities include:
- securities underwriting,
- dealing and market making,
- sponsoring mutual funds and investment companies,
- insurance underwriting and agency,
- merchant banking, and
- activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines from time to time to be so closely
related to banking or managing or controlling banks as to be a proper
incident thereto.
A bank holding company must meet three requirements before becoming a
financial holding company:
- all of the bank holding company's depository institution subsidiaries must
be well capitalized, well managed, and, except in limited circumstances,
in compliance with the Community Reinvestment Act; and
- the bank holding company must file with the Federal Reserve a declaration
of its election to become a financial holding company, including a
certification that its depository institution subsidiaries meet the prior
two criteria.
Failure to comply with the financial holding company requirements could lead
to divestiture of subsidiary banks or require all activities of such company to
conform to those permissible for a bank holding company. No Federal Reserve
Board approval is required for a financial holding company to acquire a company
(other than a bank holding company, bank or savings association) engaged in
activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Federal Reserve Board.
A bank holding company that is not also a financial holding company can only
engage in banking and such other activities determined by the Federal Reserve
Board to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto.
The Company elected to become a Financial Holding Company on July 17, 2000.
MERCHANT BANKING RESTRICTIONS. The Federal Reserve Board and the Treasury
have adopted rules governing merchant banking or venture capital investments
made by financial holding companies. Generally, the rules:
- define the types of venture ownership interests that may be acquired;
9
<PAGE>
- limit control of assets to a portfolio company (a company engaged in
activities not permissible under the Bank Holding Company Act);
- require the financial holding company to conduct activities unless it
controls a securities affiliate or an issuance affiliate with a registered
investment advisor;
- prohibit the financial holding company from routinely managing or
operating the portfolio company unless intervention is necessary to
address a material risk to the value or operation of the portfolio
company;
- establish a 10-year holding period before divestiture, except that an
investment in or held through a private equity fund may be held for the
duration of the fund;
- apply an aggregate limit on the carrying value of all merchant banking
investments without prior Federal Reserve Board approval to the lesser of
(i) 30 percent of Tier 1 capital or $6 billion or (ii) the lesser of
20 percent of Tier 1 capital or $4 billion excluding interests in private
equity funds;
- require prior approval to exceed the 10-year holding period limit; and
- apply cross-marketing restrictions to merchant banking investments and the
financial holding company's subsidiary depository institutions.
In January 2001, federal regulators proposed new capital requirements for
merchant banking activities. The proposal would employ a sliding scale based on
each banking organization's aggregate equity investments and Tier 1 capital. It
would require them to hold 8 cents for every $1 of equity investments up to 15%
of Tier 1 capital. The proposal would then require banks to hold 12 cents for
every $1 of investments for the next 10%. For investments exceeding 25%, banks
would have to hold 25 cents for every $1.
The proposed rule would exempt the first 15% of investments that banking
companies make through small-business investment corporation subsidiaries.
However, the proposed rule's sliding scale would apply for any such investments
over 15%.
The Company has not yet engaged in merchant banking activities and may never
do so.
THE BANK
GENERAL. The Bank, as a California chartered bank, is subject to primary
supervision, periodic examination, and regulation by the DFI and the FDIC. To a
lesser extent, the Bank is also subject to certain regulations promulgated by
the Federal Reserve Board. If, as a result of an examination of the Bank, the
FDIC should determine that the financial condition, capital resources, asset
quality, earnings prospects, management, liquidity, or other aspects of the
Bank's operations are unsatisfactory or that the Bank or its management is
violating or has violated any law or regulation, various remedies are available
to the FDIC. Such remedies include the power to enjoin "unsafe or unsound"
practices, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in capital, to restrict the growth of
the Bank, to assess civil monetary penalties, to remove officers and directors
and ultimately to terminate the Bank's deposit insurance, which for a California
chartered bank would result in a revocation of the Bank's charter. The DFI has
many of the same remedial powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain certain levels of
capital. See "--Capital Standards."
10
<PAGE>
DIVIDENDS AND OTHER TRANSFERS OF FUNDS. Dividends from the Bank constitute
the principal source of income to the Company. The Company is a legal entity
separate and distinct from the Bank. The Bank is subject to various statutory
and regulatory restrictions on its ability to pay dividends to the Company.
Under such restrictions, the amount available for payment of dividends to the
Company by the Bank totaled $54.4 million at December 31, 2000. In addition, the
DFI and the Federal Reserve Board have the authority to prohibit the Bank from
paying dividends, depending upon the Bank's financial condition, if such payment
is deemed to constitute an unsafe or unsound practice.
The FDIC and the Commissioner also have authority to prohibit the Bank from
engaging in activities that, in the FDIC's or the Commissioner's opinion,
constitute unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that the FDIC or the Commissioner could assert that the payment
of dividends or other payments might, under some circumstances, be an unsafe or
unsound practice. Further, the FDIC and the Federal Reserve Board have
established guidelines with respect to the maintenance of appropriate levels of
capital by banks or bank holding companies under their jurisdiction. Compliance
with the standards set forth in such guidelines and the restrictions that are or
may be imposed under the prompt corrective action provisions of federal law
could limit the amount of dividends which the Bank or the Company may pay. An
insured depository institution is prohibited from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions if after such transaction the institution would be
undercapitalized. The Commissioner may impose similar limitations on the conduct
of California-chartered banks. See "--Prompt Corrective Regulatory Action and
Other Enforcement Mechanisms" and "--Capital Standards" for a discussion of
these additional restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of, or investments in,
stock or other securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate are limited, individually, to 10.0% of
the Bank's capital and surplus (as defined by federal regulations), and such
secured loans and investments are limited, in the aggregate, to 20.0% of the
Bank's capital and surplus (as defined by federal regulations). California law
also imposes certain restrictions with respect to transactions involving the
Company and other controlling persons of the Bank. Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of federal law. See also "--Prompt Corrective
Action and Other Enforcement Mechanisms."
CAPITAL STANDARDS. The Federal Reserve Board and the FDIC have adopted
risk-based minimum capital guidelines intended to provide a measure of capital
that reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as commercial loans.
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risked-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 3%. In addition to these uniform
11
<PAGE>
risk-based capital guidelines and leverage ratios that apply across the
industry, the regulators have the discretion to set individual minimum capital
requirements for specific institutions at rates significantly above the minimum
guidelines and ratios. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Capital" for information regarding the
Company's regulatory capital ratios at December 31, 2000.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS. Federal banking
agencies possess broad powers to take corrective and other supervisory action to
resolve the problems of insured depository institutions, including but not
limited to those institutions that fall below one or more prescribed minimum
capital ratios. Each federal banking agency has promulgated regulations defining
the following five categories in which an insured depository institution will be
placed, based on its capital ratios: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. At December 31, 2000, the Bank exceeded the required ratios
for classification as "well capitalized."
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation, or any condition
imposed in writing by the agency or any written agreement with the agency.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have adopted
guidelines designed to assist the federal banking agencies in identifying and
addressing potential safety and soundness concerns before capital becomes
impaired. The guidelines set forth operational and managerial standards relating
to: (i) internal controls, information systems and internal audit systems,
(ii) loan documentation, (iii) credit underwriting, (iv) asset growth,
(v) earnings, and (vi) compensation, fees and benefits. In addition, the federal
banking agencies have also adopted safety and soundness guidelines with respect
to asset quality and earnings standards. These guidelines provide six standards
for establishing and maintaining a system to identify problem assets and prevent
those assets from deteriorating. Under these standards, an insured depository
institution should: (i) conduct periodic asset quality reviews to identify
problem assets, (ii) estimate the inherent losses in problem assets and
establish reserves that are sufficient to absorb estimated losses,
(iii) compare problem asset totals to capital, (iv) take appropriate corrective
action to resolve problem assets, (v) consider the size and potential risks of
material asset concentrations, and (vi) provide periodic asset quality reports
with adequate information for management and the board of directors to assess
the level of asset risk. These guidelines also set forth standards for
evaluating and monitoring earnings and for ensuring that earnings are sufficient
for the maintenance of adequate capital and reserves.
PREMIUMS FOR DEPOSIT INSURANCE. Although the Bank is a commercial bank, the
Bank's deposit accounts are insured by the SAIF, as administered by the FDIC, up
to the maximum amount permitted by law. Insurance of deposits may be terminated
by the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
12
<PAGE>
The FDIC charges an annual assessment for the insurance of deposits based on
the risk a particular institution poses to its deposit insurance fund. Under
this system as of December 31, 2000, SAIF members paid within a range of 0 to 27
basis points per $100 of insured deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. Pursuant to the Economic Growth and
Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"), the Bank is
currently paying, in addition to its normal deposit insurance premium as a
member of the SAIF, an amount equal to approximately 1.96 basis points toward
the retirement of the Financing Corporation bonds ("Fico Bonds") issued in the
1980's to assist in the recovery of the savings and loan industry. Effective
January 1, 2000, members of both the SAIF and the Bank Insurance Fund ("BIF")
pay the same rate to retire the Fico Bonds. Under the Paperwork Reduction Act,
the FDIC also is not permitted to establish SAIF assessment rates that are lower
than comparable BIF assessment rates. Proposals for the merging of the BIF and
the SAIF are from time to time discussed by Congress.
INTERSTATE BANKING AND BRANCHING. The BHC Act currently permits bank
holding companies in any state to acquire banks and bank holding companies
located in any other state, subject to certain conditions, including certain
nationwide- and state-imposed concentration limits. The Bank has the ability,
subject to certain restrictions, to acquire by acquisition or merger branches
outside its home state. The establishment of new interstate branches is also
possible in those states with laws that expressly permit it. Interstate branches
are subject to certain laws of the states in which they are located. Competition
may increase further as banks branch across state lines and enter new markets.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS. The Bank is
subject to certain fair lending requirements and reporting obligations involving
home mortgage lending operations and Community Reinvestment Act ("CRA")
activities. The CRA generally requires the federal banking agencies to evaluate
the record of a financial institution in meeting the credit needs of its local
communities, including low- and moderate-income neighborhoods. A bank may be
subject to substantial penalties and corrective measures for a violation of
certain fair lending laws. The federal banking agencies may take compliance with
such laws and CRA obligations into account when regulating and supervising other
activities.
A bank's compliance with its CRA obligations is based a performance-based
evaluation system which bases CRA ratings on an institution's lending service
and investment performance. When a bank holding company applies for approval to
acquire a bank or other bank holding company, the Federal Reserve Board will
review the assessment of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the application. Based on
an examination conducted in April 1997, the Bank was rated "Satisfactory" in
complying with its CRA obligations.
ALLOWANCE FOR LOAN LOSSES. Management of the Bank is committed to
maintaining the allowance for loan losses at a level that is considered to be
commensurate with estimated and known risks in the portfolio. Although the
adequacy of the allowance is reviewed quarterly, management performs an ongoing
assessment of the risks inherent in the portfolio. The Bank's total allowance
for loan losses is comprised of two components--allocated and unallocated.
The Bank utilizes several methodologies to test the overall adequacy of the
allowance. The two primary methodologies, the classification migration model and
the individual loan review analysis methodology, provide the basis for
determining the overall adequacy of the allowance. These methodologies are
augmented by ancillary analyses, which include historical loss analyses, peer
group comparisons, and analyses based on the federal regulatory interagency
policy for loan and lease losses.
The classification migration model calculates loss factors by utilizing net
losses incurred by the Bank during the preceding five years in conjunction with
current internal asset classifications. The model calculates loss factors for
every classification category (i.e. pass, special mention, substandard
13
<PAGE>
and doubtful) for each loan type, except consumer loans which are analyzed as a
homogeneous pool. These calculated loss factors are applied to outstanding loan
balances, unused commitments and off-balance sheet exposures, such as letters of
credit. While the amount of losses actually observed can vary significantly from
estimated amounts derived from the model, the loss migration model is designed
to be self-correcting by taking into account the Bank's recent loss experience.
In addition, minimum loss rates are also utilized by management as a
self-correcting mechanism to compensate for the lack of historical loss
information on certain loan types and to reduce differences between estimated
and actual observed losses. Specific allowances are established for loans where
management believes that the probability of loss is in excess of the amount
determined by the application of the migration model. These specific allowances
for individual loans are incorporated into the migration model to determine the
overall allowance requirement.
The individual loan review analysis method provides a more contemporaneous
assessment of the portfolio by incorporating individual asset evaluations
prepared by both the Bank's credit administration department and an independent
external credit review group. Specific monitoring policies and procedures are
applied in analyzing the existing loan portfolios which vary according to
relative risk profile. Residential single family and consumer loans are
relatively homogeneous and no single loan is individually significant in terms
of size or potential risk of loss. Therefore, residential and consumer
portfolios are analyzed as a pool of loans, and individual loans are criticized
or classified based solely on performance. In contrast, the monitoring process
for multifamily, commercial real estate, construction, and commercial business
loans include a periodic review of individual loans. Depending on loan size and
type, loans are reviewed at least annually and more frequently, if warranted by
circumstances. For instance, loans that are performing but have shown some signs
of weakness are subjected to more stringent reporting and oversight. Real estate
loans and commercial business loans which are subject to individual loan review,
and out-of-cycle individually reviewed loans, are monitored based on problem
loan indicators such as loan payment, delinquencies, loan covenant or reporting
violations, and property tax status. The estimated exposure and subsequent
charge-offs that result from these individual loan reviews provide the basis for
loss factors assigned to the various loan categories.
The results from the classification migration model and the individual loan
review analysis are then compared to various analyses, including historical
losses, peer group comparisons and the federal regulatory interagency policy for
loan and lease losses, to determine an overall allowance requirement amount.
Factors that are considered in determining the final allowance requirement
amount are scope and volume of completed individual loan reviews during the
period, trends and applicability of historical loss migration analysis compared
to current loan portfolio concentrations, and comparison of allowance levels to
actual historical losses.
The unallocated portion, or the amount in excess of the allowance
requirement, is composed of three elements. The first element consists of an
amount that is approximately 10% of the required allowance amount. This element
recognizes that a certain degree of estimation risk is associated with the
classification migration and individual loan review analysis methodologies. The
second element represents the amount that, in management's opinion, is necessary
to mitigate the foreign transaction risk associated with credit lines extended
to financial institutions in foreign countries. Loss factors, ranging from 0.50%
to 5.00% of the total credit facility, are assigned to absorb the loss exposure
on this type of credit offering. These loss factors are internally assigned
based on the sovereign risk ratings of various countries ranging from BBB to AA.
The final element, which consists of an amount that is approximately 5% of the
required allowance amount, takes into consideration the recent slowing of the
national economy. As a result of the Federal Open Market Committee's recent
comments about rising energy costs, eroding consumer confidence, substantial
shortfalls in sales and earnings, and stress in some sections of the financial
markets, management of the Company has deemed it prudent to carve out an
additional 5% of the required allowance amount to compensate for this current
economic risk.
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<PAGE>
EMPLOYEES. The Company does not have any employees other than executive
officers who are also executive officers of the Bank. Such employees are not
separately compensated for their employment with the Company. As of
December 31, 2000, the Bank had a total of 421 full-time employees and 54
part-time employees and the Agency had a total of 11 full-time employees and one
part-time employee. Employees are not represented by a union or collective
bargaining group. The managements of the Bank and Agency believe that their
employee relations are satisfactory.
ITEM 2. PROPERTIES
The Company owns no real property but utilizes the main office of the Bank.
The Company pays no rent or other consideration for use of this facility. The
Bank owns the land and buildings at 11 of its 29 branch offices and all of its
administrative locations, with the exception of the space occupied by the
Residential Loan Center. Those locations include:
<TABLE>
<CAPTION>
OFFICE NAME ADDRESS OWNED/LEASED
- ----------- ------- ------------
<S> <C> <C>
Alhambra Main............................. 1881 West Main St. Owned
Alhambra, CA 91801
Alhambra Valley........................... 403 W. Valley Blvd. Owned
Alhambra, CA 91803
Arcadia................................... 200 E. Duarte Road Owned
Arcadia, CA 91006
Artesia................................... 18512 Gridley Road Owned
Artesia, CA 90701
Artesia................................... 18355 Pioneer Blvd. Leased
Artesia, CA 90701
Carson.................................... 22020 S. Avalon Blvd. Leased
Carson, CA 90745
Commercial Loan Center.................... 475 Huntington Dr. Owned
San Marino, CA 91108
Cupertino................................. 10945 Wolfe Road Leased
Cupertino, CA 95014
Diamond Bar............................... 379 S. Diamond Bar Blvd. Leased
Diamond Bar, CA 91765
El Monte.................................. 9550 Flair Drive Leased
El Monte, CA 91731
Geary Street.............................. 4355 Geary Street #101 Owned
San Francisco, CA 94111
Glendale.................................. 520 N. Central Ave. Leased
Glendale, CA 91203
Headquarters.............................. 415 Huntington Dr. Owned
San Marino, CA 91108
Industry.................................. 18645 E. Gale Ave., Suite 100 Leased
City of Industry, CA 91748
Lincoln Heights........................... 2601 No. Broadway Owned
Los Angeles, CA 90031
Los Angeles--Chinatown.................... 942 North Broadway Leased
Los Angeles, CA 90012
Los Angeles Main.......................... 624 S. Grand Ave. Leased
Los Angeles, CA 90017
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
OFFICE NAME ADDRESS OWNED/LEASED
- ----------- ------- ------------
<S> <C> <C>
Market Street--Financial District......... 444 Market Street Leased
San Francisco, CA 94111
Milpitas.................................. 642 Barber Lane Leased
Milpitas, CA 95035
Montebello................................ 2825 Via Campo Leased
Montebello, CA 90640
Monterey Park............................. 720 W. Garvey Ave. Leased
Monterey Park, CA 91754
Residential Loan Center................... 1635 West Main St. Leased
Alhambra, CA 91801
Rolling Hills............................. 27421 Hawthorne Blvd. Owned
Rolling Hills Estates, CA 90274
Rosemead.................................. 8168 East Garvey Ave. Leased
Rosemead, CA 91770
Rowland Heights........................... 18458 Colima Road Leased
Rowland Heights, CA 91748
San Francisco--Chinatown.................. 1241 Stockton St. Leased
San Francisco, CA 94133
San Marino................................ 805 Huntington Dr. Owned
San Marino, CA 91108
Silverlake................................ 2496 Glendale Blvd. Owned
Los Angeles, CA 90039
South Pasadena............................ 1001 Fair Oaks Ave. Owned
S. Pasadena, CA 91030
Tarzana................................... 18321 Ventura Blvd. Leased
Tarzana, CA 91356
Torrance.................................. 23670 Hawthorne Blvd. Owned
Torrance, CA 90505
Westminster............................... 9032 Bolsa Avenue Leased
Westminster, CA 92683
</TABLE>
The Company added the following banking location as a result of the
acquisition of Prime Bank in January 2001:
<TABLE>
<CAPTION>
OFFICE NAME ADDRESS OWNED/LEASED
- ----------- ------- ------------
<S> <C> <C>
Century City.............................. 1900 Avenue of the Stars Leased
Los Angeles, CA 90067
</TABLE>
ITEM 3. 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.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, no matters were submitted to shareholders
for a vote.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of February 28, 2001, the executive
officers of the Company, their positions, and their ages. Each officer is
appointed by the Board of Directors of the Company or the Bank and serves at
their pleasure.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION WITH COMPANY OR BANK
- ---- ------ ---------------------------------
<S> <C> <C>
Dominic Ng....................... 42 Chairman of the Board, President,
and Chief Executive Officer of
the Company and the Bank
Julia Gouw....................... 41 Executive Vice President and
Chief Financial Officer of the
Company and the Bank
Sandra Wong...................... 47 Executive Vice President and
Chief Credit Officer of the Bank
Donald Chow...................... 49 Executive Vice President,
Director of Commercial Lending of
the Bank
Douglas Krause................... 44 Executive Vice President, General
Counsel, and Secretary of the
Company and the Bank
</TABLE>
- ------------------------
(1) As of February 28, 2001
BIOGRAPHICAL INFORMATION
The principal occupation during the past five years of each executive
officer is set forth below. All executive officers have held their present
positions for at least five years, unless otherwise stated.
DOMINIC NG has served as a director since 1991, as President and Chief
Executive Officer of the Bank since 1992, and as Chairman of the Board in 1998.
Mr. Ng has held the same positions with the Company since its formation. Prior
to joining the Bank, he was President and CEO of Seyen Investment Inc. While he
was a CPA with Deloitte & Touche LLP, he headed the Chinese Business Services
Group. Mr. Ng serves on the Board of ESS Technology, Inc. Mr. Ng also serves as
a member of the Board of Visitors of The Anderson School at UCLA, the Board of
Regents of Loyola Marymount University, and is the Campaign Chairman of United
Way of Greater Los Angeles. Mr. Ng has received numerous awards in the
professional and philanthropic communities during the past decade.
JULIA GOUW has served as Executive Vice President and Chief Financial
Officer of the Bank since 1994 and as a director of the Bank since 1997, and has
held these same positions with the Company since its formation. Ms. Gouw joined
the Bank in 1989 as Vice President and Controller. Prior to joining the Bank,
Ms. Gouw was a senior audit manager with KPMG LLP. Ms. Gouw is on the Board of
Visitors of UCLA School of Medicine. She is also a member of the Financial
Executives' Institute and the California Society of CPA's.
SANDRA WONG joined the Bank in November 1998 as Executive Vice President and
Chief Credit Officer. Prior to joining the Bank, Ms. Wong was Senior Vice
President--Senior Credit Officer, Business Banking Division with Bank of
America, where she managed portfolio performance and credit
17
<PAGE>
standards for a $3 billion loan portfolio of small business customers. Ms. Wong
was employed for over 20 years with Bank of America.
DONALD CHOW serves as Executive Vice President and Director of Commercial
Lending of the Bank. Mr. Chow joined the Bank in April 1993 as First Vice
President and Commercial Lending Manager. Mr. Chow was bestowed the title of
Senior Vice President in April 1994. Mr. Chow has over 25 years of experience in
commercial lending. Before joining the Bank as Senior Vice-President, Mr. Chow
was First Vice President and Senior Credit Officer for Mitsui Manufacturers
Bank. Mr. Chow was also employed for over 10 years with Security Pacific
National Bank where he held a number of positions, including Vice President and
unit leader of commercial real estate lending.
DOUGLAS KRAUSE serves as Executive Vice President, General Counsel, and
Secretary of the Bank and has held these same positions with the Company since
its formation. Prior to joining the Bank in 1996 as Senior Vice President,
Mr. Krause was Corporate Senior Vice President and General Counsel of Metrobank
since 1991. Prior to that, Mr. Krause was with the law firms of Dewey Ballantine
and Jones, Day, Reavis and Pogue specializing in financial services. Mr. Krause
is a member of the Consumer Financial Services Committee of the California Bar
Association.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
For information concerning the market for the Company's Common Stock and
related shareholder matters, see "Common Stock Price Range and Dividends"
contained in the 2000 Annual Report, which is incorporated herein by reference,
and "Item 1. BUSINESS--Regulation and Supervision--Restrictions on Transfer of
Funds to the Company by the Bank."
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's Consolidated Financial Statements and the accompanying notes presented
elsewhere herein.
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest and dividend income............... $ 186,080 $ 148,027 $ 126,708 $ 107,092 $ 96,876
Interest expense........................... 96,593 76,142 71,043 62,646 57,268
---------- ---------- ---------- ---------- ----------
Net interest income........................ 89,487 71,885 55,665 44,446 39,608
Provision for loan losses.................. 4,400 5,439 5,356 5,588 4,398
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses.............................. 85,087 66,446 50,309 38,858 35,210
Noninterest income......................... 14,968 14,693 10,027 8,493 5,571
SAIF recapitalization expense.............. -- -- -- -- 7,040
Noninterest expense........................ 49,960 39,509 32,626 29,010 28,049
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes... 50,095 41,630 27,710 18,341 5,692
Provision for income taxes................. 14,628 13,603 9,682 7,330 2,486
---------- ---------- ---------- ---------- ----------
Net income(1).............................. $ 35,467 $ 28,027 $ 18,028 $ 11,011 $ 3,206
========== ========== ========== ========== ==========
Basic earnings per share(1)................ $ 1.58 $ 1.23 $ 0.76 $ 0.46 $ 0.13
Diluted earnings per share(1).............. $ 1.53 $ 1.22 $ 0.76 $ 0.46 $ 0.13
Average number of shares outstanding,
basic.................................... 22,448 22,757 23,775 23,775 23,775
Average number of shares outstanding,
diluted.................................. 23,168 22,895 23,775 23,775 23,775
AT YEAR END:
Total assets............................... $2,485,971 $2,152,630 $2,058,160 $1,734,339 $1,621,547
Loans receivable, net...................... 1,789,988 1,486,641 1,100,579 934,850 862,640
Investment securities...................... 488,290 496,426 682,436 374,810 406,468
Deposits................................... 1,948,562 1,500,529 1,292,937 1,235,072 1,182,886
Federal Home Loan Bank advances............ 268,000 482,000 563,000 211,000 55,000
Stockholders' equity....................... 186,149 150,080 150,830 132,552 122,375
Shares outstanding......................... 22,661 22,423 23,775 23,775 23,775
Book value per share....................... $ 8.21 $ 6.69 $ 6.34 $ 5.58 $ 5.15
FINANCIAL RATIOS:
Return on assets(2)........................ 1.51% 1.35% 1.00% 0.70% 0.22%
Return on equity(2)........................ 21.57 18.96 12.83 8.91 2.71
Average stockholders' equity to average
assets................................... 7.02 7.12 7.80 7.87 8.16
Net interest margin........................ 4.03 3.62 3.22 2.92 2.82
Efficiency ratio(2)(3)..................... 40.91 40.56 46.52 52.47 75.61
ASSET QUALITY RATIOS:
Net chargeoffs to average loans............ 0.22% 0.17% 0.11% 0.37% 0.37%
Nonperforming assets to year end total
assets................................... 0.30 0.75 0.99 1.25 1.28
Allowance for loan losses to year end total
gross loans.............................. 1.31 1.38 1.47 1.29 1.15
</TABLE>
- --------------------------
(1) Excluding the non-recurring Savings Association Insurance Fund ("SAIF")
recapitalization assessment, net income and earnings per share (basic and
diluted) for the year ended December 31, 1996 were $7.4 million and $0.31,
respectively.
(2) Excluding the SAIF recapitalization assessment, the Company's return on
assets, return on equity and efficiency ratios were 0.51%, 6.26% and 59.89%,
respectively, during the year ended December 31, 1996.
(3) Represents noninterest expense, excluding the amortization of intangibles
and investments in affordable housing partnerships, divided by the aggregate
of net interest income before provision for loan losses and noninterest
income, excluding the amortization of intangibles.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides information about the results of
operations, financial condition, liquidity, and capital resources of East West
Bancorp, Inc. and its subsidiaries (the "Company"). This information is intended
to facilitate the understanding and assessment of significant changes and trends
related to the financial condition of the Company and the results of its
operations. This discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the accompanying notes presented
elsewhere herein.
In addition to historical information, this discussion includes certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 which involve inherent risks and uncertainties. A
number of important factors could cause the Company's actual results and
performance in future periods to differ materially from those discussed in such
forward-looking statements. These factors include, but are not limited to, the
effect of interest rate and currency exchange fluctuations; competition in the
financial services market for both deposits and loans; the Company's ability to
efficiently incorporate acquisitions into its operations; the ability of the
Company to increase its customer base; and regional and general economic
conditions. Given these uncertainties, the reader is cautioned not to place
undue reliance on such forward-looking statements. The Company expressly
disclaims any obligation to update or revise any forward-looking statements
contained herein to reflect any changes in the Company's expectations of results
or any change in events.
East West Bancorp, Inc. is predominantly a bank holding company. Its primary
subsidiary, East West Bank (the "Bank") is a state chartered bank with 30 branch
offices located in Los Angeles, Orange, San Francisco and Santa Clara counties.
The Bank's results of operations are primarily dependent on its net interest
income, which is the difference between the interest income earned on its
assets, primarily loans and investments, and the interest expense on its
liabilities, primarily deposits and borrowings. Net interest income may be
affected significantly by general economic and competitive conditions and
policies of regulatory agencies, particularly with respect to market interest
rates. The results of operations are also significantly influenced by the level
of noninterest expense, such as employee salaries and benefits; noninterest
income, such as fees on deposit-related services; and the Bank's provision for
loan losses. The Bank has three wholly-owned subsidiaries--E-W Services, Inc.,
which holds property used by the Bank in its operations, East-West
Investments, Inc., which primarily serves as a trustee for the Bank in
connection with real estate secured loans, and EWSC Holdings, LLC, which owns
100% of the voting shares of East West Securities Company, Inc., a
non-diversified, closed-end, management investment company registered under the
Investment Company Act of 1940, as amended.
ACQUISITION OF PRIME BANK
On January 16, 2001, the Company completed its acquisition of Prime Bank for
a combination of shares and cash valued at $16.6 million. Prime Bank, with
assets of $108 million and total stockholders' equity of $7.5 million as of
December 31, 2000, was a one-branch commercial bank located in the Century City
area of Los Angeles. Prime Bank focused on providing a wide range of services to
commercial, real estate and professional firms located in the West Los Angeles
market based upon a committed relationship approach to business banking. In
addition to commercial real estate loans, business term loans and lines of
credit, Prime Bank provided specialty depository services to entertainment,
title and escrow, and other sectors.
RESULTS OF OPERATIONS
The Company reported net income of $35.5 million for 2000, compared with
$28.0 million for 1999 and $18.0 million for 1998, representing an increase of
27% for 2000 and 55% for 1999. On a per share basis, net income was $1.53, $1.22
and $0.76 for 2000, 1999 and 1998, respectively. During 2000, the
20
<PAGE>
increase in net earnings is largely attributable to continued growth in the loan
portfolio, a higher net interest margin and a slight increase in
noninterest-related revenues partially offset by higher operating expenses.
Earnings in 1999 improved over 1998 primarily due to the growth in the loan and
investment securities portfolios and a reduction in the Company's cost of funds.
The Company's return on average total assets increased to 1.51% in 2000, from
1.35% in 1999 and 1.00% in 1998, while the return on average stockholders'
equity increased to 21.57% in 2000, compared with 18.96% in 1999 and 12.83% in
1998.
COMPONENTS OF NET INCOME
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Net interest income.................................. $ 89.5 $ 71.9 $ 55.7
Provision for loan losses............................ (4.4) (5.4) (5.4)
Noninterest income................................... 15.0 14.7 10.0
Noninterest expense.................................. (50.0) (39.5) (32.6)
Provision for income taxes........................... (14.6) (13.6) (9.7)
------ ------ ------
Net income......................................... $ 35.5 $ 28.0 $ 18.0
====== ====== ======
Return on average total assets....................... 1.51% 1.35% 1.00%
====== ====== ======
</TABLE>
NET INTEREST INCOME
The Bank's primary source of revenue is net interest income, which is the
difference between interest income on earning assets and interest expense on
interest-bearing liabilities. Net interest income in 2000 totaled
$89.5 million, a 24% increase over net interest income of $71.9 million in 1999.
Total interest and dividend income during 2000 increased 26% to
$186.1 million compared with $148.0 million during 1999. The increase in
interest and dividend income is derived primarily from a 12% growth in average
earning assets and higher yields on all categories of earning assets. Growth in
the Bank's average loan portfolio, partially offset by decreases in the other
categories of earning assets, triggered the increase in average earning assets.
The net growth in average earning assets was funded largely by time deposits,
money market accounts, and noninterest-bearing demand deposits.
Total interest expense during 2000 increased 27% to $96.6 million compared
with $76.1 million a year ago. The increase in interest expense is primarily
attributable to higher rates paid on interest-bearing liabilities and growth in
average money market accounts and time deposits, partially offset by a decrease
in average FHLB advances.
Net interest margin, defined as taxable equivalent net interest income
divided by average earning assets, increased 41 basis points to 4.03% in 2000,
compared with 3.62% in 1999. The increase in net interest margin is primarily
due to the increased volume of loans and noninterest-bearing demand deposits and
higher overall yields on earning assets, partially offset by higher rates paid
on interest bearing liabilities. Average loan growth of 28% during 2000 was most
notable in the multifamily residential, commercial real estate, construction and
commercial business segments of the portfolio. A marked increase in the average
prime rate of 121 basis points during 2000 is the main catalyst for higher
overall yields on earning assets during 2000.
The Company's overall cost of funds increased 65 basis points to 4.91%
during 2000 primarily due to the increase in rates paid on all categories of
interest-bearing liabilities, predominantly on time deposits and FHLB advances.
The increase in rates paid is due to a rise in overall interest rates. Growth in
the average volume of time deposits and money market accounts, partially offset
by a sizeable decrease in the volume of FHLB advances, further contributed to
the increase in the Company's cost of funds during 2000.
21
<PAGE>
Comparing 1999 to 1998, the Company's net interest margin increased 40 basis
points to 3.62%, from 3.22% in 1998. Despite a 33 basis point decline in the
average prime rate during 1999 resulting in a decrease in loan yields, the
overall yield on earning assets increased to 7.46% in 1999, from 7.33% in 1998.
This is primarily due to the increased volume of average loans and investment
securities during 1999 which more than compensated for the decline in loan
yields. Another factor that accounted for the increase in overall yields on
earning assets is an increase in the yield on investment securities due to
purchases of fixed rate securities during the latter half of 1998. Further
contributing to the increase in net interest margin is the growth in
noninterest-bearing demand deposits and a decrease in the overall cost of funds
due to reduced rates paid on all categories of interest-bearing liabilities.
The following table presents the net interest spread, net interest margin,
average balances, interest income and expense, and the average yields and rates
by asset and liability component for the years ended December 31, 2000, 1999 and
1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments......... $ 12,483 $ 960 7.69% $ 40,262 $ 2,381 5.91%
Taxable investment
securities(1)(2)............. 513,126 32,521 6.34 609,587 35,560 5.83
Loans receivable(1)(3)......... 1,670,981 150,985 9.04 1,306,306 108,547 8.31
FHLB stock..................... 21,794 1,614 7.41 29,203 1,539 5.27
---------- ------- ---------- -------
Total interest-earning
assets..................... 2,218,384 186,080 8.39 1,985,358 148,027 7.46
------- ----- ------- ----
Noninterest-earning assets:
Cash and due from banks........ 47,343 34,185
Allowance for loan losses...... (23,893) (19,191)
Other assets................... 101,109 76,192
---------- ----------
Total assets................. $2,342,943 $2,076,544
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Checking accounts.............. $ 108,228 1,398 1.29 $ 87,828 1,060 1.21
Money market accounts.......... 107,130 3,836 3.58 51,448 1,594 3.10
Savings deposits............... 218,455 4,213 1.93 216,590 3,954 1.83
Time deposits.................. 1,164,671 63,201 5.43 922,107 42,959 4.66
Short-term borrowings.......... 31,009 2,065 6.66 19,679 1,080 5.49
FHLB advances.................. 325,656 20,503 6.30 491,203 25,495 5.19
Junior subordinated debt
securities................... 12,686 1,377 10.85 -- -- --
---------- ------- ---------- -------
Total interest-bearing
liabilities................ 1,967,835 96,593 4.91 1,788,855 76,142 4.26
------- ----- ------- ----
Noninterest-bearing liabilities:
Demand deposits................ 185,731 116,129
Other liabilities.............. 24,953 23,712
Stockholders' equity........... 164,424 147,848
---------- ----------
Total liabilities and
stockholders' equity....... $2,342,943 $2,076,544
========== ==========
Interest rate spread............. 3.48% 3.20%
===== ====
Net interest income and net
interest margin................ $89,487 4.03% $71,885 3.62%
======= ===== ======= ====
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998
--------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST RATE
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Short-term investments......... $ 227,112 $13,302 5.86%
Taxable investment
securities(1)(2)............. 477,338 26,405 5.53
Loans receivable(1)(3)......... 1,004,477 85,806 8.54
FHLB stock..................... 20,140 1,195 5.93
---------- -------
Total interest-earning
assets..................... 1,729,067 126,708 7.33
------- ----
Noninterest-earning assets:
Cash and due from banks........ 25,231
Allowance for loan losses...... (14,253)
Other assets................... 60,537
----------
Total assets................. $1,800,582
==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Checking accounts.............. $ 78,066 1,072 1.37
Money market accounts.......... 28,051 1,010 3.60
Savings deposits............... 213,675 5,048 2.36
Time deposits.................. 845,749 42,369 5.01
Short-term borrowings.......... 119,638 6,767 5.66
FHLB advances.................. 282,091 14,777 5.24
Junior subordinated debt
securities................... -- -- --
---------- -------
Total interest-bearing
liabilities................ 1,567,270 71,043 4.53
------- ----
Noninterest-bearing liabilities:
Demand deposits................ 78,802
Other liabilities.............. 14,009
Stockholders' equity........... 140,501
----------
Total liabilities and
stockholders' equity....... $1,800,582
==========
Interest rate spread............. 2.80%
====
Net interest income and net
interest margin................ $55,665 3.22%
======= ====
</TABLE>
- ------------------------------
(1) Includes net premium amortization on investment securities and loans
receivable totaling $704 thousand, $288 thousand, and $1.2 million for the
years ended December 31, 2000, 1999, and 1998, respectively. Also includes
amortization of deferred loan fees totaling $2.0 million, $2.3 million, and
$1.9 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
(2) Average balances exclude unrealized gains or losses on available for sale
securities.
(3) Average balances include nonperforming loans.
22
<PAGE>
ANALYSIS OF CHANGES IN NET INTEREST MARGIN
Changes in the Bank's net interest income are a function of changes in rates
and volumes of both interest-earning assets and interest-bearing liabilities.
The following table sets forth information regarding changes in interest income
and interest expense for the years indicated. The total change for each category
of interest-earning asset and interest-bearing liability is segmented into the
change attributable to variations in volume (changes in volume multiplied by old
rate) and the change attributable to variations in interest rates (changes in
rates multiplied by old volume). Nonaccrual loans are included in average loans
used to compute this table.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2000 VS. 1999 1999 VS. 1998
------------------------------- -------------------------------
CHANGES DUE TO CHANGES DUE TO
TOTAL -------------------- TOTAL --------------------
CHANGE VOLUME(1) RATE(1) CHANGE VOLUME(1) RATES(1)
-------- --------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short-term investments..................... $(1,421) $ (2,517) $ 1,096 $(10,921) $(11,051) $ 130
Taxable investment securities.............. (3,038) (6,700) 3,662 9,155 7,649 1,506
Loans receivable, net...................... 42,437 32,320 10,117 22,741 25,011 (2,270)
FHLB stock................................. 75 (126) 201 344 458 (114)
------- -------- -------- -------- -------- -------
Total interest income.................. 38,053 22,977 15,076 21,319 22,067 (748)
======= ======== ======== ======== ======== =======
INTEREST-BEARING LIABILITIES:
Checking accounts.......................... 338 259 79 (12) (380) 368
Money market accounts...................... 2,242 1,960 282 584 701 (117)
Savings deposits........................... 259 34 225 (1,094) 70 (1,164)
Time deposits.............................. 20,241 12,446 7,795 590 2,633 (2,043)
Short-term borrowings...................... 985 719 266 (5,687) (5,492) (195)
FHLB advances.............................. (4,991) (13,569) 8,578 10,718 10,852 (134)
Junior subordinated debt securities........ 1,377 1,377 -- -- -- --
------- -------- -------- -------- -------- -------
Total interest expense................. 20,451 3,226 17,225 5,099 8,384 (3,285)
------- -------- -------- -------- -------- -------
CHANGE IN NET INTEREST INCOME.............. $17,602 $ 19,751 $ (2,149) $ 16,220 $ 13,683 $ 2,537
======= ======== ======== ======== ======== =======
</TABLE>
- ------------------------------
(1) Changes in interest income/expense not arising from volume or rate variances
are allocated proportionately to rate and volume.
PROVISION FOR LOAN LOSSES
The provision for loan losses amounted to $4.4 million for 2000 and
$5.4 million for both 1999 and 1998. Provisions for loan losses are charged to
income to bring the allowance for credit losses to a level deemed appropriate by
management based on the factors discussed under the "Allowance for Loan Losses"
section of this report.
23
<PAGE>
NONINTEREST INCOME
COMPONENTS OF NONINTEREST INCOME
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Loan fees........................................... $ 1.85 $ 2.28 $ 2.39
Branch fees......................................... 4.84 3.39 2.58
Letters of credit fees and commissions.............. 4.35 4.11 2.79
Net gain on sales of securities available for
sale.............................................. 0.12 0.69 1.32
Net gain on trading securities...................... (0.02) 1.90 --
Net gain on sale of affordable housing
investments....................................... 1.28 0.40 --
Net gain on sale of branch.......................... -- 0.68 --
Amortization of negative intangibles................ 0.42 0.41 0.41
Other............................................... 2.13 0.83 0.54
------ ------ ------
Total........................................... $14.97 $14.69 $10.03
====== ====== ======
</TABLE>
Noninterest income includes revenues earned from sources other than interest
income. These sources include: ancillary fees on loans, service charges and fees
on deposit accounts, fees and commissions generated from trade finance
activities and the issuance of letters of credit, net gains on trading
securities, and net gains on sales of investment securities available for sale
and affordable housing investments.
Noninterest income increased 2% to $15.0 million during 2000, primarily due
to higher branch service-related fees, gains on sales of affordable housing
investments, and other income, partially offset by lower gains on trading
securities and sales of investment securities available for sale. Included in
noninterest income for 1999 is a one-time gain on sale of the Company's Irvine
branch amounting to $676 thousand. There was no such gain recorded in 2000.
Ancillary fees on loans include fees and service charges related to
appraisal services, loan documentation, processing and underwriting, and
secondary market-related activities. Ancillary loan fees decreased 19% to
$1.8 million in 2000, from $2.3 million in 1999, primarily due to the Company's
reduced secondary marketing activities. The reduction in secondary marketing
activities was prompted, in part, by the introduction of new loan portfolio
products and, to a larger extent, by the current interest rate environment
during 2000 which favored the origination of adjustable rate mortgages over
fixed rate mortgages.
Branch fees, which represent revenues derived from branch operations,
amounted to $4.8 million in 2000, a 43% increase from the $3.4 million earned
during 1999. The increase in branch fees is primarily due to higher
service-related fee income on transaction accounts resulting from the
acquisition of American International Bank in mid-January 2000. Further,
sustained growth in revenues from analysis charges on commercial deposit
accounts also contributed to the increase in branch fee income.
Letters of credit fees and commissions increased 6% to $4.4 million entirely
due to the growth in trade finance revenues. Fees related to the issuance and
maintenance of standby letters of credit remained at $2.3 million for both 2000
and 1999.
Other noninterest income, which include insurance commissions and
insurance-related service fees, interest earned on officer life insurance
policies, branch rental income, and income from operating leases, increased 157%
to $2.1 million. The increase in other noninterest income is primarily due to
$395 thousand in insurance commissions and other insurance-related service fee
income in connection with the acquisition of Risk Services, Inc. in
August 2000. There were no such commissions and service fee income during 1999.
In addition, the Company also recorded $305 thousand in revenues from
24
<PAGE>
equipment leased to third parties in connection with $1.3 million in operating
leases entered into by the Company during 2000. The Company had no operating
leases in 1999. The Company also recorded $142 thousand in sublease rental
income from its Torrance branch location as part of the Company's acquisition of
American International Bank in mid-January 2000. Further contributing to other
noninterest income is a $263 thousand increase in interest income on officer
life insurance policies relative to such income earned in 1999. At December 31,
2000, the aggregate net cash surrender value of the Company's officer life
insurance policies amounted to $17.0 million compared to $11.0 million at
December 31, 1999.
Other contributions to noninterest income include $123 thousand and
$685 thousand in gains on sales of available for sale securities for 2000 and
1999, respectively. Net losses on trading securities totaled $16 thousand during
2000 compared to $1.9 million in trading securities gains during 1999.
Comparing 1999 to 1998, noninterest income increased 47% to $14.7 million.
Included in noninterest income for 1999 are the one-time $676 thousand gain on
sale of the Irvine branch, $1.9 million in gains on trading securities and
$402 thousand in gains on sale of an investment in affordable housing
partnerships. There were no such gains recorded in 1998. Further contributing to
the increase in noninterest income during 1999 is a 48% growth in fee-based
service income related to letters of credit fees and commissions and 31%
increase in branch service-related fee income. Slightly offsetting these
increases was a 4% decrease in ancillary loan fees primarily due to a decline in
secondary market activities.
NONINTEREST EXPENSE
COMPONENTS OF NONINTEREST EXPENSE
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Compensation and other employee benefits............ $20.29 $18.48 $17.28
Net occupancy....................................... 7.56 5.65 4.97
Data processing..................................... 1.78 1.40 1.25
Amortization of positive intangibles................ 3.32 1.57 1.24
Amortization of affordable housing investments...... 4.08 2.99 1.02
Deposit insurance premiums and regulatory
assessments....................................... 0.46 0.86 0.83
Other real estate owned operations, net............. (0.17) (0.34) (0.38)
Other............................................... 12.64 8.90 6.42
------ ------ ------
Total........................................... $49.96 $39.51 $32.63
====== ====== ======
Efficiency ratio.................................... 41% 41% 47%
====== ====== ======
</TABLE>
Noninterest expense, which is comprised primarily of compensation and
employee benefits, occupancy and other operating expenses increased 26% to
$50.0 million during 2000. Compensation and employee benefits increased 10% to
$20.3 million primarily due to the acquisition of American International Bank
and also to the addition of several new loan officers with specialized lending
experience.
Occupancy expenses increased 34% to $7.6 million during 2000 primarily
reflecting the operations of the eight branches of American International Bank,
an overhead factor which was not present during 1999. Additionally, the impact
of normal rent adjustments in existing leases, increased expenses related to the
enhancement and maintenance of the Company's computer network system, and
increased depreciation from equipment under operating leases further contributed
to the rise in occupancy expenses.
25
<PAGE>
Data processing expenses increased 27% to $1.8 million during 2000, compared
with $1.4 million in 1999, primarily due to the acquisition of American
International Bank.
The amortization of positive intangibles, which include premiums on deposits
acquired and excess of purchase price over fair value of net assets acquired
("goodwill"), increased 111% during 2000. The increase in the amortization of
positive intangibles is due to the acquisitions of First Central Bank, American
International Bank and East West Insurance Agency. Combined goodwill of
$14.2 million and deposit premiums of $8.6 million were recorded by the Company
for these transactions which are being amortized straight line over 15 years and
7 years, respectively.
The amortization of investments in affordable housing partnerships increased
36% to $4.1 million during 2000, compared with $3.0 million in 1999. The
increase in amortization reflects the impact of $5.5 million in additional
investment purchases made since year-end 1999, offset by two sale transactions
totaling $9.3 million in February 2000 and September 2000. Total investments in
affordable housing partnerships amounted to $19.7 million as of December 31,
2000, compared with $26.5 million as of December 31, 1999.
Deposit insurance premiums and regulatory assessments decreased 47% to
$458 thousand primarily due to a significant decrease in the Savings Association
Insurance Fund ("SAIF") Financing Corporation ("FICO") assessment rates
effective in 2000. The average annual FICO assessment rate during 2000 was 2.07
basis points per $100 of assessable deposits compared to 5.93 basis points
during 1999.
Net income related to OREO operations, which includes net rental income
collected from OREO properties and net gains or losses on subsequent sales,
totaled $174 thousand during 2000, compared with net income of $340 thousand in
1999, primarily due to a 60% decrease in net gains on sales of OREO properties
during 2000 in comparison to 1999.
Other operating expenses include advertising and public relations, telephone
and postage, stationery and supplies, bank and item processing charges,
insurance, legal and other professional fees. Other operating expenses increased
42% to $12.6 million in 2000, compared with $8.9 million for 1999. The increase
in other operating expenses can be attributed to the Company's continued
expansion, which includes the recent acquisitions of First Central Bank,
American International Bank and East West Insurance Agency, as well as internal
growth.
Comparing 1999 to 1998, noninterest expense increased $6.9 million, or 21%,
to $39.5 million. The increase is comprised primarily of the following: (1) an
increase in compensation and employee benefits of $1.2 million primarily due to
internal growth and the acquisition of First Central Bank at the end of
May 1999; (2) an increase in occupancy expenses of $675 thousand reflecting four
months of operations for the branches and administrative offices of First
Central Bank prior to their integration with existing East West Bank locations,
and increased expenses related to the outsourcing of computer hardware
maintenance, partially offset by the sale of the Irvine branch to People's Bank
of California in May 1999; (3) an increase in amortization of positive
intangibles of $331 thousand due to the acquisition of First Central Bank;
(4) an increase in amortization of affordable housing partnerships of
$2.0 million reflecting the impact of $5.1 million in additional investments
purchased during 1999; and (5) an increase in other operating expenses of
$2.5 million attributed to the Company's overall growth--through organic
expansion and through the acquisition of First Central Bank, as well as various
expenses directly related to the Company's change in status from a privately
held institution to a public company, including legal fees, investor relations
expenses, Delaware corporation franchise taxes, SEC and NASDAQ fees, and
registrar and transfer agent fees.
Despite the Company's growth trend over the past several years, ongoing
efforts to closely manage operational expenses continue to favorably impact the
Company's efficiency ratio, which represents noninterest expense (excluding the
amortization of intangibles and investments in affordable housing
26
<PAGE>
partnerships) divided by the aggregate of net interest income before provision
for loan losses and noninterest income (excluding the amortization of
intangibles). The Company's efficiency ratio remained at 41% in 2000 and 1999,
compared to 47% in 1998.
PROVISION FOR INCOME TAXES
The provision for income taxes increased 8% to $14.6 million during 2000,
compared with $13.6 million in 1999. This is primarily due to higher pretax
income partially offset by tax credits from qualified affordable housing
investments and state tax benefits achieved through the formation and funding of
East West Securities Company, Inc., a regulated investment company, in
July 2000. Tax credits from qualified affordable housing investments utilized
during 2000 totaled $3.9 million, compared to $3.2 million for 1999. The 2000
provision reflects an effective tax rate of 29.2%, compared with 32.7% for 1999.
Comparing 1999 to 1998, the provision for income taxes increased 41% to
$13.6 million, compared to $9.7 million for 1998. The 1998 provision reflects an
effective tax rate of 34.9% and tax credits from affordable housing investments
of $1.7 million.
BALANCE SHEET ANALYSIS
The Company's total assets increased $333.3 million, or 15%, to
$2.49 billion, as of December 31, 2000, primarily due to loan growth. The
increase in total assets was funded by increases of $448.0 million in deposits,
$37.4 million in short-term borrowings and $20.8 million in junior subordinated
debt securities, partially offset by decreases in FHLB advances of
$214.0 million.
INVESTMENT SECURITIES HELD FOR TRADING
Investment securities held for trading are investment grade securities which
are generally held by the Bank for a period of seven days or less. Net losses
from trading securities totaled $16 thousand during 2000 compared with net gains
of $1.9 million during 1999.
INVESTMENT SECURITIES AVAILABLE FOR SALE
Income from investing activities provides a significant portion of the
Bank's total income. Management generally maintains an investment portfolio with
an adequate mix of fixed rate and adjustable rate securities with relatively
short maturities to minimize overall interest rate risk. The Bank has a
substantial investment in residential mortgage-backed securities, consisting of
pass-through certificates issued by GNMA, FHLMC, FNMA and private issuers. As of
December 31, 2000, the carrying value of mortgage-backed securities totaled
$384.7 million, or 15% of total assets. At December 31, 2000, the Bank held
$695 thousand, $125.2 million, $220.7 million, and $38.1 million of
mortgage-backed securities issued by GNMA, FHLMC, FNMA and private issuers,
respectively. Mortgage-backed securities with a total carrying value of
$221.2 million, or 51% of the total portfolio, had adjustable interest rates at
December 31, 2000. At December 31, 2000, $139.9 million of mortgage-backed
securities were pledged as collateral for public funds.
27
<PAGE>
The following table sets forth the carrying values of investment securities
available for sale at December 31, 2000 and 1999:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
U.S. Treasury securities............................. $ 8,429 $ 975
U.S. Government agency securities.................... 67,382 68,871
Mortgage-backed securities........................... 384,678 426,378
Obligations of states and political subdivisions..... 201 202
Corporate securities................................. 27,600 --
-------- --------
Total investment securities available for sale..... $488,290 $496,426
======== ========
</TABLE>
Total investment securities available for sale decreased 2% to
$488.3 million as of December 31, 2000. Total repayments and proceeds from sales
of available for sale securities amounted to $80.9 million and $61.1 million,
respectively, during 2000. Proceeds from repayments and sales were applied
toward additional investment securities purchases, repayments of FHLB advances,
and funding a portion of loan originations and loan purchases made during 2000.
The Bank recorded net gains totaling $123 thousand and $685 thousand on sales of
available for sale securities during 2000 and 1999, respectively.
The following table sets forth certain information regarding the carrying
values, weighted average yields, and contractual maturity distribution,
excluding periodic principal payments, of the Bank's investment securities
available for sale portfolio at December 31, 2000:
<TABLE>
<CAPTION>
AFTER FIVE
AFTER ONE YEAR YEARS BUT
WITHIN ONE BUT WITHIN FIVE WITHIN TEN
YEAR YEARS YEARS
------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury..................... $301 5.88% $ 8,128 6.42% $ -- --%
U.S. Government agency............ -- -- 10,930 5.77 -- --
Mortgage-backed securities........ -- -- -- -- 60,676 6.19
Obligations of states and
political
subdivisions.................... 201 4.71 -- -- -- --
Corporate securities.............. -- -- -- -- -- --
---- ------- -------
Total............................. $502 5.41 $19,058 6.05 $60,676 6.19
==== ======= =======
<CAPTION>
AFTER TEN YEARS TOTAL
------------------- -------------------
AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury..................... $ -- --% $ 8,429 6.40%
U.S. Government agency............ 56,452 6.55 67,382 6.42
Mortgage-backed securities........ 324,002 6.77 384,678 6.68
Obligations of states and
political
subdivisions.................... -- -- 201 4.71
Corporate securities.............. 27,600 8.13 27,600 8.13
-------- --------
Total............................. $408,054 6.83 $488,290 6.72
======== ========
</TABLE>
LOANS
The Bank offers a broad range of products designed to meet the credit needs
of its borrowers. The Bank's lending activities consist of residential mortgage
loans, multifamily residential real estate loans, commercial real estate loans,
construction loans, commercial business and trade finance loans, and consumer
loans. Net loans receivable increased 20% to $1.79 billion at December 31, 2000.
Excluding the $105.2 million of net loans acquired from American International
Bank, organic loan growth during 2000 was 13%. The increase in loans was funded
primarily through deposit growth and through repayments and sales of investment
securities available for sale.
The Bank experienced moderate loan demand throughout 2000. The growth in
loans, excluding loans acquired from American International Bank, is comprised
of increases in single family loans of $56.4 million or 20%, multifamily loans
of $12.3 million or 4%, commercial real estate loans of $42.3 million or 8%,
commercial business loans, including trade finance products, of $82.3 million or
33%, and consumer loans, including home equity lines of credit, of
$16.3 million or 68%. Partially
28
<PAGE>
offsetting the growth in these loan categories was a decrease in construction
loans of $11.5 million or 10%, primarily as a result of the Bank's increased
loan participation activity during 2000.
The following table sets forth the composition of the loan portfolio at the
end of each of the past five years:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------
2000 1999 1998 1997
--------------------- --------------------- --------------------- --------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
---------- -------- ---------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential, one to four
units....................... $ 334,775 18.5% $ 278,161 18.4% $ 270,444 24.2% $356,478
Residential, multifamily...... 323,469 17.8 311,193 20.6 167,545 15.0 144,147
Commercial and industrial real
estate...................... 640,713 35.3 518,074 34.4 358,850 32.0 269,028
Construction.................. 118,241 6.5 122,363 8.1 78,922 7.0 27,020
---------- ----- ---------- ----- ---------- ----- --------
Total real estate loans..... 1,417,198 78.1 1,229,791 81.5 875,761 78.2 796,673
---------- ----- ---------- ----- ---------- ----- --------
Other loans:
Business, commercial.......... 350,282 19.3 248,865 16.5 223,318 20.0 138,408
Automobile.................... 6,409 0.4 5,284 0.4 4,972 0.4 5,259
Other consumer................ 40,547 2.2 23,834 1.6 15,156 1.4 9,137
---------- ----- ---------- ----- ---------- ----- --------
Total other loans........... 397,238 21.9 277,983 18.5 243,446 21.8 152,804
---------- ----- ---------- ----- ---------- ----- --------
Total gross loans....... 1,814,436 100.0% 1,507,774 100.0% 1,119,207 100.0% 949,477
===== ===== =====
Unearned fees, premiums and
discounts, net................ (600) (289) (2,122) (2,354)
Allowance for loan losses....... (23,848) (20,844) (16,506) (12,273)
---------- ---------- ---------- --------
Loans receivable, net....... $1,789,988 $1,486,641 $1,100,579 $934,850
========== ========== ========== ========
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
-------- -------------------
PERCENT AMOUNT PERCENT
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
Residential, one to four
units....................... 37.5% $425,270 48.7%
Residential, multifamily...... 15.2 141,649 16.2
Commercial and industrial real
estate...................... 28.3 214,599 24.5
Construction.................. 2.8 11,607 1.3
----- -------- -----
Total real estate loans..... 83.8 793,125 90.7
----- -------- -----
Other loans:
Business, commercial.......... 14.6 71,672 8.2
Automobile.................... 0.6 3,877 0.4
Other consumer................ 1.0 5,953 0.7
----- -------- -----
Total other loans........... 16.2 81,502 9.3
----- -------- -----
Total gross loans....... 100.0% 874,627 100.0%
===== =====
Unearned fees, premiums and
discounts, net................ (1,903)
Allowance for loan losses....... (10,084)
--------
Loans receivable, net....... $862,640
========
</TABLE>
RESIDENTIAL MORTGAGE LOANS. The Company offers first mortgage loans secured
by one-to-four unit residential properties located in the Bank's primary lending
area. At December 31, 2000, $334.8 million or 19% of the loan portfolio was
secured by one-to-four family residential real estate mortgages, compared to
$278.2 million or 18% at December 31, 1999. During 2000, the Bank's secondary
marketing activities were significantly curtailed due, in part, to the Bank's
introduction of new portfolio products, and also as a response to the rising
interest rate environment which favored the origination of adjustable rate loans
over fixed rate loans. Prior to 2000, as part of the Bank's lending strategy,
substantially all new fixed-rate single family residential loans were sold into
the secondary market. In a declining interest rate environment, the Bank
anticipates an escalation in its secondary marketing activities.
MULTIFAMILY AND COMMERCIAL REAL ESTATE LOANS. The Bank continues to place
emphasis in the origination of multifamily and commercial real estate loans.
Although real estate lending activities are collateralized by real property,
these transactions are subject to similar credit evaluation, underwriting and
monitoring standards as those applied to commercial business loans. Multifamily
and commercial real estate loans accounted for $323.5 million or 18% and
$640.7 million or 35%, respectively, of the Bank's loan portfolio at
December 31, 2000. At year-end 1999, multifamily and commercial real estate
loans amounted to $311.2 million or 21% and $518.1 million or 34%, respectively.
CONSTRUCTION LOANS. The Bank offers loans to finance the construction of
income-producing or owner-occupied buildings. The Bank limits its exposure in
construction loans to no more than 25% of total loans. At December 31, 2000,
construction loans accounted for $118.2 million or 7% of the Bank's loan
portfolio. This compares with $122.4 million or 8% of the loan portfolio at
December 31, 1999.
29
<PAGE>
COMMERCIAL BUSINESS LOANS. The Bank finances small and middle-market
businesses in a wide spectrum of industries throughout California. The Bank
offers commercial loans for working capital, accounts receivable and inventory
lines. At December 31, 2000, commercial business loans accounted for
$236.1 million or 13% of the Bank's loan portfolio compared to $145.0 million or
10% at December 31, 1999.
TRADE FINANCE. The Bank offers a variety of international finance and trade
services and products, including letters of credit, revolving lines of credit,
import loans, bankers' acceptances, working capital lines, domestic purchase
financing, and pre-export financing. Total fee income generated from trade
finance activities has grown significantly from $26 thousand in 1994 to
$2.1 million in 2000. A substantial portion of this business involves
California-based customers engaged in import activities.
At December 31, 2000, loans to finance international trade totaled
$114.2 million or 6% of the Bank's loan portfolio. Of this amount, almost all
loans were made to borrowers on the import side of international trade. At
December 31, 1999, such loans amounted to $103.9 million or 7% of the Bank's
loan portfolio. These financings are generally made through letters of credit
ranging from $100 thousand to $1 million. All trade finance transactions are
U.S. dollar denominated.
AFFORDABLE HOUSING. The Bank is engaged in a variety of lending and credit
enhancement programs to finance the development of affordable housing projects,
which generally are eligible for federal low income housing tax credits. As of
December 31, 2000, the Bank had outstanding $162.6 million of letters of credit,
which were issued to enhance the ratings of revenue bonds used to finance
affordable housing projects. This compares to $131.7 million as of year-end
1999. Credit facilities for individual projects generally range in size from
$1 million to $10 million.
The following table presents the maturity schedule of the Bank's loan
portfolio at December 31, 2000. All loans are shown maturing based upon
contractual maturities, and include scheduled repayments but not potential
prepayments. Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due within one year. Loan
balances have not been reduced for undisbursed loan proceeds, unearned
discounts, and the allowance for loan losses. Nonaccrual loans of $3.7 million
are included in the within one year category.
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN MORE THAN
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential, one to four units..................... $ 10,021 $ 35,063 $289,691 $ 334,775
Residential, multifamily........................... 12,337 79,522 231,610 323,469
Commercial and industrial real estate.............. 85,838 386,867 168,008 640,713
Construction....................................... 81,963 35,980 298 118,241
Business, commercial............................... 223,717 79,477 47,088 350,282
Other consumer..................................... 11,189 6,194 29,573 46,956
-------- -------- -------- ----------
Total............................................ $425,065 $623,103 $766,268 $1,814,436
======== ======== ======== ==========
</TABLE>
As of December 31, 2000, excluding nonaccrual loans, outstanding loans
scheduled to be repriced within one year, after one but within five years, and
in more than five years, are as follows:
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN MORE THAN
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total fixed rate................................... $122,073 $224,839 $ 36,143 $ 383,055
Total variable rate................................ 1,332,781 98,504 96 1,431,381
-------- -------- -------- ----------
Total............................................ $1,454,854 $323,343 $ 36,239 $1,814,436
======== ======== ======== ==========
</TABLE>
30
<PAGE>
NONPERFORMING ASSETS
Loans are continually monitored by management and the Board of Directors.
The Bank's policy is to place a loan on nonaccrual status if either
(i) principal or interest payments are past due in excess of 90 days; or
(ii) the full collection of principal or interest becomes uncertain, regardless
of the length of past due status. When a loan reaches nonaccrual status, any
interest accrued on the loan is reversed and charged against current income. In
general, subsequent payments received are applied to the outstanding principal
balance of the loan. Nonaccrual loans that demonstrate a satisfactory payment
trend for several months are returned to full accrual status subject to
management's assessment of the full collectibility of the account. Nonaccrual
loans totaled $3.7 million at December 31, 2000, compared to $10.9 million at
year-end 1999. Nonaccrual loans as a percentage of total loans outstanding were
0.20% and 0.73% at December 31, 2000 and 1999, respectively. During 2000, loans
totaling $2.8 million were placed on nonaccrual status. These additions to
nonaccrual loans were by offset by $4.3 million in payoffs, $4.3 million in
gross chargeoffs, $650 thousand in loans brought current, and two loans totaling
$767 thousand that were transferred to other real estate owned. Loans placed on
nonaccrual loans during 2000 were comprised of $420 thousand in residential
single family loans, $1.5 million in commercial real estate loans,
$824 thousand in commercial business loans, and $54 thousand in consumer home
equity loans.
Restructured loans or loans that have had their original terms modified
totaled $3.0 million at December 31, 2000, compared with $4.7 million at
year-end 1999. The net decrease in restructured loans is due to the transfer of
one commercial real estate loan totaling $1.2 million to nonaccrual status and
$600 thousand in payments received during 2000, partially offset by the addition
of two commercial loans totaling $114 thousand.
Other real estate owned ("OREO") includes properties acquired through
foreclosure or through full or partial satisfaction of loans. The difference
between the fair value of the real estate or other collateral, less the
estimated costs of disposal, and the loan balance at the time of transfer to
OREO is reflected in the allowance for loan losses as a charge-off. Any
subsequent declines in fair value of the OREO after the date of transfer are
recorded through a provision for writedowns on OREO. Routine holding costs, net
of any income and gains and losses on disposal, are reported as noninterest
expense. Other real estate owned totaled $801 thousand and $577 thousand at
December 31, 2000 and 1999, respectively. During 2000, additions to OREO
totaling $1.1 million were comprised of a parcel of commercial land acquired
from American International Bank and four single family residential properties.
The Bank sold five properties with a combined book value of $849 thousand during
2000. Net gains amounting to $213 thousand were recognized on these OREO sales.
The Bank is actively marketing the remaining properties.
31
<PAGE>
The following table sets forth information regarding nonaccrual loans,
restructured loans and other real estate owned as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans................................ $3,652 $10,933 $ 9,762 $ 8,490 $11,613
Loans past due 90 days or more but not on
nonaccrual.................................... -- -- 129 2,403 206
------ ------- ------- ------- -------
Total nonperforming loans................... 3,652 10,933 9,891 10,893 11,819
------ ------- ------- ------- -------
Restructured loans.............................. 2,972 4,700 5,936 7,487 5,485
Other real estate owned, net.................... 801 577 4,600 3,217 3,491
------ ------- ------- ------- -------
Total nonperforming assets.................. $7,425 $16,210 $20,427 $21,597 $20,795
====== ======= ======= ======= =======
Total nonperforming assets to total assets...... 0.30% 0.75% 0.99% 1.25% 1.28%
Allowance for loan losses to nonperforming
loans......................................... 653.01 190.65 166.88 112.67 85.32
Nonperforming loans to total gross loans........ 0.20 0.73 0.88 1.15 1.35
</TABLE>
At December 31, 2000 and 1999, the Bank had classified $12.4 million and
$20.9 million, respectively, of its loans as impaired, with specific reserves of
$1.3 million for both periods. The Bank's average recorded investment in
impaired loans at December 31, 2000 and 1999 was $12.9 million and
$21.4 million, respectively. During 2000 and 1999, gross interest income that
would have been recorded on impaired loans, had they performed in accordance
with their original terms, totaled $1.5 million and $2.0 million, respectively.
Of this amount, actual interest recognized on impaired loans, on a cash basis,
was $1.1 million and $1.6 million, respectively.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by the provision for loan losses
which is charged against current period operating results, and is decreased by
the amount of net chargeoffs during the period. While management believes that
the allowance for loan losses is adequate at December 31, 2000, future additions
to the allowance will be subject to continuing evaluation of estimated and
known, as well as inherent, risks in the loan portfolio. At December 31, 2000,
the allowance for loan losses amounted to $23.8 million, or 1.31% of total
loans, compared with $20.8 million, or 1.38% of total loans, at December 31,
1999. The $3.0 million increase in the allowance for loan losses at
December 31, 2000 is primarily due to $2.3 million in allowance for loan losses
acquired from American International Bank. The remaining $700 thousand increase
in the allowance during 2000 is comprised of $4.4 million in additional loss
provisions less $3.7 million in net chargeoffs recorded during the period.
32
<PAGE>
The following table summarizes activity in the allowance for loan losses for
the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance balance, beginning of year........ $ 20,844 $ 16,506 $ 12,273 $ 10,084 $ 8,735
Allowance from acquisition.................. 2,256 1,150 -- -- --
Provision for loan losses................... 4,400 5,439 5,356 5,588 4,398
Actual charge-offs:
1-4 family residential real estate........ 46 26 196 469 530
Multifamily real estate................... -- 44 588 1,595 1,919
Commercial and industrial real estate..... 3 -- 60 1,079 985
Business, commercial...................... 4,511 2,786 1,689 986 92
Automobile................................ 32 19 130 5 28
Other..................................... -- 2 3 2 17
---------- ---------- ---------- -------- --------
Total charge-offs....................... 4,592 2,877 2,666 4,136 3,571
---------- ---------- ---------- -------- --------
Recoveries:
1-4 family residential real estate........ 227 17 172 12 49
Multifamily real estate................... 9 207 1 275 174
Commercial and industrial real estate..... 7 29 845 385 284
Business, commercial...................... 660 358 480 41 3
Automobile................................ 34 14 45 19 9
Other..................................... 3 1 -- 5 3
---------- ---------- ---------- -------- --------
Total recoveries........................ 940 626 1,543 737 522
---------- ---------- ---------- -------- --------
Net charge-offs....................... 3,652 2,251 1,123 3,399 3,049
---------- ---------- ---------- -------- --------
Allowance balance, end of year.............. $ 23,848 $ 20,844 $ 16,506 $ 12,273 $ 10,084
========== ========== ========== ======== ========
Average loans outstanding................... $1,670,981 $1,306,306 $1,004,477 $915,202 $819,868
========== ========== ========== ======== ========
Total loans outstanding, end of year........ $1,814,436 $1,507,774 $1,119,207 $949,477 $874,627
========== ========== ========== ======== ========
Net charge-offs to average loans............ 0.22% 0.17% 0.11% 0.37% 0.37%
Allowance for loan losses to total gross
loans at end of year...................... 1.31 1.38 1.47 1.29 1.15
</TABLE>
Net chargeoffs totaled $3.7 million, or 0.22% of average loans outstanding,
during 2000. This compares to net chargeoffs of $2.3 million, or 0.17% of
average loans outstanding, during 1999. The Bank continues to record loan loss
provisions to compensate for both the continued growth of the Bank's loan
portfolio, which grew 20% in 2000 and 35% in 1999, and the changing composition
of the overall loan portfolio, reflecting a shift towards commercial real estate
and commercial business loans. At December 31, 2000, the combined volume of
commercial real estate and commercial business loans represented approximately
55% of the total loan portfolio, compared to 51% at December 31, 1999.
33
<PAGE>
The following table reflects management's allocation of the allowance for
loan losses by loan category and the ratio of each loan category to total loans
as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------
2000 1999 1998 1997
------------------- ------------------- ------------------- --------
AMOUNT % AMOUNT % AMOUNT % AMOUNT
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1-4 family residential real
estate......................... $ 142 18.5% $ 345 18.4% $ 500 24.2% $ 894
Multifamily real estate.......... 1,768 17.8 2,735 20.6 2,435 15.0 3,022
Commercial and industrial real
estate......................... 4,472 35.3 3,110 34.4 1,373 32.0 1,059
Construction..................... 2,370 6.5 2,597 8.1 2,339 7.0 404
Business, commercial............. 10,461 19.3 9,244 16.5 7,679 20.0 5,249
Automobile....................... 23 0.4 30 0.4 45 0.4 33
Consumer and other............... 21 2.2 9 1.6 22 1.4 32
Other risks...................... 4,591 2,774 2,113 1,580
------- ----- ------- ----- ------- ----- -------
Total........................ $23,848 100.0% $20,844 100.0% $16,506 100.0% $12,273
======= ===== ======= ===== ======= ===== =======
<CAPTION>
AT DECEMBER 31,
------------------------------
1997 1996
-------- -------------------
% AMOUNT %
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1-4 family residential real
estate......................... 37.5% $ 996 48.7%
Multifamily real estate.......... 15.2 3,445 16.2
Commercial and industrial real
estate......................... 28.3 2,044 24.5
Construction..................... 2.8 66 1.3
Business, commercial............. 14.6 1,357 8.2
Automobile....................... 0.6 27 0.4
Consumer and other............... 1.0 23 0.7
Other risks...................... 2,126
----- ------- -----
Total........................ 100.0% $10,084 100.0%
===== ======= =====
</TABLE>
Despite a 20% increase in the volume of single family loans at December 31,
2000 from year-end 1999 levels, allocated reserves on single family loans
decreased $203 thousand, or 59%, to $142 thousand. This is directly correlated
to a 50% decrease in the loss factor for single family loans that are not
classified (i.e. rated "pass"). The loss factor for pass single family loans as
of December 31, 2000 was 3 basis points compared to 6 points at December 31,
1999. At December 31, 2000, approximately 99% of the loans within this category
were rated "pass."
Allocated reserves on multifamily loans decreased $967 thousand, or 35%, to
$1.8 million as of December 31, 2000 despite a 4% increase in the volume of
loans within this category since December 31, 1999. This is primarily due to a
22% and 62% decline in the loss factors for multifamily loans that are rated
"pass" and "special mention," respectively. The loss factors for pass and
special mention multifamily loans as of December 31, 2000 were 25 basis points
and 5.0%, respectively, compared to 32 basis points and 13.2%, respectively, at
December 31, 1999. At December 31, 2000, over 98% of the loans within this
category were rated "pass" while approximately 1% were rated "special mention."
Allocated reserves on commercial real estate loans increased $1.4 million,
or 44%, to $4.5 million as of December 31, 2000 primarily due to a 24% increase
in the volume of loans in this loan category since year-end 1999. Further
contributing to the increase in allocated reserves on commercial real estate
loans is an increase in the volume of special mention loans to $8.9 million at
December 31, 2000, from $3.2 million at December 31, 1999.
Allocated reserves on construction loans decreased $227 thousand, or 9%, to
$2.4 million at December 31, 2000 primarily due to the absence of classified
loans (i.e. rated "substandard" or "doubtful") at December 31, 2000, compared to
$4.0 million at December 31, 1999. Substandard construction loans are subject to
a minimum loss rate of 20.0%. This was partially offset by a $7.2 million
increase in special mention loans at December 31, 2000, relative to year-end
1999 levels, which are subject to a minimum loss rate of 5.0%.
Allocated reserves on commercial business loans increased $1.2 million, or
13%, to $10.5 million at December 31, 2000 for two reasons: (1) a 41% increase
in loan volume since year-end 1999 and (2) a 60% increase in special mention
loans to $41.3 million at December 31, 2000, partially offset by a 44% decrease
in substandard loans to $9.2 million, relative to year-end 1999 levels.
The allowance for loan losses of $23.8 million at December 31, 2000 exceeded
the Bank's allocated allowance by $4.6 million, or 19% of the total allowance.
This compares to an unallocated allowance of $2.8 million, or 13%, as of
December 31, 1999. The $4.6 million unallocated allowance at
34
<PAGE>
December 31, 2000 is essentially comprised of three elements. First, the Bank
has set aside $1.9 million, or approximately 10% of the allocated allowance
amount of $19.3 million at December 31, 2000, to compensate for the estimation
risk associated with the classification migration and individual loan review
analysis methodologies. The second element, which accounts for approximately
$1.4 million of the unallocated allowance, has been established for the foreign
transaction risk associated with credit lines totaling $86.5 million extended to
financial institutions in foreign countries. Loss factors, ranging from 0.5% to
5.0% of the total credit facility, have been assigned to absorb the loss
exposure on this type of credit offering. These loss factors are internally
determined based on the sovereign risk ratings of the various countries which
generally range from BBB to AA. The third and final element, which accounts for
approximately $965 thousand of the unallocated allowance, represents a 5%
economic risk factor to compensate for the recent slowing of the national
economy, as evidenced by tightening local job markets, rising energy costs,
eroding consumer confidence, and substantial shortfalls in sales and earnings.
Management of the Bank has deemed it prudent to set aside a portion of the
unallocated allowance to compensate for this current economic risk.
DEPOSITS
The Bank offers a wide variety of retail deposit account products to both
consumer and commercial deposit customers. Time deposits, consisting primarily
of retail fixed-rate certificates of deposit, comprised 67% of the deposit
portfolio at December 31, 2000 and 1999. Non-time deposits, which include
noninterest bearing demand accounts, interest-bearing checking accounts, savings
deposits and money market accounts, accounted for the remaining 33% of the
deposit portfolio at December 31, 2000 and 1999.
Deposits increased $448.0 million, or 30%, to $1.95 billion at December 31,
2000. The increase in deposits reflects $170.8 million in deposits acquired from
American International Bank in January 2000. Excluding this transaction,
internal deposit growth amounted to $277.3 million, or 19%, over December 31,
1999. This internal deposit growth was primarily due to a 22% increase in time
deposits of $216.1 million, resulting from the growth in brokered deposits and
various promotions associated with the Chinese New Year holiday. Although the
Company occasionally promotes certain time deposit products, its efforts are
largely concentrated in increasing the volume of low-cost transaction accounts
which generate higher fee income and are a less costly source of funds in
comparison to time deposits. Excluding deposits acquired from American
International Bank, noninterest-bearing demand deposits increased
$30.5 million, or 24%, checking accounts increased $9.0 million, or 10%, and
money market accounts increased $27.9 million, or 40%, primarily due to new and
existing commercial account relationships.
Included in time deposits at December 31, 2000 are $154.5 million of
brokered deposits, compared with $82.7 million as of December 31, 1999. The
increase of $71.8 million essentially reflects the continued replacement of
Federal Home Loan Bank advances with brokered deposits as an alternate source of
funding. The transition to brokered deposits as an alternate source of funding
has enabled the Bank to release some investment securities which were previously
pledged as collateral against FHLB advances.
Public deposits increased 10% to $122.3 million as of December 31, 2000,
compared with $119.8 million at year-end 1999. The balance of public funds at
December 31, 2000 is comprised almost entirely of deposits from the State of
California. Notwithstanding the increases in brokered and public deposits during
2000, the Bank's principal market strategy continues to be based on its
reputation as a community bank that provides quality products and personal
customer service.
Time deposits greater than $100 thousand totaled $741.1 million, accounting
for 38% of the deposit portfolio at December 31, 2000. These accounts,
consisting primarily of deposits by consumers and public funds, had a weighted
average interest rate of 6.16% at December 31, 2000. The following
35
<PAGE>
table provides the remaining maturities at December 31, 2000 of time deposits
greater than $100 thousand (in thousands):
<TABLE>
<S> <C>
3 months or less............................................ $284,437
Over 3 months through 6 months.............................. 267,741
Over 6 months through 12 months............................. 136,796
Over 12 months.............................................. 52,170
--------
Total................................................... $741,144
========
</TABLE>
BORROWINGS
The Bank regularly uses short-term borrowings and FHLB advances to manage
its liquidity position. Short-term borrowings, which consist of federal funds
purchased and securities sold under agreements to repurchase increased to
$38.0 million at December 31, 2000, compared to $600 thousand at December 31,
1999. At December 31, 2000 and 1999, the balance of short-term borrowings
consisted entirely of federal funds purchased. The increase in federal funds
purchased during 2000 was primarily due to partial repayments of FHLB advances.
The following table provides information on securities sold under agreements
to repurchase for the past three years:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average balance outstanding during the year.... $ -- $ 9,159 $118,588
Maximum amount outstanding at any month-end
during the year.............................. $ -- $33,000 $191,635
Weighted average interest rate during the
year......................................... --% 5.05% 5.62%
Total short-term borrowings at end of year..... $ -- $ -- $ 33,000
Weighted average interest rate at end of
year......................................... --% --% 5.75%
</TABLE>
FHLB advances decreased 44% to $268.0 million at December 31, 2000, compared
to $482.0 million at December 31, 1999. The decrease in FHLB advances is
directly correlated to the growth in brokered deposits and short-term borrowings
as alternate sources of funding. Cash acquired from American International Bank
and runoffs on investment securities available for sale also contributed to the
decrease in FHLB advances during 2000. At December 31, 2000 and 1999, FHLB
advances had a weighted average interest rate of 6.49% and 5.87%, respectively.
Only $24.0 million, or 9% of outstanding FHLB advances at December 31, 2000, had
remaining maturities greater than one year.
36
<PAGE>
CAPITAL RESOURCES
The primary source of capital for the Company is the retention of net after
tax earnings. At December 31, 2000, stockholders' equity totaled
$186.1 million, an increase of 24% from $150.1 million as of December 31, 1999.
The increase is due primarily to: (1) net income of $35.5 million during 2000;
(2) net issuance of common stock totaling $4.4 million from the exercise of
stock options and stock warrants; (3) net issuance of common stock totaling
$496 thousand in connection with the Company's Employee Stock Purchase Program;
(4) stock compensation costs amounting to $421 thousand related to the Company's
Restricted Stock Award Program; (5) net issuance of common stock totaling
$869 thousand in connection with the acquisition of Risk Services, Inc.; and
(6) a decrease of $5.5 million in unrealized losses on available-for-sale
securities. These transactions were offset by (1) repurchases of $8.4 million or
361,878 shares of common stock in connection with the Company's stock repurchase
programs; and to a much lesser degree, from forfeitures of restricted stock
awards and (2) payment of quarterly 2000 cash dividends totaling $2.7 million.
Management is committed to maintaining capital at a level sufficient to
assure shareholders, customers and regulators that the Company and its bank
subsidiary are financially sound. The Company and its bank subsidiary are
subject to risk-based capital regulations adopted by the federal banking
regulators in January 1990. These guidelines are used to evaluate capital
adequacy and are based on an institution's asset risk profile and off-balance
sheet exposures. According to the regulations, institutions whose Tier 1 and
total capital ratios meet or exceed 6% and 10%, respectively, are deemed to be
"well-capitalized." At December 31, 2000, the Company's Tier 1 and total capital
ratios were 9.6% and 10.9%, respectively, compared to 9.3% and 10.6%,
respectively, at December 31, 1999.
The following table compares the Company's and the Bank's actual capital
ratios at December 31, 2000, to those required by regulatory agencies for
capital adequacy and well-capitalized classification purposes:
<TABLE>
<CAPTION>
MINIMUM WELL
EAST WEST EAST WEST REGULATORY CAPITALIZED
BANCORP BANK REQUIREMENTS REQUIREMENTS
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Total Capital (to Risk-Weighted
Assets)................................ 10.9% 10.7% 8.0% 10.0%
Tier 1 Capital (to Risk-Weighted
Assets)................................ 9.6 9.5 4.0 6.0
Tier 1 Capital (to Average Assets)....... 7.7 7.9 4.0 5.0
</TABLE>
During the first quarter of 2000, the Company filed a $50 million universal
shelf registration statement with the Securities and Exchange Commission.
Pursuant to this filing, the Company may offer new common stock, trust
preferred, preferred stock and/or other debentures to augment its capital
resources. The timing and amount of offerings will depend on market and general
business conditions. The Company intends to utilize the net proceeds from the
sale of securities for general business purposes, which include supporting the
growth of its commercial banking activities and possible future acquisitions.
Additionally, the Company has issued a total of $20.8 million of junior
subordinated deferrable interest debentures in two separate private placement
transactions. These securities qualify as Tier 1 capital for regulatory
reporting purposes.
On July 13, 2000, East West Securities Company, Inc. was incorporated under
the general laws of the State of Maryland as a closed-end, non-diversified
management investment company registered under the Investment Company Act of
1940, as amended. The formation of this entity provides the Bank with the
flexibility to raise additional capital in a tax efficient manner for future
business opportunities, if desired.
In August 2000, the Securities and Exchange Commission completed an
examination of East West Securities Company, Inc. The Company received the
Commission's findings in a letter dated
37
<PAGE>
September 11, 2000. The Commission staff determined that the Fund should not be
eligible to be registered as an investment company due to the failure to meet
certain statutory requirements of the Investment Company Act of 1940 and
requested that the Fund voluntarily de-register. In its response to the
Commission, dated October 11, 2000, the Company stated that it disagrees with
certain factual statements and conclusions of law contained in the Commission's
findings and sets forth the basis for its belief based on advice of counsel,
which was included, that the Fund was formed in compliance with regulatory
requirements. In response, the Commission has issued another letter to the
Company, dated December 12, 2000, which is essentially similar to the
Commission's initial letter. The Company has declined the Commission's requests
to voluntarily de-register the Fund. The Company expects to receive further
correspondence from the Commission.
If the Company were to accommodate the Commission's requests to voluntarily
de-register the Fund, the Company would forego the state tax benefits that are
currently being realized through the Fund. Further, the Company would forfeit
its flexibility to raise additional capital in a tax efficient manner for future
business opportunities though the Fund. Management believes, based on the advice
of counsel, that the impact of de-registration would be prospective only and not
retroactive. The Fund would continue to be a registered investment company under
the Investment Company Act of 1940, from the date of registration to the
effective date of de-registration.
ASSET LIABILITY AND MARKET RISK MANAGEMENT
LIQUIDITY
Liquidity management involves the Bank's ability to meet cash flow
requirements arising from fluctuations in deposit levels and demands of daily
operations, which include funding of securities purchases, providing for
customers' credit needs and ongoing repayment of borrowings. The Bank's
liquidity is actively managed on a daily basis and reviewed periodically by the
Asset/Liability Committee and the Board of Directors. This process is intended
to ensure the maintenance of sufficient funds to meet the needs of the Bank,
including adequate cash flow for off-balance sheet instruments.
The Bank's primary sources of liquidity are derived from financing
activities which include the acceptance of customer and broker deposits, federal
funds facilities, repurchase agreement facilities and advances from the Federal
Home Loan Bank of San Francisco. These funding sources are augmented by payments
of principal and interest on loans, the routine liquidation of securities from
the available-for-sale portfolio and securitizations of eligible loans. Primary
uses of funds include withdrawal of and interest payments on deposits,
originations and purchases of loans, purchases of investment securities, and
payment of operating expenses.
During the years ended December 31, 2000 and 1999, the Company experienced
net cash inflows of $22.5 million and $41.8 million, respectively, from
operating activities. The increase in net cash inflows from operating activities
for both periods was due primarily to the growth in interest income on loans and
investment securities. Net proceeds from sales of loans held for sale also
contributed to operating cash inflows during 1999. Net cash outflows from
investing activities totaled $116.7 million and $233.9 million, respectively,
during 2000 and 1999, primarily due to the growth in the Bank's loan portfolio.
Financing activities provided net cash inflows of $113.0 million and
$74.4 million, respectively, during 2000 and 1999, primarily due to deposit
growth.
As a means of augmenting its liquidity, the Bank has established federal
funds lines with four correspondent banks and several master repurchase
agreements with major brokerage companies. At December 31, 2000, the Bank's
available borrowing capacity includes approximately $43.3 million in repurchase
arrangements, $47.0 million in federal funds line facilities, and
$246.0 million in unused FHLB advances. Management believes its liquidity
sources to be stable and adequate. At December 31, 2000, management was not
aware of any information that was reasonably likely to have a material effect on
the Bank's liquidity position.
38
<PAGE>
The liquidity of the parent company, East West Bancorp, Inc. is primarily
dependent on the payment of cash dividends by its subsidiary, East West Bank,
subject to limitations imposed by the Financial Code of the State of California.
During 2000, total dividends paid by the Bank to East West Bancorp, Inc. totaled
$9.6 million, compared with $17.5 million during 1999. As of December 31, 2000,
approximately $54.4 million of undivided profits of the Bank was available for
dividends to the Company.
INTEREST RATE SENSITIVITY MANAGEMENT
The Bank's success is largely dependent upon its ability to manage interest
rate risk, which is the impact of adverse fluctuations in interest rates on the
Bank's net interest income and net portfolio value. Although in the normal
course of business the Bank manages other risks, such as credit and liquidity
risk, management considers interest rate risk to be its most significant market
risk and could potentially have the largest material effect on the Bank's
financial condition and results of operations.
The fundamental objective of the asset liability management process is to
manage the Bank's exposure to interest rate fluctuations while maintaining
adequate levels of liquidity and capital. The Bank's strategy is formulated by
the Asset/Liability Committee, which coordinates with the Board of Directors to
monitor the Bank's overall asset and liability composition. The Committee meets
regularly to evaluate, among other things, the sensitivity of the Bank's assets
and liabilities to interest rate changes, the book and market values of assets
and liabilities, unrealized gains and losses on its available-for-sale portfolio
(including those attributable to hedging transactions), purchase and
securitization activity, and maturities of investments and borrowings.
The Bank's overall goal 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, the Bank simulates the
effect of instantaneous interest rate changes on net interest income and net
portfolio value on a monthly basis. The table below shows the estimated impact
of changes in interest rates on net interest income and market value of equity
as of December 31, 2000 and 1999, assuming a parallel shift of 100 to 200 basis
points in both directions.
<TABLE>
<CAPTION>
NET INTEREST INCOME NET PORTFOLIO VALUE
VOLATILITY(1) VOLATILITY(2)
DECEMBER 31, DECEMBER 31,
CHANGE IN INTEREST RATES ------------------------- ----------------------
(BASIS POINTS) 2000 1999 2000 1999
------------------------ ----------- -------- -------- --------
<S> <C> <C> <C> <C>
+200........................................... 7.4% 2.6% (10.7)% (13.0)%
+100........................................... 4.6% 2.1% (5.0)% (5.3)%
- -100........................................... (4.6)% (2.7)% 2.1% 8.5%
- -200........................................... (9.2)% (5.9)% (0.8)% 8.5%
</TABLE>
- ------------------------------
(1) The percentage change represents net interest income for twelve months in a
stable interest rate environment versus net interest income in the various
rate scenarios.
(2) The percentage change represents the net portfolio value of the Bank in a
stable rate environment versus net portfolio value in the various rate
scenarios.
39
<PAGE>
All interest-earning assets, interest-bearing liabilities and related
derivative contracts are included in the interest rate sensitivity analysis at
December 31, 2000 and 1999. At December 31, 2000 and 1999, the Bank's estimated
changes in net interest income and net portfolio value were within the ranges
established by the Board of Directors.
The primary analytical tool used by the Bank to gauge interest rate
sensitivity is a simulation model used by many major banks and bank regulators,
and is based on the actual maturity and repricing characteristics of
interest-rate sensitive assets and liabilities. The model attempts to predict
changes in the yields earned on assets and the rates paid on liabilities in
relation to changes in market interest rate 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 Bank product
line and takes into account the Bank's increased ability to control rates
offered on deposit products in comparison to its ability to control rates on
adjustable-rate loans tied to published indices.
The following tables provide the outstanding principal balances and the
weighted average interest rates of the Bank's non-derivative financial
instruments as of December 31, 2000 and 1999. The Bank does not consider these
financial instruments to be materially sensitive to interest rate fluctuations.
Historically, the balances of these financial instruments have remained fairly
constant over various economic conditions. The information presented below is
based on the repricing date for variable rate instruments and the expected
maturity date for fixed rate instruments.
<TABLE>
<CAPTION>
EXPECTED MATURITY OR REPRICING DATE BY YEAR
------------------------------------------------------------------------------
AFTER FAIR VALUE AT
2001 2002 2003 2004 2005 2005 TOTAL DEC. 31, 2000
---------- -------- -------- -------- -------- -------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 2000:
ASSETS:
Short-term investments........ $ 4,500 $ -- $ -- $ -- $ -- $ -- $ 4,500 $ 4,500
Weighted average rate....... 6.50% --% --% --% --% --% 6.50%
Investment securities
available-for-sale (fixed
rate)....................... $ 45,424 $ 47,364 $ 33,865 $25,084 $21,014 $101,436 $ 274,187 $ 267,050
Weighted average rate....... 6.12% 6.17% 6.11% 6.15% 6.15% 6.19% 6.16%
Investment securities
available-for-sale (variable
rate)....................... $ 226,109 $ -- $ -- $ -- $ -- $ -- $ 226,109 $ 221,240
Weighted average rate....... 7.09% --% --% --% --% --% 7.09%
Total gross loans............. $1,456,774 $139,424 $106,963 $48,110 $26,958 $ 36,206 $1,814,436 $1,812,765
Weighted average rate....... 9.17% 8.18% 8.51% 8.13% 8.31% 8.10% 8.98%
LIABILITIES:
Checking accounts............. $ 111,228 $ -- $ -- $ -- $ -- $ -- $ 111,228 $ 111,228
Weighted average rate....... 1.39% --% --% --% --% --% 1.39%
Money market accounts......... $ 122,079 $ -- $ -- $ -- $ -- $ -- $ 122,079 $ 122,079
Weighted average rate....... 4.19% --% --% --% --% --% 4.19%
Savings deposits.............. $ 212,411 $ -- $ -- $ -- $ -- $ -- $ 212,411 $ 212,411
Weighted average rate....... 2.05% --% --% --% --% --% 2.05%
Time deposits................. $1,207,805 $ 53,043 $ 6,505 $ 1,737 $ 2,389 $ 29,910 $1,301,388 $1,299,899
Weighted average rate....... 5.84% 5.99% 5.94% 5.27% 6.09% 7.00% 5.87%
Short-term borrowings......... $ 38,000 $ -- $ -- $ -- $ -- $ -- $ 38,000 $ 38,013
Weighted average rate....... 6.60% --% --% --% --% --% 6.60%
FHLB advances................. $ 244,000 $ 10,000 $ 14,000 $ -- $ -- $ -- $ 268,000 $ 268,074
Weighted average rate....... 6.53% 6.33% 5.94% --% --% --% 6.49%
Junior subordinated debt
securities.................. $ -- $ -- $ -- $ -- $ -- $ 20,750 $ 20,750 $ 22,797
Weighted average rate....... --% --% --% --% --% 10.91% 10.91%
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXPECTED MATURITY OR REPRICING DATE BY YEAR
------------------------------------------------------------------------------
AFTER FAIR VALUE AT
2000 2001 2002 2003 2004 2004 TOTAL DEC. 31, 1999
---------- -------- -------- -------- -------- -------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1999:
ASSETS:
Short-term investments........... $ 10,000 $ -- $ -- $ -- $ -- $ -- $ 10,000 $ 10,000
Weighted average rate.......... 4.00% --% --% --% --% --% 4.00%
Investment securities available-
for-sale (fixed rate).......... $ 49,783 $41,527 $35,429 $30,313 $24,322 $110,906 $ 292,280 $ 275,783
Weighted average rate.......... 6.13% 6.14% 6.14% 6.14% 6.15% 6.16% 6.15%
Investment securities available-
for-sale (variable rate)....... $ 225,040 $ -- $ -- $ -- $ -- $ -- $ 225,040 $ 220,643
Weighted average rate.......... 6.43% --% --% --% --% --% 6.43%
Total gross loans................ $1,299,273 $78,110 $44,223 $32,686 $27,286 $ 26,196 $1,507,774 $1,511,241
Weighted average rate.......... 8.42% 8.10% 8.02% 8.16% 8.21% 7.65% 8.37%
LIABILITIES:
Checking accounts................ $ 89,545 $ -- $ -- $ -- $ -- $ -- $ 89,545 $ 89,545
Weighted average rate.......... 1.22% --% --% --% --% --% 1.22%
Money market accounts............ $ 69,434 $ -- $ -- $ -- $ -- $ -- $ 69,434 $ 69,434
Weighted average rate.......... 3.38% --% --% --% --% --% 3.38%
Savings deposits................. $ 211,818 $ -- $ -- $ -- $ -- $ -- $ 211,818 $ 211,818
Weighted average rate.......... 1.85% --% --% --% --% --% 1.85%
Time deposits.................... $ 930,167 $36,894 $ 1,250 $ 667 $ 2,202 $ 30,000 $1,001,180 $1,002,176
Weighted average rate.......... 4.70% 5.03% 5.06% 5.09% 5.50% 7.00% 4.79%
Short-term borrowings............ $ 600 $ -- $ -- $ -- $ -- $ -- $ 600 $ 600
Weighted average rate.......... 5.75% --% --% --% --% --% 5.75%
FHLB advances.................... $ 468,000 $ -- $ -- $14,000 $ -- $ -- $ 482,000 $ 482,507
Weighted average rate.......... 5.86% --% --% 5.94% --% --% 5.87%
</TABLE>
Expected maturities of assets are contractual maturities adjusted for
projected payment based on contractual amortization and unscheduled prepayments
of principal as well as repricing frequency. Expected maturities for deposits
are based on contractual maturities adjusted for projected rollover rates and
changes in pricing for deposits with no stated maturity dates. The Bank utilizes
assumptions supported by documented analyses for the expected maturities of its
loans and repricing of its deposits. It also relies on third party data
providers for prepayment projections for amortizing securities. The actual
maturities of these instruments could vary significantly if future prepayments
and repricing differ from the Bank's expectations based on historical
experience.
The fair values of short-term investments approximate their book values due
to their short maturities. The fair values of available for sale securities are
based on bid quotations from third party data providers. The fair values of
loans are estimated for portfolios with similar financial characteristics and
takes into consideration discounted cash flows based on expected maturities or
repricing dates utilizing estimated market discount rates as projected by third
party data providers.
Transaction deposit accounts, which include checking, money market and
savings accounts, are presumed to have equal book and fair values because the
interest rates paid on these accounts are based on prevailing market rates. The
fair value of time deposits is based upon the discounted value of contractual
cash flows, which is estimated using current rates offered for deposits of
similar remaining terms. The fair value of short-term borrowings approximates
book value due to their short maturities. The fair value of FHLB advances is
estimated by discounting the cash flows through maturity or the next repricing
date based on current rates offered by the FHLB for borrowings with similar
maturities. The fair value of junior subordinated debt securities is estimated
by discounting the cash flows through maturity based on current rates offered on
the 30-year Treasury bond.
The Asset/Liability Committee is authorized to utilize a wide variety of
off-balance sheet financial techniques to assist in the management of interest
rate risk. Derivative positions are integral components of the Bank's
asset/liability management strategy. Therefore, the Bank does not believe it is
meaningful to separately analyze the derivatives components of its risk
management activities in
41
<PAGE>
isolation from their related positions. The Bank uses derivative instruments,
primarily interest rate swap and cap agreements, as part of its management of
asset and liability positions in connection with its overall goal of minimizing
the impact of interest rate fluctuations on the Bank's net interest margin or
its stockholders' equity. These contracts are entered into for purposes of
reducing the Bank's interest rate risk and not for trading purposes.
The Bank enters into interest rate swap agreements for the purposes of
converting fixed rate commercial real estate loans and certain brokered deposits
to floating rate assets and liabilities. Effective November 6, 2000, the Company
terminated interest rate swap agreements with a total notional amount of
$28.5 million. These interest rate swaps were previously utilized by the Company
as a hedge against fixed rate commercial real estate loans. The termination of
these swap agreements was in line with the Company's asset liability strategy
and the changing outlook of the Federal Reserve Board towards the future
direction of interest rates. An internal analysis performed by the Company
indicated that the interest rate swaps had a minimal impact on the Company's net
portfolio value even if interest rates had continued to rise. The total loss
amount recorded by the Company upon termination of the swap agreements was
$138 thousand. At December 31, 2000 and 1999, the total gross notional amount of
interest rate swaps was $30.0 million and $58.5 million, respectively. At
December 31, 2000, the net unrealized loss on the entire swap agreement
portfolio was $149 thousand compared to a net unrealized loss of $1.4 million at
December 31, 1999.
The Bank has also entered into interest rate cap agreements which are
primarily linked to the three-month LIBOR. Prior to October 1, 1999, the Bank
used interest rate caps for purposes of hedging against market fluctuations in
the Bank's available-for-sale securities portfolio. Due to the volatility of the
correlation between the Treasury yield curve and fixed rate mortgage-backed
securities, the Bank ceased using interest rate caps to hedge against
fluctuations in the investment securities available for sale portfolio,
effective October 1, 1999. The resulting net gain realized from this transaction
amounted to $65 thousand for the three months ended December 31, 1999. The Bank
continues to record interest rate caps at their estimated fair values, with
resulting gains or losses recorded in current earnings. The unrealized gains and
losses reflected in accumulated other comprehensive income (loss) in
stockholders' equity as of September 30, 1999 are amortized into interest income
or expense over the expected remaining lives of the interest rate cap
agreements. The total net realized loss on interest rate caps amounted to
$16 thousand for the year ended December 31, 2000.
The following table summarizes the expected maturities, weighted average pay
and receive rates, and the unrealized gains and losses of the Bank's interest
rate contracts as of December 31, 2000 and 1999. The fair values reflected in
the table are based on quoted market prices from broker dealers making a market
for these derivatives.
<TABLE>
<CAPTION>
EXPECTED MATURITY
---------------------------------------------------- AVERAGE
AFTER UNREALIZED EXPECTED
2001 2002 2003 2004 2004 TOTAL GAIN(LOSS) MATURITY
-------- -------- -------- -------- -------- -------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 2000:
Interest rate swap agreements:
Notional amount........................ $ -- $ -- $ -- $ -- $30,000 $30,000 $(149) 8.6 Years
Weighted average receive rate.......... --% --% --% --% 7.00% 7.00%
Weighted average pay rate.............. --% --% --% --% 6.61% 6.61%
Interest rate cap agreements:
Notional amount........................ $18,000 $18,000 $ -- $ -- $ -- $36,000 $ -- 1.1 Years
LIBOR cap rate......................... 6.50% 7.50% --% --% --% 6.75%
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
EXPECTED MATURITY
---------------------------------------------------- AVERAGE
AFTER UNREALIZED EXPECTED
2000 2001 2002 2003 2003 TOTAL GAIN(LOSS) MATURITY
-------- -------- -------- -------- -------- -------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1999:
Interest rate swap agreements:
Notional amount........................ $ -- $10,000 $18,500 $ -- $30,000 $58,500 $(1,408) 6.1 Years
Weighted average receive rate.......... --% 5.24% 5.29% --% 7.00% 6.16%
Weighted average pay rate.............. --% 6.46% 6.45% --% 6.10% 6.27%
Interest rate cap agreements:
Notional amount........................ $ -- $18,000 $18,000 $ -- $ -- $36,000 $ -- 2.1 Years
LIBOR cap rate......................... --% 6.50% 7.50% --% --% 6.75%
</TABLE>
BUSINESS SEGMENTS
For information regarding the Company's business segments, see Footnote 21,
entitled "Segment Information," of the 2000 Annual Report which is incorporated
herein by reference.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISKS
For quantitative and qualitative disclosures regarding market risks in the
Bank's portfolio, see, "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations--Asset Liability and Market Risk
Management."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements of the Company, see "Supplementary Financial
Information," and "Consolidated Financial Statements and Notes," including the
"Independent Auditor's Report" thereon, in the 2000 Annual Report, which is
incorporated herein by reference. See "ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K" below for financial statements filed as a
part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
43
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as hereinafter noted, the information concerning directors and
executive officers of the Company is incorporated by reference from the section
entitled "Election of Directors" of the Company's Proxy Statement, which is
filed as Exhibit No. 99 to this Annual Report on Form 10-K. For information
concerning executive officers of the Company, see "ITEM 4(A). EXECUTIVE OFFICERS
OF THE REGISTRANT."
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
from the section entitled "Compensation of Directors and Executive Officers" of
the Company's Proxy Statement, which is filed as Exhibit No. 99 to this Annual
Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
Management is incorporated by reference from the sections entitled "Principal
Shareholders," and "Election of Directors" of the Company's Proxy Statement,
which is filed as Exhibit No. 99 to this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated by reference from the section entitled "Certain Transactions" of
the Company's Proxy Statement, which is filed as Exhibit No. 99 to this Annual
Report on Form 10-K.
44
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES
(1) The following financial statements included in the registrant's 2000 Annual
Report to Shareholders are incorporated herein by reference. Page number
references are to the 2000 Annual Report to Shareholders.
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
East West Bancorp, Inc. and Subsidiaries:
Report of Management........................................ 47
Independent Auditors' Report................................ 49
Consolidated Balance Sheets at December 31, 2000 and 1999... 50
Consolidated Statements of Income for the Years Ended
December 31, 2000, 1999, and 1998......................... 51
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2000, 1999, and 1998..... 52
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... 53
Notes to Consolidated Financial Statements.................. 55
</TABLE>
(2) The following additional information for the years 2000, 1999 and 1998 is
submitted herewith:
All schedules are omitted because they are not applicable, not material or
because the information is included in the financial statements or the notes
thereto.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the last quarter of 2000.
45
<PAGE>
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ------- -------------------
<S> <C>
2 Plan of Reorganization and Merger Agreement between East
West Bancorp, Inc., East-West Bank and East West Merger
Co., Inc.*
3(i) Certificate of Incorporation of the Registrant*
3(ii) Bylaws of the Registrant*
4.1 Specimen Certificate of Registrant*
4.2 Registration Rights Agreement*
4.3 Warrant Agreement*
10.1 Employment Agreement with Dominic Ng*+
10.2 Employment Agreement with Julia Gouw*+
10.5 Employment Agreement with Douglas P. Krause*+
10.6 East West Bancorp, Inc. 1998 Stock Incentive Plan and Forms
of Agreements*+
10.6.1 Amendment to East West Bancorp, Inc. 1998 Stock Incentive
Plan and Forms of Agreements#+
10.7 East West Bancorp, Inc. 1998 Employee Stock Purchase Plan*+
10.9 Employment Agreement with Sandra Wong#+
10.10 Employment Agreement with Donald Sang Chow#+
10.10.1 Amendment to Employment Agreement with Donald Sang Chow#+
21.1 Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
99 Proxy Statement for Annual Meeting of Stockholders to be
held on May 16, 2001
</TABLE>
- ------------------------
* Incorporated by reference from Registrant's Registration Statement on
Form S-4 filed with the Commission on November 13, 1998 (File
No. 333-63605).
# Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999, filed with the Commission on March 30,
2000 (File No. 000-24939).
+ Denotes management contract or compensatory plan or arrangement.
46
<PAGE>
REPORT OF MANAGEMENT
February 16, 2001
To our Shareholders:
FINANCIAL STATEMENTS
The management of East West Bancorp, Inc. and subsidiaries (the "Company")
is responsible for the preparation, integrity, and fair presentation of its
published financial statements and all other information presented in this
annual report. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and, as such, include amounts based on informed judgments and estimates
made by management.
INTERNAL CONTROL
Management is responsible for establishing and maintaining effective
internal control over financial reporting, including safeguarding of assets, for
financial presentations in conformity with both accounting principles generally
accepted in the United States of America and the Federal Financial Institutions
Examination Council Instructions for Consolidated Reports of Condition and
Income (Call Report instructions). The internal control contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal control can provide only
reasonable assurance with respect to consolidated financial statement
preparation. Further, because of changes in conditions, the effectiveness of
internal control may vary over time.
Management assessed the Company's internal control over financial reporting,
including safeguarding of assets, for financial presentations in conformity with
both accounting principles generally accepted in the United States of America
and Call Report instructions as of December 31, 2000. This assessment was based
on criteria for effective internal control over financial reporting, including
safeguarding of assets, described in INTERNAL CONTROL--INTEGRATED FRAMEWORK
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management believes that the Bank maintained effective
internal control over financial reporting, including safeguarding of assets,
presented in conformity with both accounting principles generally accepted in
the United States of America and Call Report instructions, as of December 31,
2000.
The Audit Committee of the Board of Directors is comprised entirely of
outside directors who are independent of the Company's management. The Audit
Committee is responsible for recommending to the Board of Directors the
selection of independent auditors. It meets periodically with management, the
independent auditors, and the internal auditors to ensure that they are carrying
out their responsibilities. The Committee is also responsible for performing an
oversight role by reviewing and monitoring the financial, accounting and
auditing procedures of the Company in addition to reviewing the Company's
financial reports. The independent auditors and the internal auditors have full
and free access to the Audit Committee, with or without the presence of
management, to discuss the adequacy of internal control over financial reporting
and any other matters which they believe should be brought to the attention of
the Committee.
47
<PAGE>
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for ensuring compliance with the federal laws
and regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the Federal Deposit Insurance Corporation ("FDIC") as safety and soundness laws
and regulations.
Management assessed its compliance with the designated safety and soundness
laws and regulations and has maintained records of its determinations and
assessments as required by the FDIC. Based on this assessment, management
believes that the Company has complied, in all material respects, with the
designated safety and soundness laws and regulations for the year ended
December 31, 2000.
<TABLE>
<S> <C>
DOMINIC NG JULIA S. GOUW
Chairman, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
</TABLE>
48
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
East West Bancorp, Inc. and Subsidiaries
San Marino, California
We have audited the accompanying consolidated balance sheets of East West
Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 16, 2001 (March 20, 2001 as to Note 23)
49
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 63,048 $ 43,497
Investment securities available for sale, at fair value
(with amortized cost of $500,296 in 2000 and $517,320 in
1999)..................................................... 488,290 496,426
Loans receivable, net of allowance for loan losses of
$23,848 in 2000 and $20,844 in 1999....................... 1,789,988 1,486,641
Investment in Federal Home Loan Bank stock, at cost......... 14,845 26,954
Other real estate owned..................................... 801 577
Investments in affordable housing partnerships.............. 19,676 26,485
Premises and equipment, net................................. 26,630 22,646
Premiums on deposits acquired, net.......................... 7,696 3,812
Excess of purchase price over fair value of net assets
acquired, net............................................. 16,497 6,770
Accrued interest receivable and other assets................ 47,993 30,503
Deferred tax assets......................................... 10,507 8,319
---------- ----------
TOTAL................................................... $2,485,971 $2,152,630
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposit accounts
Noninterest-bearing....................................... $ 201,456 $ 128,552
Interest-bearing.......................................... 1,747,106 1,371,977
---------- ----------
Total deposits.......................................... 1,948,562 1,500,529
Short-term borrowings....................................... 38,000 600
Federal Home Loan Bank advances............................. 268,000 482,000
Notes payable............................................... -- 1,532
Accrued expenses and other liabilities...................... 22,897 15,861
Junior subordinated debt securities......................... 20,750 --
---------- ----------
Total liabilities......................................... 2,298,209 2,000,522
---------- ----------
FAIR VALUE OF NET ASSETS ACQUIRED IN EXCESS OF PURCHASE
PRICE, NET................................................ 1,613 2,028
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY
Common stock (par value of $0.001 per share)
Authorized--50,000,000 shares
Issued--24,508,331 shares and 23,908,731 shares in 2000
and 1999, respectively
Outstanding--22,660,590 shares and 22,422,868 shares in
2000 and 1999, respectively............................. 25 24
Additional paid-in capital.................................. 118,039 111,306
Retained earnings........................................... 99,764 67,001
Deferred compensation....................................... (1,344) (863)
Treasury stock, at cost--1,847,741 shares and 1,485,863
shares in 2000
and 1999, respectively.................................... (23,060) (14,659)
Accumulated other comprehensive loss, net of tax............ (7,275) (12,729)
---------- ----------
Total stockholders' equity.................................. 186,149 150,080
---------- ----------
TOTAL..................................................... $2,485,971 $2,152,630
========== ==========
</TABLE>
See notes to consolidated financial statements.
50
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees.......................... $150,985 $108,547 $85,806
Investment securities available for sale.................. 32,521 35,451 26,405
Investment securities held for trading.................... -- 109 --
Short-term investments.................................... 960 2,381 13,302
Federal Home Loan Bank stock.............................. 1,614 1,539 1,195
-------- -------- -------
Total interest and dividend income...................... 186,080 148,027 126,708
-------- -------- -------
INTEREST EXPENSE
Customer deposit accounts................................. 72,648 49,567 49,499
Short-term borrowings..................................... 2,065 1,080 6,767
Federal Home Loan Bank advances........................... 20,503 25,495 14,777
Junior subordinated debt securities....................... 1,377 -- --
-------- -------- -------
Total interest expense.................................. 96,593 76,142 71,043
-------- -------- -------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES........ 89,487 71,885 55,665
PROVISION FOR LOAN LOSSES................................... 4,400 5,439 5,356
-------- -------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 85,087 66,446 50,309
-------- -------- -------
NONINTEREST INCOME
Loan fees................................................. 1,845 2,282 2,389
Branch fees............................................... 4,839 3,388 2,579
Letters of credit fees and commissions.................... 4,353 4,111 2,785
Net gain on sales of investment securities available for
sale.................................................... 123 685 1,320
Net gain (loss) on trading securities..................... (16) 1,904 --
Net gain on sales of investment in affordable housing
partnerships............................................ 1,279 402 --
Net gain on sale of branch................................ -- 676 --
Amortization of fair value of net assets acquired in
excess of purchase price................................ 415 415 415
Other operating income.................................... 2,130 830 539
-------- -------- -------
Total noninterest income................................ 14,968 14,693 10,027
-------- -------- -------
NONINTEREST EXPENSE
Compensation and employee benefits........................ 20,286 18,481 17,281
Net occupancy............................................. 7,563 5,649 4,974
Data processing........................................... 1,783 1,399 1,245
Amortization of premiums on deposits acquired and excess
of purchase price over fair value of net assets
acquired................................................ 3,318 1,572 1,241
Amortization of investments in affordable housing
partnerships............................................ 4,081 2,991 1,017
Deposit insurance premiums and regulatory assessments..... 458 862 825
Other real estate owned operations, net................... (174) (340) (380)
Other operating expenses.................................. 12,645 8,895 6,423
-------- -------- -------
Total noninterest expense............................... 49,960 39,509 32,626
-------- -------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 50,095 41,630 27,710
PROVISION FOR INCOME TAXES.................................. 14,628 13,603 9,682
-------- -------- -------
NET INCOME.................................................. $ 35,467 $ 28,027 $18,028
-------- -------- -------
BASIC EARNINGS PER SHARE.................................... $ 1.58 $ 1.23 $ 0.76
DILUTED EARNINGS PER SHARE.................................. $ 1.53 $ 1.22 $ 0.76
AVERAGE NUMBER OF SHARES OUTSTANDING--BASIC................. 22,448 22,757 23,775
AVERAGE NUMBER OF SHARES OUTSTANDING--DILUTED............... 23,168 22,895 23,775
</TABLE>
See notes to consolidated financial statements.
51
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED DEFERRED TREASURY LOSS, NET OF
STOCK CAPITAL EARNINGS COMPENSATION STOCK TAX
-------- ---------- -------- ------------ -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998........... $24 $109,976 $23,690 $ -- $ -- $ (1,138)
Comprehensive income
Net income for the year.......... 18,028
Net unrealized gain on
securities..................... 250
Comprehensive income...............
--- -------- ------- ------- -------- --------
BALANCE, DECEMBER 31, 1998......... 24 109,976 41,718 -- -- (888)
Comprehensive income
Net income for the year.......... 28,027
Net unrealized loss on
securities..................... (11,841)
Comprehensive income...............
Stock compensation cost............ 249
Issuance of 105,003 shares under
Restricted Stock Plan............ 1,112 (1,112)
Issuance of 28,728 shares under
Employee Stock Purchase Plan..... 218
Purchase of 1,485,863 shares of
treasury stock................... (14,659)
Dividends paid on common stock..... (2,744)
--- -------- ------- ------- -------- --------
BALANCE, DECEMBER 31, 1999......... 24 111,306 67,001 (863) (14,659) (12,729)
Comprehensive income
Net income for the year.......... 35,467
Net unrealized gain on
securities..................... 5,454
Comprehensive income...............
Stock compensation cost............ 16 405
Tax benefit from option exercise... 55
Issuance of 16,444 shares under
Stock Option Plan................ 164
Issuance of 1,500 shares under
Restricted Stock Plan............ 18 (18)
Issuance of 53,584 shares under
Employee Stock Purchase Plan..... 496
Issuance of 424,781 shares under
Stock Warrants Plan.............. 1 4,247
Issuance of 103,291 shares for
acquisition of Risk Services,
Inc.............................. 1,737 (868)
Purchase of 361,878 shares of
treasury stock................... (8,401)
Dividends paid on common stock..... (2,704)
--- -------- ------- ------- -------- --------
BALANCE, DECEMBER 31, 2000......... $25 $118,039 $99,764 $(1,344) $(23,060) $ (7,275)
=== ======== ======= ======= ======== ========
<CAPTION>
TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE, JANUARY 1, 1998........... $132,552
Comprehensive income
Net income for the year.......... $ 18,028 18,028
Net unrealized gain on
securities..................... 250 250
--------
Comprehensive income............... $ 18,278
========
--------
BALANCE, DECEMBER 31, 1998......... 150,830
Comprehensive income
Net income for the year.......... $ 28,027 28,027
Net unrealized loss on
securities..................... (11,841) (11,841)
--------
Comprehensive income............... $ 16,186
========
Stock compensation cost............ 249
Issuance of 105,003 shares under
Restricted Stock Plan............ --
Issuance of 28,728 shares under
Employee Stock Purchase Plan..... 218
Purchase of 1,485,863 shares of
treasury stock................... (14,659)
Dividends paid on common stock..... (2,744)
--------
BALANCE, DECEMBER 31, 1999......... 150,080
Comprehensive income
Net income for the year.......... $ 35,467 35,467
Net unrealized gain on
securities..................... 5,454 5,454
--------
Comprehensive income............... $ 40,921
========
Stock compensation cost............ 421
Tax benefit from option exercise... 55
Issuance of 16,444 shares under
Stock Option Plan................ 164
Issuance of 1,500 shares under
Restricted Stock Plan............ --
Issuance of 53,584 shares under
Employee Stock Purchase Plan..... 496
Issuance of 424,781 shares under
Stock Warrants Plan.............. 4,248
Issuance of 103,291 shares for
acquisition of Risk Services,
Inc.............................. 869
Purchase of 361,878 shares of
treasury stock................... (8,401)
Dividends paid on common stock..... (2,704)
--------
BALANCE, DECEMBER 31, 2000......... $186,149
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized holding gain (loss) arising during period, net of
tax expense (benefit) of $3,685 in 2000, $(7,620) in 1999
and $595 in 1998.......................................... $5,528 $(11,430) $1,109
Less: Reclassification adjustment for gain included in net
income, net of tax expense of $49 in 2000, $274 in 1999
and $461 in 1998.......................................... (74) (411) (859)
------ -------- ------
Net unrealized gain (loss) on securities, net of tax expense
(benefit) of $3,636 in 2000, $(7,894) in 1999 and $134 in
1998...................................................... $5,454 $(11,841) $ 250
====== ======== ======
</TABLE>
See notes to consolidated financial statements.
52
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECMEBER 31,
-----------------------------------------
2000 1999 1998
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 35,467 $ 28,027 18,028
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 8,751 4,139 4,539
Net loan fees deferred........................... 1,777 2,246 2,377
Stock compensation costs......................... 421 249 --
Deferred tax benefit............................. (794) (2,477) (1,690)
Provision for loan losses........................ 4,400 5,439 5,356
Provision for other real estate owned losses..... -- 169 341
Net gain on sales of investment securities and
other assets................................... (1,353) (2,925) (2,685)
Net (gain) loss on trading securities............ 16 (1,904) --
Federal Home Loan Bank stock dividends........... (1,727) (1,608) (921)
Proceeds from sale of trading securities......... -- 117,366 --
Purchases of trading securities.................. -- (115,527) --
Proceeds from sale of loans held for sale........ 12,384 46,225 92,729
Originations of loans held for sale.............. (12,565) (37,341) (91,987)
Increase in accrued interest receivable and other
assets, net of effects from purchases of First
Central Bank and American International Bank... (14,054) (2,379) (14,373)
Increase (decrease) in accrued expenses and other
liabilities, net of effects from purchases of
First Central Bank and American International
Bank........................................... (9,530) 2,115 3,410
------------ ------------ -----------
Total adjustments............................ (12,274) 13,787 (2,904)
------------ ------------ -----------
Net cash provided by operating activities.... 23,193 41,814 15,124
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans................................ (7,543) (190,959) (169,644)
Purchases of:
Investment securities available for sale......... (46,194) (420,587) (883,989)
Loans receivable................................. (196,185) (208,171) (41,230)
Federal Home Loan Bank stock..................... (508) (1,809) (18,072)
Investments in affordable housing partnerships... (5,544) (10,707) (3,411)
Premises and equipment........................... (3,617) (1,476) (1,389)
Proceeds from sale of:
Investment securities available for sale......... 61,052 177,758 279,504
Other real estate owned.......................... 1,062 5,278 1,695
Investments in affordable housing partnerships... 9,551 3,267 --
Premises and equipment........................... 1 4 13
Repayments, maturity and redemption of investment
securities available for sale.................... 80,891 409,499 332,678
Redemption of Federal Home Loan Bank stock......... 15,211 9,337 --
Repayments on foreclosed properties................ 38 250 --
Investment in nonbank entity....................... (250) (250) --
Payment for purchase of First Central Bank, net of
cash received.................................... -- (5,295) --
Payment for purchase of American International
Bank, net of cash received....................... (25,174) -- --
Net cash acquired from acquisition of Risk
Services, Inc.................................... 549 -- --
------------ ------------ -----------
Net cash used in investing activities........ (116,660) (233,861) (503,845)
------------ ------------ -----------
</TABLE>
53
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECMEBER 31,
-----------------------------------------
2000 1999 1998
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits............................. $ 277,269 $ 190,523 57,865
Proceeds from sale of deposits..................... -- 17,795 --
Net increase (decrease) in short-term borrowings... 37,400 (32,400) (106,000)
Proceeds from Federal Home Loan Bank advances...... 16,711,300 19,810,100 4,150,821
Repayment of Federal Home Loan Bank advances....... (16,925,300) (19,891,100) (3,798,820)
Proceeds from issuance of junior subordinated debt
securities....................................... 20,750 -- --
Payment of debt issue cost......................... (672) -- --
Repayment of notes payable on affordable housing
investments...................................... (1,532) (3,320) (1,615)
Proceeds from common stock options exercised....... 164 -- --
Proceeds from stock warrants exercised............. 4,248 -- --
Proceeds from stock purchase plan.................. 496 218 --
Repurchases of common stock........................ (8,401) (14,659) --
Dividends paid on common stock..................... (2,704) (2,744) --
------------ ------------ -----------
Net cash provided by financing activities.... 113,018 74,413 302,251
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 19,551 (117,634) (186,470)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......... 43,497 161,131 347,601
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR............... $ 63,048 $ 43,497 $ 161,131
============ ============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid...................................... $ 93,840 $ 76,624 70,565
Income tax payments, net........................... 14,246 17,350 10,225
Noncash investing and financing activities:
Other real estate acquired through foreclosure... 1,112 4,080 4,706
Loans made to facilitate sales of other real
estate owned................................... -- 2,945 1,488
Investment in affordable housing partnerships
acquired through notes payable................. -- 3,033 1,820
Issuance of common stock in connection with the
acquisition of Risk Services, Inc., net of
deferred compensation.......................... 869 -- --
</TABLE>
See notes to consolidated financial statements.
54
<PAGE>
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
East West Bancorp, Inc., a registered bank holding company (the "Company"),
offers a full range of banking services to individuals and small to large
businesses through its subsidiary bank, East West Bank and its subsidiaries (the
"Bank"), which operates 30 branches located throughout California. The Company
specializes in financing international trade and lending for commercial,
construction, and residential real estate projects. The Company's revenues are
derived from providing financing for residential and commercial real estate and
business customers, as well as investing activities. Funding for lending and
investing activities is obtained through acceptance of customer deposits,
Federal Home Loan Bank advances and other borrowing activities.
REVERSE STOCK SPLIT--In June 1998, the Articles of Incorporation of the Bank
were amended to decrease the authorized common shares of the Bank from
200,000,000 shares to 50,000,000 shares. The amendment was made in conjunction
with the 118,875 for 550,000 reverse stock split effective June 11, 1998.
CHANGE IN OWNERSHIP--On June 12, 1998, previous shareholders of the Bank
sold all of the Bank's common stock to various institutional and accredited
investors. No person or group of persons acting in concert was permitted to
purchase more than 9.9% of the number of outstanding shares of the Bank's common
stock immediately after the sale. Since there was not a control group in this
transaction, generally accepted principles did not require the assets and
liabilities of the Bank to be revalued.
FORMATION OF BANK HOLDING COMPANY--On August 27, 1998, at the direction of
the Board of Directors of the Bank, the Company was incorporated under the laws
of the State of Delaware for the purpose of becoming a bank holding company by
acquiring all of the outstanding common stock of the Bank. This reorganization,
which was accounted for in a manner similar to a pooling of interests and
completed on December 30, 1998, provided the Company with greater operating and
financial flexibility and permits expansion into a broader range of financial
services and other business activities.
BRANCH SALE--On May 21, 1999, the Company completed the sale of its Irvine
branch to another bank. The assets and liabilities assumed by the acquiring bank
were $83 thousand and $17.1 million, respectively. The net gain from the sale of
this branch amounted to $676 thousand.
FORMATION OF REGULATED INVESTMENT COMPANY--On July 13, 2000, East West
Securities Company, Inc. (the "Fund"), was incorporated under the general laws
of the State of Maryland as a closed-end, non-diversified, management investment
company registered under the Investment Company Act of 1940, as amended. The
formation of the Fund provides the Bank with the flexibility to raise additional
capital in a tax efficient manner for future business opportunities, if desired.
There can be no assurance as to the timing or ability of the Bank to raise
capital through this entity.
EWSC Holdings, LLC, a California limited liability company and wholly owned
subsidiary of the Bank, owns 100% of the voting shares of the Fund. The Fund is
the sole member in six limited liability companies, namely EW Assets, LLC, EW
Assets 2, LLC, EW Assets 3, LLC, EW Assets 4, LLC, EW Assets 5, LLC, and EW
Assets 6, LLC. These companies invest primarily in loans and money market
deposit accounts.
BASIS OF PRESENTATION--The consolidated 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 following is a
summary of significant principles used in the preparation of the accompanying
financial statements. In preparing the financial statements, management of the
Company has made a number of estimates and assumptions relating to the reporting
of assets and
55
<PAGE>
liabilities, including the allowance for loan losses, the disclosure of
contingent assets and liabilities and the disclosure of income and expenses for
the periods presented in conformity with accounting principles generally
accepted in the United States of America. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION--The financial statements include the accounts
of the Company and its subsidiaries, East West Bank and Risk Services, Inc. (see
Note 2). Intercompany transactions and accounts have been eliminated in
consolidation.
INVESTMENT SECURITIES--Investment securities available for sale are reported
at estimated fair value, with unrealized gains and losses, net of the related
tax effect, excluded from operations and reported as a separate component of
other comprehensive income. Amortization of premiums and accretion of discounts
on debt securities are recorded as yield adjustments on such securities using
the effective interest method. The specific identification method is used for
purposes of determining cost in computing realized gains and losses on
investment securities sold.
DERIVATIVE FINANCIAL INSTRUMENTS--The Company is a party to certain
derivative transactions, including interest rate swaps and interest rate caps.
These contracts were entered into for purposes of reducing the Company's
interest rate risk. The carrying values of derivative financial instruments are
included in other assets.
INTEREST RATE SWAP AGREEMENTS--Interest rate swaps were entered into for the
purposes of modifying the interest rate characteristics of certain loans and
deposits of the Company. The interest rate swaps involve no exchange of
principal either at inception or upon maturity; rather, they involve the
periodic exchange of interest payments arising from an underlying notional
principal amount. Interest rate swaps are accounted for using settlement
accounting and are reported at their initial cost, and unrealized gains or
losses resulting from changes in their fair value are not recorded in the
financial statements. Revenues or expenses associated with these agreements are
accounted for on an accrual basis and are recognized as adjustments to interest
income on loans receivable or interest expense on deposits, based on the
interest rates currently in effect for such contracts.
INTEREST RATE CAP AGREEMENTS--Prior to October 1, 1999, the Company used
interest rate caps for purposes of hedging against fluctuations in the fair
value of the Company's investment securities available-for-sale portfolio. The
interest rate caps involve the payment of a one-time premium to a counterparty
who, if interest rates rise above a predetermined level, will make payments to
the Company at an agreed-upon rate for the term of the agreement or until such
time as interest rates fall below the cap level. The premiums paid for the
interest rate caps were amortized to interest income on investments over the
term of the agreements. The interest rate caps were reported at their estimated
fair values, with unrealized gains and losses recognized as a separate component
of accumulated other comprehensive income or loss (net of tax effects)
consistent with the hedged securities. Amounts receivable on the cap agreements
were accrued and recognized as interest income on investments.
Effective October 1, 1999, the Company ceased using interest rate caps to
hedge against fluctuations in the investment securities available for sale
portfolio. Interest rate caps continue to be recorded at their estimated fair
values, with resulting gains or losses recorded in current earnings. The
unrealized gains and losses reflected in accumulated other comprehensive income
(loss) in stockholders' equity as of September 30, 1999 are amortized into
interest income or expense over the expected remaining lives of the interest
rate cap agreements.
LOANS RECEIVABLE--Loans receivable, which management has the intent and
ability to hold for the foreseeable future or until maturity, are stated at
their outstanding principal, reduced by an allowance for loan losses and net
deferred loan fees or costs on originated loans and unamortized premiums or
discounts on purchased loans. Discounts or premiums on purchased loans are
amortized to income using the interest method over the remaining period to
contractual maturity adjusted for anticipated
56
<PAGE>
prepayments. Interest on loans is calculated using the simple-interest method on
daily balances of the principal amount outstanding. Accrual of interest is
discontinued on a loan when management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful. Generally, loans are
placed on nonaccrual status when they become 90 days past due. When interest
accrual is discontinued, all unpaid accrued interest is reversed against current
earnings. In general, subsequent payments received are applied to the
outstanding principal balance of the loan. A loan is returned to accrual status
when the borrower has demonstrated a satisfactory payment trend subject to
management's assessment of the borrower's ability to repay the loan.
Loans held for sale are carried at the lower of aggregate cost or market
value. Origination fees on loans held for sale, net of certain costs of
processing and closing the loans, are deferred until the time of sale and are
included in the computation of the gain or loss from the sale of the related
loans. A valuation allowance is established if the market value of such loans is
lower than their cost and operations are charged for valuation adjustments.
Nonrefundable fees and direct costs associated with the origination or
purchase of loans are deferred and netted against outstanding loan balances. The
deferred net loan fees and costs are recognized in interest income as an
adjustment to yield over the loan term using the effective interest method.
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due (principal and interest) according to the contractual
terms of the loan agreement. Impaired loans are measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as an expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent, less costs to sell.
LEASE FINANCING TRANSACTIONS--Loans receivable include the Company's share
of aggregate rentals on lease financing transactions and residual values, net of
unearned income. Lease financing transactions are primarily direct financing
leases. Unearned income on lease financing transactions is amortized utilizing
the interest method.
PROVISION AND ALLOWANCE FOR LOAN LOSSES--The determination of the balance in
the allowance for loan losses is based on an analysis of the loan portfolio and
reflects an amount that, in management's judgment, is adequate to provide for
probable losses after giving consideration to estimated losses on specifically
identified impaired loans, as well as the characteristics of the loan portfolio,
current economic conditions, past credit loss experience and such other factors
as deserve current recognition in estimating credit losses. The allowance for
loan losses is increased by charges to income and decreased by charge-offs (net
of recoveries). Consumer and other homogeneous smaller balance loans are
reviewed on a collective basis for impairment.
OTHER REAL ESTATE OWNED--Other real estate owned represents real estate
acquired through foreclosure and is recorded at fair value at the time of
foreclosure. Loan balances in excess of fair value of the real estate acquired
at the date of foreclosure are charged against the allowance for loan losses.
After foreclosure, valuations are periodically performed by management and the
real estate is carried at the lower of carrying value or fair value less costs
to sell. Any subsequent operating expenses or income, reduction in estimated
values, and gains or losses on disposition of such properties are charged to
current operations. Revenue recognition upon disposition of the property is
dependent on the sale having met certain criteria relating to the buyer's
initial investment in the property sold.
REAL ESTATE INVESTMENT--The Company owns limited partnership interests in
projects of affordable housing for lower income tenants. The investments in
which the Company has significant influence are recorded using the equity method
of accounting. The remaining investments are being amortized using
57
<PAGE>
the level-yield method over the life of the related tax credits. The tax credits
are being recognized in the consolidated financial statements to the extent they
are utilized on the Company's tax returns.
PREMISES AND EQUIPMENT--Company premises and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization
are computed based on the straight-line method over the estimated useful lives
of the various classes of assets. The ranges of useful lives for the principal
classes of assets are as follows:
<TABLE>
<S> <C>
Buildings and building improvements.......... 25 years
Furniture, fixtures and equipment............ 3 to 10 years
Term of lease or useful life, whichever is
Leasehold improvements....................... shorter
</TABLE>
INTANGIBLE ASSETS--Excess of purchase price over fair value of net assets
acquired and fair value of net assets acquired in excess of purchase price, also
known as goodwill, is amortized using the straight-line method over 15 to
25 years. Premiums on deposits, which represent the intangible value of
depositor relationships resulting from deposit liabilities assumed in
acquisitions, are amortized using the straight-line method over 7 to 10 years.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, goodwill and premiums on deposits are assessed
periodically for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. In management's
opinion, no significant events or changes in circumstances have occurred that
would indicate impairment of these assets.
STOCK OF FEDERAL HOME LOAN BANK OF SAN FRANCISCO--As a member of the Federal
Home Loan Bank ("FHLB") of San Francisco, the Company is required to own common
stock in the FHLB of San Francisco based upon the Company's balance of
residential mortgage loans and outstanding FHLB advances. FHLB stock is carried
at cost and may be sold back to the FHLB at its carrying value. Both cash and
stock dividends received are reported as dividend income.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE--The Company enters into
sales of securities under repurchase agreements with primary dealers, which
provide for the repurchase of the same security with substantially the same
terms as the security sold. The repurchase agreements are typically
collateralized by mortgage-backed securities that are normally held by a third
party custodian. In the event that the fair market value of the securities
decreases below the carrying amount of the related repurchase agreement, the
counterparty is required to designate an equivalent value of additional
securities. These agreements are accounted for as financings, and the
obligations of the Company to repurchase the securities are reflected as
liabilities. The securities underlying the agreements remain in the asset
accounts in the consolidated balance sheets.
JUNIOR SUBORDINATED DEBT SECURITIES--During 2000, the Company established
East West Capital Trust I and East West Capital Trust II (the "Trusts") as
wholly owned subsidiaries. In two separate private placement transactions, the
Trusts issued $10.8 million of 10.875% capital securities and $10.0 million of
10.945% capital securities representing undivided preferred beneficial interests
in the assets of the Trusts. The Company is the owner of all the beneficial
interests represented by the common securities of the Trusts. The purpose of
issuing the capital securities was to provide the Company with a cost-effective
means of obtaining Tier I Capital for regulatory purposes.
INCOME TAXES--Deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end, based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income.
STOCK-BASED COMPENSATION--The Company has adopted SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, which establishes financial accounting and
reporting standards for stock-based employee
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<PAGE>
compensation plans. These standards include the recognition of compensation
expense over the vesting period of the fair value of all stock-based awards on
the date of grant. SFAS No. 123 permits entities to continue to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and provide only the pro forma net income and pro
forma net earnings per share disclosures as if the fair-value based method
defined in SFAS No. 123 had been applied. Under APB Opinion No. 25, compensation
expense for fixed options would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. The
Company has elected to continue to apply the provisions of APB Opinion No. 25 in
accounting for its stock option plan and provide the pro forma disclosure
requirements of SFAS No. 123 in the footnotes to its consolidated financial
statements.
In addition to stock options, the Company also grants restricted stock
awards to certain officers and employees. The Company records the cost of the
restricted shares at market. The restricted stock grant is reflected as a
component of common stock and additional paid-in capital with an offsetting
amount of deferred compensation in the consolidated statement of stockholders'
equity. The restricted shares awarded become fully vested after three years of
continued employment from the date of grant. The Company becomes entitled to an
income tax deduction in an amount equal to the taxable income reported by the
holders of the restricted shares when the restrictions are released and the
shares are issued. The deferred compensation cost reflected in stockholders'
equity is being amortized as compensation expense over three years using the
straight-line method. Restricted shares are forfeited if officers and employees
terminate prior to the lapsing of restrictions. The Company records forfeitures
of restricted stock as treasury share repurchases and any compensation cost
previously recognized is reversed in the period of forfeiture.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES--A sale is recognized when the Company relinquishes control over a
financial asset and is compensated for such asset. The difference between the
net proceeds received and the carrying amount of the financial assets being sold
or securitized is recognized as a gain or loss on sale.
EARNINGS PER SHARE--Basic EPS is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, or resulted from issuance of common stock that then shared in
the earnings of the Company. The basic and diluted earnings per share and the
presentation of common stock and additional paid-in capital for all periods
presented have been adjusted to reflect the 118,875 for 550,000 reverse stock
split, which was effective June 11, 1998.
COMPREHENSIVE INCOME--The term "comprehensive income" describes the total of
all components of comprehensive income including net income. "Other
comprehensive income" refers to revenues, expenses, and gains and losses that
are included in comprehensive income but are excluded from net income as they
have been recorded directly in equity under the provisions of other Financial
Accounting Standard Board statements. The Company presents the comprehensive
income disclosure as a part of the statements of changes in stockholders' equity
by identifying each element of other comprehensive income, including net income.
RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--In June 1998,
the Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133, as amended by SFAS No. 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES--AN
AMENDMENT OF FASB STATEMENT NO. 133, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It
59
<PAGE>
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. Gains or losses resulting from changes in the values
of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The key criterion for
hedge accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. Implementation of SFAS
No. 133 will be effective for the Company on January 1, 2001. The adoption of
this standard will not have a material impact on the Company's results of
operations or financial position.
REVENUE RECOGNITION IN FINANCIAL STATEMENTS--On December 3, 1999, the
Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin
("SAB") No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which summarizes
the SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. Under the provisions of SAB No. 101, if a
transaction is within the scope of existing specific authoritative literature
that provides revenue recognition guidance, such literature should be applied.
SAB No. 101 is intended to provide additional or more consistent guidance only
in the absence of authoritative literature addressing a specific arrangement or
a specific industry as it relates to revenue recognition. It is the view of the
SEC that revenue is generally realized or realizable and earned when all of the
following criteria are met: (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred or services have been rendered, (3) the seller's price
to the buyer is fixed or determinable, and (4) collectibility is reasonably
assured. Management does not believe that the bulletin has a material impact on
the Company's results of operations or financial position.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES--In September 2000, the FASB issued SFAS
No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES--A REPLACEMENT TO FASB STATEMENT NO. 125. SFAS
No. 140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but carries over most of SFAS 125's provisions without reconsideration. SFAS
No. 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. These standards are
based on consistent application of a "financial-components approach" that
focuses on control. Under this approach, after a transfer of financial assets,
an entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This Statement also
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. This Statement is also effective for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. Management does not believe that the adoption of this
standard will have a material impact on the Company's results of operations or
financial position when adopted.
RECLASSIFICATIONS--Certain reclassifications have been made to the prior
year financial statements to conform to the current year presentation.
2. BUSINESS COMBINATIONS
ACQUISITION OF FIRST CENTRAL BANK, N.A.--On May 28, 1999, the Bank acquired
all of the issued and outstanding stock of First Central Bank, N.A. First
Central Bank was a national bank with three branches in Southern California. The
Bank acquired approximately $55.0 million in loans and assumed approximately
$92.6 million in deposits as a result of this transaction.
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<PAGE>
The acquisition was accounted for under the purchase method of accounting,
and accordingly, all assets and liabilities were adjusted to and recorded at
their estimated fair values as of the acquisition date. The estimated tax effect
of differences between tax bases and market values (except for intangible
assets) has been reflected in deferred income taxes.
Summarized below are the assets and liabilities recorded at fair value at
the date of acquisition:
<TABLE>
<CAPTION>
VALUES OF
ASSETS ACQUIRED
AND LIABILITIES
ASSUMED
(IN THOUSANDS) ---------------
<S> <C>
Cash, cash equivalents and other investments................ $ 46,570
Loans receivable............................................ 54,305
Property and equipment...................................... 363
Excess of purchase price over fair value of net assets
acquired.................................................. 3,513
Premium on deposits acquired................................ 2,450
Other assets................................................ 914
--------
Total assets............................................ 108,115
--------
Deposits.................................................... 92,569
Other liabilities........................................... 1,240
Deferred income taxes....................................... 833
--------
Total liabilities....................................... 94,642
--------
Purchase price and other acquisition costs............ $ 13,473
========
</TABLE>
ACQUISITION OF AMERICAN INTERNATIONAL BANK--On January 18, 2000, the Company
completed its $33.1 million acquisition of American International Bank ("AIB")
in an all-cash transaction. American International Bank, with assets of
$202 million, was a state-chartered bank with eight branches in Southern
California. AIB specialized in servicing small-to-medium sized companies
involved in international trade and other areas, as well as offering a full
range of personal banking products and services to a predominantly
Chinese-American customer base.
The acquisition of AIB was accounted for under the purchase method of
accounting, and accordingly, all assets and liabilities were adjusted to and
recorded at their estimated fair values as of the acquisition date. The
estimated tax effect of differences between tax bases and market values has been
reflected in deferred income taxes.
61
<PAGE>
Summarized below are the assets and liabilities recorded at fair value at
the date of acquisition:
<TABLE>
<CAPTION>
VALUES OF
ASSETS ACQUIRED
AND LIABILITIES
ASSUMED
(IN THOUSANDS) ---------------
<S> <C>
Cash, cash equivalents and other investments................ $ 86,738
Loans receivable............................................ 105,225
Property and equipment...................................... 3,505
Excess of purchase price over fair value of net assets
acquired.................................................. 10,243
Premium on deposits acquired................................ 6,100
Other assets................................................ 5,039
Deferred tax assets, net.................................... 3,449
--------
Total assets............................................ 220,299
--------
Deposits.................................................... 170,765
Other liabilities........................................... 16,399
--------
Total liabilities....................................... 187,164
--------
Purchase price and other acquisition costs............ $ 33,135
========
</TABLE>
ACQUISITION OF RISK SERVICES, INC. (DBA EAST WEST INSURANCE AGENCY)--On
August 22, 2000, the Company completed the acquisition of Risk Services, Inc.
(the "Agency') in a stock swap transaction. Risk Services, Inc., with assets of
$789 thousand as of the acquisition date, is an unrelated agent providing
business and consumer insurance services to the Southern California market. The
Agency continues to run its operations autonomously as a wholly owned subsidiary
of East West Bancorp, Inc.
In exchange for all of the outstanding stock of Risk Services, Inc., the
Company issued a total of 103,291 new shares of East West Bancorp, Inc. common
stock, par value of $.001. The total cash value of the shares issued was
approximately $1.7 million. Approximately half of the shares issued for the
acquisition of the Agency, or 51,645 shares, are held in escrow by the Company
and are subject to a three-and-a-half year earn-out period pursuant to the
provisions of the Agreement and Plan of Merger dated August 8, 2000. The
distribution of the shares held in escrow is scheduled in four phases and is
contingent on the Agency achieving specified revenue and pre-tax earnings levels
over the next three-and-a-half years following the completion of the
acquisition.
The acquisition of the Agency was accounted for under the purchase method of
accounting, and accordingly, all assets and liabilities were adjusted to and
recorded at their estimated fair values as of the acquisition date.
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<PAGE>
Summarized below are the assets and liabilities recorded at fair value at
the date of acquisition:
<TABLE>
<CAPTION>
VALUES OF
ASSETS ACQUIRED
AND LIABILITIES
ASSUMED
(IN THOUSANDS) ---------------
<S> <C>
Cash, cash equivalents and other investments................ $ 549
Property and equipment...................................... 78
Excess of purchase price over fair value of net assets
acquired.................................................. 357
Other assets................................................ 106
------
Total assets............................................ 1,090
------
Other liabilities........................................... 221
------
Total liabilities....................................... 221
------
Purchase price and other acquisition costs............ $ 869
======
</TABLE>
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, amounts due from banks, and
short-term investments with maturities of less than three months. Short-term
investments, which include federal funds sold and securities purchased under
agreements to resell, are recorded at cost, which approximates market.
Information concerning securities purchased under agreements to resell is
summarized as follows:
<TABLE>
<CAPTION>
2000 1999
(IN THOUSANDS) -------- --------
<S> <C> <C>
Balance at year-end...................................... $ -- $ --
Average balance during the year.......................... 4,904 32,358
Maximum month-end balance during the year................ 38,000 101,000
Weighted average interest rate during the year........... 6.85% 5.79%
Weighted average interest rate at end of year............ --% --%
</TABLE>
Securities purchased under agreements to resell are collateralized by
mortgage-backed securities and mortgage or commercial loans. The collateral is
generally held by a third party custodian. The purchase is overcollateralized to
ensure against unfavorable market price movements. In the event that the fair
market value of the securities decreases below the carrying amount of the
related repurchase agreement, the counterparty is required to designate an
equivalent value of additional securities. The counterparties to these
agreements are nationally recognized investment banking firms that meet credit
eligibility criteria and with whom a master repurchase agreement has been duly
executed.
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<PAGE>
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
An analysis of the available-for-sale investment securities portfolio is
presented as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
As of December 31, 2000:
US Treasury securities............................ $ 8,310 $119 $ -- $ 8,429
US Government agency securities................... 72,290 -- (4,908) 67,382
Obligations of states and political
subdivisions.................................... 200 1 -- 201
Mortgage-backed securities........................ 390,592 99 (6,013) 384,678
Corporate securities.............................. 28,904 -- (1,304) 27,600
-------- ---- -------- --------
Total........................................... $500,296 $219 $(12,225) $488,290
======== ==== ======== ========
As of December 31, 1999:
US Treasury securities............................ $ 985 $ -- $ (10) $ 975
US Government agency securities................... 75,610 -- (6,739) 68,871
Obligations of states and political
subdivisions.................................... 200 2 -- 202
Mortgage-backed securities........................ 440,525 51 (14,198) 426,378
-------- ---- -------- --------
Total........................................... $517,320 $ 53 $(20,947) $496,426
======== ==== ======== ========
</TABLE>
The scheduled maturities of investment securities available for sale at
December 31, 2000 are presented as follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due within one year..................................... $ 500 $ 502
Due after one year through five years................... 19,009 19,058
Due after five years through ten years.................. 61,095 60,676
Due after ten years..................................... 419,692 408,054
-------- --------
Total............................................... $500,296 $488,290
======== ========
</TABLE>
Expected maturities of mortgage-backed securities can differ from
contractual maturities because borrowers have the right to prepay obligations.
In addition, such factors as prepayments and interest rates may affect the
yields on the carrying values of mortgage-backed securities.
Proceeds from sales of securities during 2000, 1999 and 1998 were
$61.1 million, $177.8 million and $279.5 million, respectively, with related
gross realized gains of $261 thousand, $685 thousand and $1.4 million. Gross
realized losses on securities sales amounted to $138 thousand, $0, and
$31 thousand during 2000, 1999 and 1998.
At December 31, 2000 and 1999, investment securities with a carrying value
of $445.0 million and $492.1 million, respectively, were pledged to secure
public deposits, securities sold under agreements to repurchase, FHLB advances,
interest rate swap agreements and for other purposes required or permitted by
law.
5. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative positions are integral components of the Company's asset and
liability management activities. Therefore, the Company does not believe it is
meaningful to separately analyze the derivatives component of its risk
management activities in isolation from related positions.
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<PAGE>
The Company uses derivative instruments, primarily interest rate swap and
cap agreements, as part of its management of asset and liability positions in
connection with its overall goal of minimizing the impact of interest rate
fluctuations on the Company's net interest margin or its stockholders' equity.
Derivatives are used as hedges against market fluctuations in the Company's
available-for-sale securities portfolio and to effectively convert certain fixed
rate commercial real estate loans and brokered deposits to floating rate assets
and liabilities.
For the years ended December 31, 2000 and 1999, the interest rate swaps were
designated for purposes of converting fixed rate loans and certain brokered
deposits to floating rate assets and liabilities. Effective November 6, 2000,
the Company terminated interest rate swap agreements with a total notional
amount of $28.5 million. These interest rate swaps were previously utilized by
the Company as a hedge against fixed rate commercial real estate loans. The
termination of these swap agreements was in line with the Company's asset
liability strategy and the changing outlook of the Federal Reserve Board towards
the future direction of interest rates. An internal analysis performed by the
Company indicated that the interest rate swaps had a minimal impact on the
Company's net portfolio value even if interest rates had continued to rise. The
total loss amount recorded by the Company upon termination of the swap
agreements was $138 thousand.
Interest rate cap agreements were designated as hedges against the
available-for-sale securities portfolio during the year ended December 31, 1998
and the nine months ended September 30, 1999. Due to the volatility of the
correlation between the Treasury yield curve and fixed rate mortgage-backed
securities, the Company ceased using interest rate cap agreements to hedge
against fluctuations in the investment securities available-for-sale portfolio
effective October 1, 1999. Accordingly, trading gains of $65 thousand for the
three months ended December 31, 1999 and trading losses of $232 thousand for the
year ended December 31, 2000 were recorded in current earnings, respectively.
The following table reflects summary information on derivative contracts
used to hedge the Company's interest rate risk as of December 31, 2000 and 1999.
Amounts included in the estimated fair value column do not include gains or
losses from changes in the value of the underlying asset or liability being
hedged. Notional amounts are not exchanged but serve as a point of reference for
calculating payments and do not represent exposure to credit or market risk.
Amounts shown as unamortized premiums paid for interest rate swaps represent the
cost basis of such instruments resulting from a prior mark-to-market adjustment
upon sale of a previously hedged item, and subsequent redesignation to the
current hedged item.
<TABLE>
<CAPTION>
DECEMBER 31, 2000
------------------------------------------------------------
UNAMORTIZED GROSS GROSS ESTIMATED
NOTIONAL PREMIUM UNREALIZED UNREALIZED FAIR
AMOUNT PAID GAINS LOSSES VALUE
-------- ----------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest rate swap agreements:
Maturing on July 21, 2009, pay 7.00%
fixed and receive 3-month LIBOR....... $15,000 $ -- $ -- $ (86) $(86)
Maturing on June 23, 2009, pay 7.00%
fixed and receive 3-month LIBOR....... 15,000 -- -- (63) (63)
Interest rate cap agreements reclassified
as trading securities:
Maturing on October 24, 2002, 7.00%
LIBOR cap............................. 18,000 209 -- (199) 10
Maturing on April 10, 2001, 6.50%
LIBOR cap............................. 18,000 33 -- (19) 14
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------------------
UNAMORTIZED GROSS GROSS ESTIMATED
NOTIONAL PREMIUM UNREALIZED UNREALIZED FAIR
AMOUNT PAID GAINS LOSSES VALUE
-------- ----------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest rate swap agreements:
Maturing on July 21, 2009, pay 7.00%
fixed and receive 3-month LIBOR....... $15,000 $ -- $-- $(706) $(706)
Maturing on June 23, 2009, pay 7.00%
fixed and receive 3-month LIBOR....... 15,000 -- -- (623) (623)
Maturing on November 13, 2002, pay 6.31%
fixed and receive 3-month LIBOR....... 14,000 286 -- (96) 190
Maturing on October 10, 2001, pay 6.46%
fixed and receive 3-month LIBOR....... 10,000 -- 34 -- 34
Maturing on January 17, 2002, pay 6.89%
fixed and receive 3-month LIBOR....... 4,500 -- -- (17) (17)
Interest rate cap agreements reclassified
as trading securities:
Maturing on October 24, 2002, 7.00%
LIBOR cap............................. 18,000 326 -- (128) 198
Maturing on April 10, 2001, 6.50%
LIBOR cap............................. 18,000 132 -- (74) 58
</TABLE>
The estimated fair values of derivative financial instruments were
determined using quoted market prices from dealers. The Company is exposed to
credit-related losses in the event of nonperformance by counterparties to
financial instruments but does not expect any counterparties to fail to meet
their obligations. The Company deals only with highly rated counterparties. The
current credit exposure of derivatives is represented by the estimated fair
value of contracts having positive fair values at the reporting date.
6. LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of loans receivable:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Real estate loans:
Residential, one to four units..................... $ 334,775 $ 278,161
Residential, multifamily........................... 323,469 311,193
Commercial and industrial real estate.............. 640,713 518,074
Construction....................................... 118,241 122,363
---------- ----------
Total real estate loans.......................... 1,417,198 1,229,791
---------- ----------
Other loans:
Business, commercial............................... 350,282 248,865
Automobile......................................... 6,409 5,284
Other consumer..................................... 40,547 23,834
---------- ----------
Total other loans................................ 397,238 277,983
---------- ----------
Total gross loans.............................. 1,814,436 1,507,774
Unearned fees, premiums and discounts, net........... (600) (289)
Allowance for loan losses............................ (23,848) (20,844)
---------- ----------
Loans receivable, net.......................... $1,789,988 $1,486,641
========== ==========
</TABLE>
66
<PAGE>
Loans held for sale were $1.1 million and $736 thousand at December 31, 2000
and 1999, respectively. Accrued interest on loans receivable amounted to
$12.1 million and $9.2 million at December 31, 2000 and 1999, respectively.
An analysis of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year....................... $20,844 $16,506 $12,273
Allowance from acquisition....................... 2,256 1,150 --
Provision for loan losses........................ 4,400 5,439 5,356
Chargeoffs....................................... (4,592) (2,877) (2,666)
Recoveries....................................... 940 626 1,543
------- ------- -------
Balance, end of year............................. $23,848 $20,844 $16,506
======= ======= =======
</TABLE>
The following is a summary of interest foregone on impaired loans for the
years ended December 31:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income that would have been recognized
had impaired loans performed in accordance with
their original terms............................ $ 1,475 $ 1,980 $1,057
Less: Interest income recognized on impaired
loans........................................... (1,138) (1,562) (890)
------- ------- ------
Interest foregone on impaired loans............... $ 337 $ 418 $ 167
======= ======= ======
</TABLE>
There were no commitments to lend additional funds to borrowers whose loans
are included above.
The following table provides information on impaired loans for the periods
indicated:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Recorded investment with related allowance....... $ 2,641 $ 7,773 $ 745
Recorded investment with no related allowance.... 9,781 13,078 9,239
------- ------- -------
Total recorded investment...................... 12,422 20,851 9,984
Allowance on impaired loans...................... (1,318) (1,254) (350)
------- ------- -------
Net recorded investment in impaired loans...... $11,104 $19,597 $ 9,634
======= ======= =======
Average total recorded investment in impaired
loans.......................................... $12,875 $21,368 $10,522
</TABLE>
Loans serviced for others amounted to approximately $198.8 million and
$208.5 million at December 31, 2000 and 1999, respectively.
CREDIT RISK AND CONCENTRATION--Substantially all of the Company's real
estate loans are secured by real properties located in California. In addition,
although most of the Company's trade finance activities are related to trade
with Asia, all of the Company's loans are made to companies domiciled in the
United States.
67
<PAGE>
7. REAL ESTATE INVESTMENTS
The Company has invested in certain limited partnerships that were formed to
develop and operate several apartment complexes designed as high-quality
affordable housing for lower income tenants throughout the United States. The
Company's ownership in each limited partnership varies from 1% to 19.8%. Four of
the investments are being accounted for using the equity method of accounting,
since the Company exercises significant control over these partnerships. The
remaining investments are being amortized on a level yield method over the life
of the related tax credits. Each of the partnerships must meet the regulatory
requirements for affordable housing for a minimum 15 year compliance period to
fully utilize the tax credits. If the partnerships cease to qualify during the
compliance period, the credit may be denied for any period in which the project
is not in compliance and a portion of the credit previously taken is subject to
recapture with interest.
The remaining federal tax credits to be utilized over a multiple-year period
is $18.6 million as of December 31, 2000. The Company's usage of tax credits
approximated $3.9 million and $3.2 million during 2000 and 1999, respectively.
Investment amortization amounted to $4.1 million and $3.0 million for the years
ended December 31, 2000 and 1999, respectively.
8. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................... $ 11,587 $ 9,796
Office buildings........................................ 11,784 11,084
Leasehold improvements.................................. 3,339 2,704
Furniture, fixtures and equipment....................... 11,600 9,682
Equipment under operating leases........................ 1,299 --
-------- --------
39,609 33,266
Accumulated depreciation and amortization............... (12,979) (10,620)
-------- --------
Net................................................... $ 26,630 $ 22,646
======== ========
</TABLE>
9. CUSTOMER DEPOSIT ACCOUNTS
Customer deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Demand deposits (non-interest bearing)............... $ 201,456 $ 128,552
Checking accounts (interest bearing)................. 111,228 89,545
Money market accounts................................ 122,079 69,434
Savings deposits..................................... 212,411 211,818
---------- ----------
647,174 499,349
---------- ----------
Time deposits:
Less than $100,000................................. 560,244 487,335
$100,000 or greater................................ 741,144 513,845
---------- ----------
1,301,388 1,001,180
---------- ----------
Total deposits................................... $1,948,562 $1,500,529
========== ==========
</TABLE>
68
<PAGE>
At December 31, 2000, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
$100,000
OR LESS THAN
GREATER $100,000 TOTAL
-------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
2001........................................ $688,974 $507,980 $1,196,954
2002........................................ 16,600 44,747 61,347
2003........................................ 5,007 3,906 8,913
2004........................................ 108 1,605 1,713
2005 and thereafter......................... 30,455 2,006 32,461
-------- -------- ----------
Total..................................... $741,144 $560,244 $1,301,388
======== ======== ==========
</TABLE>
Accrued interest payable was $2.1 million and $958 thousand at December 31,
2000 and 1999, respectively. Interest expense on customer deposits by account
type is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Checking accounts................................ $ 1,398 $ 1,056 $ 1,072
Money market accounts............................ 3,836 1,593 1,010
Savings deposits................................. 4,213 3,960 5,048
Time deposits:
Less than $100,000............................. 25,398 21,533 23,234
$100,000 or greater............................ 37,803 21,425 19,135
------- ------- -------
Total........................................ $72,648 $49,567 $49,499
======= ======= =======
</TABLE>
10. SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased and securities sold
under agreements to repurchase. Federal funds purchased generally mature within
one business day from the date of transaction while securities sold under
agreements to repurchase generally mature within 90 days from the transaction
date. At December 31, 2000 and 1999, total short-term borrowings consisted
entirely of federal funds purchased amounting to $38 million and $600 thousand,
respectively. Information concerning securities sold under agreements to
repurchase is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance at year-end....................................... $ -- $ --
Average balance during the year........................... $ -- $ 9,159
Highest month-end balance during the year................. $ -- $33,000
Weighted average interest rate during the year............ --% 5.05%
Weighted average interest rate at end of year............. --% --%
</TABLE>
69
<PAGE>
11. FEDERAL HOME LOAN BANK ADVANCES
FHLB advances and their related weighted average interest rates are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
2000 1999
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Maturing during Year Ending December 31,
2000..................................... $ -- --% $468,000 5.87%
2001..................................... 244,000 6.53% -- --%
2002..................................... 10,000 6.33% -- --%
2003..................................... 14,000 5.94% 14,000 5.94%
-------- ---- -------- -----
Total.................................. $268,000 6.49% $482,000 5.87%
======== ==== ======== =====
</TABLE>
At December 31, 2000 and 1999, all outstanding FHLB advances have fixed
interest rates for a specific term. Some advances are secured by certain real
estate loans with remaining principal balances of approximately $592.9 million
and $600.4 million at December 31, 2000 and 1999, respectively.
12. CAPITAL RESOURCES
SHELF REGISTRATION
During the first quarter of 2000, the Company filed a $50 million universal
shelf registration statement with the Securities and Exchange Commission.
Pursuant to this filing, the Company may offer new common stock, trust
preferred, preferred stock and/or other debentures to augment its capital
resources. The timing and amount of offerings will depend on market and general
business conditions. The Company intends to utilize the net proceeds from the
sale of securities for general business purposes, which include supporting the
growth of its commercial banking activities and possible future acquisitions. At
December 31, 2000, the Company has not offered new common stock, trust
preferred, preferred stock and/or other debentures pursuant to this shelf
registration.
JUNIOR SUBORDINATED DEBT SECURITIES
On March 23, 2000, East West Capital Trust I, a statutory business trust and
wholly owned subsidiary of the Company, issued $10.8 million of junior
subordinated deferrable interest debentures. These securities have a scheduled
maturity date of March 8, 2030 and an interest rate of 10.875% per annum.
Interest payments are due on March 8 and September 8 of each year.
On July 26, 2000, East West Capital Trust II, also a statutory business
trust and wholly owned subsidiary of the Company, issued $10.0 million in junior
subordinated deferrable interest debentures. The scheduled maturity date of
these securities is July 19, 2030. These securities bear an interest rate of
10.945% per annum and interest payments are due on January 19 and July 19 of
each year.
Interest payments on these securities are deductible for tax purposes. These
securities, which are not registered with the Securities and Exchange
Commission, are recorded in the liability section of the consolidated balance
sheet in accordance with accounting principles generally accepted in the United
States of America. For regulatory reporting purposes, these securities qualify
for Tier 1 capital treatment.
REGULATED INVESTMENT COMPANY
On July 13, 2000, East West Securities Company, Inc., was incorporated as a
closed-end, non-diversified management investment company registered under the
Investment Company Act of
70
<PAGE>
12. CAPITAL RESOURCES (CONTINUED)
1940, as amended. The formation of this entity provides the Company with the
flexibility to raise additional capital in a tax efficient manner for future
business opportunities, if desired.
13. INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense:
Federal........................................ $13,432 $11,155 $ 8,801
State.......................................... 1,989 4,925 2,571
------- ------- -------
Total current income tax expense............. 15,421 16,080 11,372
------- ------- -------
Deferred income tax expense (benefit):
Federal........................................ (350) (2,062) (1,837)
State.......................................... (443) (415) 147
------- ------- -------
Total deferred income tax benefit............ (793) (2,477) (1,690)
------- ------- -------
Provision for income taxes..................... $14,628 $13,603 $ 9,682
======= ======= =======
</TABLE>
The difference between the effective tax rate implicit in the consolidated
financial statements and the statutory federal income tax rate can be attributed
to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Federal income tax provision at statutory rate....... 35.0% 35.0% 35.0%
State franchise taxes, net of federal tax effect..... 2.0 7.0 6.4
Low income housing tax credits....................... (7.7) (7.7) (6.1)
Other, net........................................... (0.1) (1.6) (0.4)
----- ----- -----
Effective income tax rate............................ 29.2% 32.7% 34.9%
===== ===== =====
</TABLE>
During the year ended December 31, 2000, the Company realized state tax
benefits through the formation and funding of a regulated investment company in
July 2000. There were no such benefits realized during the years ended
December 31, 1999 and 1998.
71
<PAGE>
13. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax (assets) liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Core deposit premium.................................. $ 4,707 $ 2,749
Depreciation.......................................... 2,575 3,111
FHLB stock dividends.................................. 3,924 3,184
Deferred loan fees.................................... 4,447 4,125
Other, net............................................ 3,904 3,194
-------- --------
Total gross deferred tax liabilities................ 19,557 16,363
-------- --------
Deferred tax assets:
Bad debt deduction.................................... (9,706) (8,151)
Purchased loan discounts.............................. (1,577) (1,455)
Deferred compensation accrual......................... (1,310) (1,058)
California franchise tax.............................. (724) (1,443)
Unrealized loss on securities......................... (5,134) (8,860)
Federal net operating loss carryforwards.............. (4,678) --
State net operating loss carryforwards................ (240) --
Other, net............................................ (6,695) (3,715)
-------- --------
Total gross deferred tax assets......................... (30,064) (24,682)
-------- --------
Net deferred tax assets............................. $(10,507) $ (8,319)
======== ========
</TABLE>
At December 31, 2000, the Company has federal net operating loss
carryforwards of approximately $15.0 million which expire through 2020 and state
operating loss carryforwards of approximately $3.9 million which expire through
2005. These net operating loss carryforwards were acquired by the Company in
connection with its acquisition of American International Bank. Federal and
state tax laws, related to a change in ownership such as the acquisition of
American International Bank, place limitations on the annual amount of operating
loss carryovers that can be utilized to offset post-acquisition operating
income. Under Internal Revenue Code Section 382, which has been adopted under
California law, if during any three-year period there is more than a 50% change
in ownership of the Bank, then the future use of any pre-change net operating
losses or built-in losses of the Bank would be subject to an annual percentage
limitation based on the value of the Bank at an ownership change date.
14. COMMITMENTS AND CONTINGENCIES
CREDIT EXTENSIONS--In the normal course of business, there are various
outstanding commitments to extend credit which are not reflected in the
accompanying consolidated financial statements. While the Company does not
anticipate losses as a result of these transactions, commitments are included in
determining the appropriate level of the allowance for loan losses.
Loan commitments are agreements to lend to a customer provided there is no
violation of any condition established in the agreement. Commitments generally
have fixed expiration dates or other termination clauses. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future funding requirements. The
Company
72
<PAGE>
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
uses the same credit policies in making commitments and conditional obligations
as it does in extending loan facilities to customers. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties. As of December 31, 2000 and 1999,
undisbursed loan commitments amounted to $311.0 million and $290.8 million,
respectively. In addition, the Company committed to fund mortgage loan
applications in process amounting to $41.4 million and $34.8 million as of
December 31, 2000 and 1999, respectively.
Commercial letters of credit are issued to facilitate domestic and foreign
trade transactions while standby letters of credit are issued to make payments
on behalf of customers when certain specified future events occur. As of
December 31, 2000 and 1999, commercial and standby letters of credit totaled
$183.1 million and $151.7 million, respectively.
LEASE COMMITMENTS--The Company conducts a portion of its operations
utilizing leased premises and equipment under operating leases. Rental expense
amounted to $2.6 million, $1.6 million and $1.4 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
Future minimum rental payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
- ------------ --------------
<S> <C>
2001........................................................ $ 2,308
2002........................................................ 1,923
2003........................................................ 1,688
2004........................................................ 1,438
2005........................................................ 1,309
Thereafter.................................................. 2,222
-------
Total................................................... $10,888
=======
</TABLE>
LITIGATION--Neither the Company nor the Bank is involved in any material
legal proceedings. The Bank, from time to time, is a party to litigation which
arises in the ordinary course of business, such as claims to enforce liens,
claims involving the origination and servicing of loans, and other issues
related to the business of the Bank. After taking into consideration information
furnished by counsel to the Company and the Bank, management believes that the
resolution of such issues would not have a material adverse impact on the
financial position, results of operations, or liquidity of the Company or the
Bank.
REGULATED INVESMENT COMPANY--In August 2000, the Securities and Exchange
Commission completed an examination of East West Securities Company, Inc. The
Company received the Commission's findings in a letter dated September 11, 2000.
The Commission staff determined that the Fund should not be eligible to be
registered as an investment company due to the failure to meet certain
regulatory requirements of the Investment Company Act of 1940 and requested that
the Fund voluntarily de-register. In its response to the Commission, dated
October 11, 2000, the Company stated that it disagrees with certain factual
statements and conclusions of law contained in the Commission's findings and
sets forth the basis for its belief based on advice of counsel, which was
included, that the Fund was formed in compliance with regulatory requirements.
In response, the Commission has issued another letter to the Company, dated
December 12, 2000, which is essentially similar to the
73
<PAGE>
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Commission's initial letter. The Company has declined the Commission's requests
to voluntarily de-register the Fund. The Company expects to receive further
correspondence from the Commission.
If the Company were to accommodate the Commission's requests to voluntarily
de-register the Fund, the Company would forego the state tax benefits that are
currently being realized through the Fund. Estimated professional fees totaling
$600 thousand, contingent upon realization of these state tax benefits, are due
and payable in the first quarter of 2001. Further, the Company would forfeit its
flexibility to raise additional capital in a tax efficient manner for future
business opportunities through the Fund. Management believes, based on the
advice of counsel, that the impact of de-registration would be prospective only
and not retroactive. The Fund would continue to be a registered investment
company under the Investment Company Act of 1940, from the date of registration
to the effective date of de-registration.
15. STOCK COMPENSATION PLANS
STOCK OPTIONS
The Company adopted the 1998 Stock Incentive Plan (the "Plan") on June 25,
1998. Pursuant to an amendment under the Plan, the Company may grant stock
options, restricted stock, or any form of award deemed appropriate not to exceed
2,902,000 shares of common stock over a ten-year period. The stock options
awarded under the Plan are granted with a four-year or three-year vesting period
and a ten-year contractual life. At December 31, 2000 and 1999, 35,000 and
60,000 options have been granted respectively to nonemployee directors under the
Plan.
A summary of the Company's stock options as of and for the years ended
December 31, 2000, 1999, and 1998 is presented below:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year......... 1,753,474 $10.00 1,715,150 $10.00 -- $ --
Granted.................................. 338,000 15.39 72,200 10.42 1,716,850 10.00
Exercised................................ (16,444) 10.00 -- -- -- --
Forfeited................................ (57,839) 11.90 (33,876) 10.00 (1,700) 10.00
--------- ------ --------- ------ --------- ------
Outstanding at end of year............... 2,017,191 $10.86 1,753,474 $10.02 1,715,150 $10.00
========= ====== ========= ====== ========= ======
Options exercisable at year-end.......... 834,749 426,834 None
Weighted-average fair value of options
granted during the year................ $ 8.55 $ 5.18 $ 4.08
</TABLE>
74
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OF AVERAGE AVERAGE OF AVERAGE
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL LIFE PRICE OPTIONS PRICE
- ------------------------ ----------- ---------------- -------- ----------- --------
<C> <C> <S> <C> <C> <C>
10 to $$12........ 1,724,191 7.5 years $10.02 832,999 $10.00
12 to $$14........ 17,000 9 years 12.21 1,750 12.25
14 to $$16........ 255,000 9.3 years 15.80 -- --
16 to $$18........ -- -- -- -- --
18 to $$20........ 16,000 9.8 years 18.94 -- --
20 to $$22........ 5,000 9.9 years 20.63 -- --
--------- --------- ------ ------- ------
10 to $$22........ 2,017,191 7.8 years $10.86 834,749 $10.00
========= ========= ====== ======= ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OF AVERAGE AVERAGE OF AVERAGE
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL LIFE PRICE OPTIONS PRICE
- ------------------------ ----------- ---------------- -------- ----------- --------
<C> <C> <S> <C> <C> <C>
10 to $$11........ 1,736,474 8.5 years $10.00 426,834 $10.00
11 to $$12........ 10,000 10 years 11.44 -- --
12 to $$13........ 7,000 9.9 years 12.25 -- --
--------- --------- ------ ------- ------
10 to $$13........ 1,753,474 8.5 years $10.02 426,834 $10.00
========= ========= ====== ======= ======
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan, and accordingly, no compensation expense has been
recognized in the consolidated financial statements since the stock options were
granted at fair value. Had the Company determined compensation expense based on
the fair value at the grant date consistent with SFAS No. 123, the Company's net
income and earnings per share ("EPS") would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net Income
As Reported............................... $35,467 $28,027 $18,028
Pro Forma................................. $34,450 $27,241 $17,519
Basic EPS
As Reported............................... $ 1.58 $ 1.23 $ 0.76
Pro Forma................................. $ 1.53 $ 1.20 $ 0.74
Diluted EPS
As Reported............................... $ 1.53 $ 1.22 $ 0.76
Pro Forma................................. $ 1.49 $ 1.19 $ 0.74
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions in 2000,
1999 and 1998, respectively: dividend yield of 0.8%, 1.2% and 1.2%; expected
volatility of 47.5%, 43.5% and 30.4%; risk-free interest rate of 5.1%, 6.7% and
4.8%; and expected lives of 6.0 years, 6.0 years and 6.5 years.
75
<PAGE>
RESTRICTED STOCK
As part of the 1998 Stock Incentive Plan, the Company granted restricted
stock with a three-year vesting period and a ten-year contractual life to
certain officers and employees during 1999 and 2000. Noncash compensation cost
amounted to $405 thousand and $249 thousand for the years ended December 31,
2000 and 1999, respectively. The Company was not entitled to any income tax
deduction in 2000 and 1999 in connection with the restricted stock award, since
no restrictions have lapsed and no shares have been issued.
A summary of the Company's Restricted Stock as of December 31, 2000 and
1999, and changes during the years then ended are as follows:
<TABLE>
<CAPTION>
2000 1999
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 94,140 $10.62 -- $ --
Granted.................................. 1,500 12.00 105,003 10.59
Forfeited................................ (11,878) 10.56 (10,863) 10.59
------- ------ ------- ------
Outstanding at end of year............... 83,762 $10.65 94,140 $10.59
======= ====== ======= ======
</TABLE>
STOCK PURCHASE PLAN
The Company has adopted the 1998 Employee Stock Purchase Plan (the "Purchase
Plan"), providing eligible employees of the Company and its subsidiaries
participation in the ownership of the Company through the right to purchase
shares of the Company's common stock at a discount. Under the terms of the
Purchase Plan, employees can purchase shares of the Company's common stock at
85% of the per-share market price at the date of grant, subject to an annual
limitation of common stock valued at $25,000. The Purchase Plan qualifies as a
noncompensatory plan under Section 423 of the Internal Revenue Code, and
accordingly, no compensation expense is recognized under the plan.
The Purchase Plan covers a total of 1,000,000 shares of the Company's common
stock. During 2000 and 1999, 53,584 shares totaling $496 thousand and 28,728
shares totaling $218 thousand, respectively, were sold to employees under the
Purchase Plan.
WARRANTS
In connection with the securities offering and change in ownership of the
Bank, warrants to purchase 475,500 shares of common stock of the Company were
issued to the placement agent in June 1998. The warrants are exercisable for a
five-year period at an exercise price of $10 per share. At December 31, 2000,
warrants to purchase a total of 50,719 shares of common stock remain
outstanding.
16. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan for the benefit of its
employees. The Company's contributions to the plan are determined annually by
the Board of Directors in accordance with plan requirements. For tax purposes,
eligible participants may contribute up to a maximum of 15% of their
compensation, not to exceed the dollar limit imposed by the Internal Revenue
Service. For the plan years ended December 31, 2000, 1999 and 1998, the Company
contributed $578 thousand, $459 thousand, and $400 thousand, respectively.
76
<PAGE>
17. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
STOCK REPURCHASE PROGRAM
During 1999, the Company's Board of Directors authorized the Company to
repurchase up to $21.0 million of its common stock under three different Stock
Repurchase Programs. During the years ended December 31, 2000 and 1999, the
Company has repurchased 361,878 shares and 1,485,863 shares of common stock with
a cost of $8.4 million and $14.7 million, respectively. A portion of the shares
repurchased during the year ended December 31, 2000, specifically 100,000 shares
at a total cost of $2.4 million, were purchased in a private transaction in
connection with the exercise of stock warrants that were issued to the placement
agent in June 1998. The repurchase of these shares are exclusive of the three
aforementioned Stock Repurchase Programs.
QUARTERLY DIVIDENDS
The Company has declared and paid a cash dividend of $0.03 per share during
the four quarters of 2000 and 1999 to its shareholders totaling $2.7 million per
year.
EARNINGS PER SHARE
The calculation of earnings per share and diluted earnings per share for
2000, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
NET NUMBER PER SHARE
INCOME OF SHARES AMOUNTS
--------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
2000
Basic EPS................................... $35,467 22,448 $1.58
Effect of dilutive securities:
Stock Options............................. -- 571
Restricted Stock.......................... -- 33
Stock Warrants............................ -- 116
------- ------
Diluted EPS................................. $35,467 23,168 $1.53
======= ======
1999
Basic EPS................................... $28,027 22,757 $1.23
Effect of dilutive securities:
Stock Options............................. -- 69
Restricted Stock.......................... -- 51
Stock Warrants............................ -- 18
------- ------
Diluted EPS................................. $28,027 22,895 $1.22
======= ======
1998
Basic EPS................................... $18,028 23,775 $0.76
Effect of dilutive securities............... -- --
------- ------
Diluted EPS................................. $18,028 23,775 $0.76
======= ======
</TABLE>
77
<PAGE>
18. REGULATORY REQUIREMENTS
RISK-BASED CAPITAL
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies, including the Federal
Deposit Insurance Corporation ("FDIC"). Failure to meet minimum capital
requirements can initiate certain mandatory actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of the
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
As of December 31, 2000 and 1999, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain specific total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table below. There are no conditions or events since
that notification which management believes have changed the category of the
Bank.
The actual and required capital amounts and ratios at December 31, 2000 and
1999 are presented as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 2000:
Total Capital (to Risk-Weighted Assets)
Consolidated Company...................... $213,678 10.9% $157,588 8.0% $196,985 10.0%
East West Bank............................ $209,937 10.7% $157,422 8.0% $196,777 10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated Company...................... $189,830 9.6% $ 78,794 4.0% $118,191 6.0%
East West Bank............................ $186,089 9.5% $ 78,711 4.0% $118,066 6.0%
Tier I Capital (to Average Assets)
Consolidated Company...................... $189,830 7.7% $ 98,249 4.0% $122,812 5.0%
East West Bank............................ $186,089 7.9% $ 94,788 4.0% $118,485 5.0%
AS OF DECEMBER 31, 1999:
Total Capital (to Risk-Weighted Assets)
Consolidated Company...................... $174,917 10.6% $132,223 8.0% $165,279 10.0%
East West Bank............................ $174,885 10.6% $132,200 8.0% $165,250 10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated Company...................... $154,255 9.3% $ 66,112 4.0% $ 99,168 6.0%
East West Bank............................ $154,226 9.3% $ 66,100 4.0% $ 99,150 6.0%
Tier I Capital (to Average Assets)
Consolidated Company...................... $154,255 7.3% $ 84,444 4.0% $105,555 5.0%
East West Bank............................ $154,226 7.3% $ 84,505 4.0% $105,631 5.0%
</TABLE>
78
<PAGE>
RESERVE REQUIREMENT
The Company is required to maintain a percentage of its deposits as reserves
at the Federal Reserve Bank. The daily average reserve requirement was
approximately $7.4 million and $1.0 million at December 31, 2000 and 1999,
respectively.
19. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
2000 1999
------------------------ ------------------------
CARRYING CARRYING
OR CONTRACT ESTIMATED OR CONTRACT ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents....................... $ 63,048 $ 63,048 $ 43,497 $ 43,497
Investment securities available for sale........ 488,290 488,290 496,426 496,426
Loans receivable, net........................... 1,789,988 1,788,317 1,486,641 1,490,108
FHLB stock...................................... 14,845 14,845 26,954 26,954
Accrued interest receivable..................... 15,138 15,138 11,988 11,988
Liabilities:
Customer deposit accounts:
Demand accounts............................... 647,174 647,174 499,349 499,349
Time deposits............................... 1,301,388 1,299,899 1,001,180 1,002,176
Short-term borrowings........................... 38,000 38,013 600 600
FHLB advances................................... 268,000 268,074 482,000 482,507
Junior subordinated debt securities............. 20,750 22,797 -- --
Accrued interest payable........................ 5,010 5,010 958 958
Off-balance sheet financial instruments:
Commercial letters of credit.................... 14,842 19 13,394 17
Standby letters of credit....................... 168,300 1,968 138,281 1,340
Commitments to extend credit.................... 310,974 1,733 290,797 1,601
Derivatives:
Interest rate swaps........................... -- (149) 286 (1,122)
Interest rate caps............................ 24 24 256 256
</TABLE>
The methods and assumptions used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value are
explained below:
CASH AND CASH EQUIVALENTS--The carrying amounts approximate fair values due
to the short-term nature of these instruments.
INVESTMENT SECURITIES AND DERIVATIVE INSTRUMENTS--The fair value is based on
quoted market price from securities brokers or dealers in the respective
instruments.
LOANS AND ACCRUED INTEREST RECEIVABLE--Fair values are estimated for
portfolios of loans with similar financial characteristics, primarily fixed and
adjustable rate interest terms. The fair values of fixed rate
79
<PAGE>
19. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
mortgage loans are based upon discounted cash flows utilizing applicable
risk-adjusted spreads relative to the current pricing for 15- and 30-year
conventional loans as well as anticipated prepayment schedules. The fair values
of adjustable rate mortgage loans are based upon discounted cash flows utilizing
discount rates that approximate the risk-adjusted pricing of available
mortgage-backed securities having similar rates and repricing characteristics as
well as anticipated prepayment schedules. No adjustments have been made for
changes in credit within the loan portfolio. It is management's opinion that the
allowance for loan losses pertaining to performing and nonperforming loans
results in a fair valuation of such loans. The carrying amount of accrued
interest receivable approximates fair value due to its short term nature.
FHLB STOCK--The carrying amount approximates fair value, as the stock may be
sold back to the Federal Home Loan Bank at carrying value.
DEPOSITS AND ACCRUED INTEREST PAYABLE--The fair values of deposits are
estimated based upon the type of deposit products. Demand accounts, which
include passbooks and transaction accounts, are presumed to have equal book and
fair values, since the interest rates paid on these accounts are based on
prevailing market rates. The estimated fair values of time deposits are based
upon the contractual discounted cash flows estimated in current rate for the
deposits over the remaining terms. The carrying amount of accrued interest
payable approximates fair value due to its short term nature.
SHORT-TERM BORROWINGS--The fair values are estimated by discounting the
amounts contractually due under such agreements using the prevailing federal
funds rate at each reporting date.
FHLB ADVANCES--The fair values of FHLB advances are estimated based on the
discounted value of contractual cash flows, using rates currently offered by the
Federal Home Loan Bank of San Francisco for fixed-rate credit advances with
similar remaining maturities at each reporting date.
JUNIOR SUBORDINATED DEBT SECURITIES--The fair values of junior subordinated
debt securities are estimated by discounting the cash flows through maturity
based on prevailing rates offered on the 30-year Treasury bond at each reporting
date.
COMMITMENTS TO EXTEND CREDIT, COMMERCIAL AND STANDBY LETTERS OF CREDIT--The
fair values of commitments are estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparty's credit standing.
The fair value estimates presented herein are based on pertinent information
available to management as of each reporting date. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and therefore, current estimates of
fair value may differ significantly from the amounts presented herein.
20. RELATED PARTY TRANSACTIONS
The Company enters into certain related party transactions with its
affiliates in the normal course of business. These transactions are conducted at
market terms.
One of the Company's directors is a guarantor of an extension of credit to
two corporations in which the director is an executive officer and the
beneficial owner of over 10% of a class of equity securities of the two
corporations. At December 31, 1999, the total approved commitment amounted to
$1.1 million with an outstanding balance of $410 thousand. This loan was repaid
in full during 2000. No extension of credit was outstanding for any related
party as of December 31, 2000.
80
<PAGE>
21. SEGMENT INFORMATION
Management utilizes an internal reporting system to measure the performance
of various operating segments within the Company and the Company overall. Four
principal operating segments have been identified by the Company for purposes of
management reporting: retail banking, commercial lending, treasury, and
residential lending. Information related to the Company's remaining centralized
functions and eliminations of intersegment amounts have been aggregated and
included in "Other." Although all four operating segments offer financial
products and services, they are managed separately based on each segment's
strategic focus. While the retail banking segment focuses primarily on retail
operations through the Company's branch network, certain designated branches
have responsibility for generating commercial deposits and loans. The commercial
lending segment primarily generates commercial loans and deposits through the
efforts of commercial lending officers located in the Company's northern and
southern California production offices. The treasury department's primary focus
is managing the Company's investments, liquidity, and interest rate risk; the
residential lending segment is mainly responsible for the Company's portfolio of
single family and multifamily residential loans.
Operating segment results are based on the Company's internal management
reporting process, which reflects assignments and allocations of capital,
certain operating and administrative costs and the provision for loan losses.
Net interest income is based on the Company's internal funds transfer pricing
system which assigns a cost of funds or a credit for funds to assets or
liabilities based on their type, maturity or repricing characteristics.
Noninterest income and noninterest expense, including depreciation and
amortization, directly attributable to a segment are assigned to that business.
Indirect costs, including overhead expense, are allocated to the segments based
on several factors, including, but not limited to, full-time equivalent
employees, loan volume and deposit volume. The provision for credit losses is
allocated based on new loan originations for the period. The Company evaluates
overall performance based on profit or loss from operations before income taxes
not including nonrecurring gains and losses.
Future changes in the Company's management structure or reporting
methodologies may result in changes in the measurement of operating segment
results. Results for prior periods have been restated for comparability for
changes in management structure or reporting methodologies.
The following tables present the operating results and other key financial
measures for the individual operating segments for the years ended December 31,
2000, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------
RETAIL COMMERCIAL RESIDENTIAL
BANKING LENDING TREASURY LENDING OTHER TOTAL
-------- ---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Interest income................ $ 47,428 $ 61,379 $ 35,029 $ 38,903 $ 3,341 $ 186,080
Charge for funds used.......... (32,425) (43,763) (34,071) (32,540) (854) (143,653)
-------- -------- -------- -------- -------- ---------
Interest spread on funds
used....................... 15,003 17,616 958 6,363 2,487 42,427
-------- -------- -------- -------- -------- ---------
Interest expense............... (52,902) (5,301) (38,390) -- -- (96,593)
Credit on funds provided....... 88,784 10,141 44,728 -- -- 143,653
-------- -------- -------- -------- -------- ---------
Interest spread on funds
provided................... 35,882 4,840 6,338 -- -- 47,060
-------- -------- -------- -------- -------- ---------
Net interest income........ $ 50,885 $ 22,456 $ 7,296 $ 6,363 $ 2,487 $ 89,487
======== ======== ======== ======== ======== =========
Depreciation and
amortization................. $ 4,228 $ 486 $ 321 $ 684 $ 3,032 $ 8,751
Segment profit................. 22,160 14,391 6,846 4,985 1,713 50,095
Segment assets................. 516,398 765,746 507,642 534,086 162,099 2,485,971
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------
RETAIL COMMERCIAL RESIDENTIAL
BANKING LENDING TREASURY LENDING OTHER TOTAL
-------- ---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Interest income................ $ 28,868 $ 45,700 $ 38,959 $ 32,029 $ 2,471 $ 148,027
Charge for funds used.......... (17,048) (27,271) (33,472) (22,689) (149) (100,629)
-------- -------- -------- -------- -------- ---------
Interest spread on funds
used....................... 11,820 18,429 5,487 9,340 2,322 47,398
-------- -------- -------- -------- -------- ---------
Interest expense............... (40,032) (3,016) (33,094) -- -- (76,142)
Credit on funds provided....... 58,161 5,417 37,051 -- -- 100,629
-------- -------- -------- -------- -------- ---------
Interest spread on funds
provided................... 18,129 2,401 3,957 -- -- 24,487
-------- -------- -------- -------- -------- ---------
Net interest income........ $ 29,949 $ 20,830 $ 9,444 $ 9,340 $ 2,322 $ 71,885
======== ======== ======== ======== ======== =========
Depreciation and
amortization................. $ 2,550 $ 251 $ 346 $ (258) $ 1,250 $ 4,139
Segment profit................. 7,332 16,511 9,919 7,379 489 41,630
Segment assets................. 384,718 655,739 533,387 487,299 91,487 2,152,630
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------
RETAIL COMMERCIAL RESIDENTIAL
BANKING LENDING TREASURY LENDING OTHER TOTAL
-------- ---------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Interest income................ $ 16,273 $ 29,502 $ 40,901 $ 37,368 $ 2,664 $ 126,708
Charge for funds used.......... (9,949) (17,035) (36,871) (31,353) (577) (95,785)
-------- -------- -------- -------- -------- ---------
Interest spread on funds
used....................... 6,324 12,467 4,030 6,015 2,087 30,923
-------- -------- -------- -------- -------- ---------
Interest expense............... (41,839) (2,738) (26,466) -- -- (71,043)
Credit on funds provided....... 59,171 4,096 32,518 -- -- 95,785
-------- -------- -------- -------- -------- ---------
Interest spread on funds
provided................... 17,332 1,358 6,052 -- -- 24,742
-------- -------- -------- -------- -------- ---------
Net interest income........ $ 23,656 $ 13,825 $ 10,082 $ 6,015 $ 2,087 $ 55,665
======== ======== ======== ======== ======== =========
Depreciation and
amortization................. $ 2,267 $ 227 $ 1,799 $ 647 $ (401) $ 4,539
Segment profit................. 3,292 11,996 8,605 3,676 141 27,710
Segment assets................. 246,336 412,647 839,309 433,538 126,330 2,058,160
</TABLE>
82
<PAGE>
22. EAST WEST BANCORP, INC. (PARENT COMPANY ONLY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 2,441 $ --
Loans receivable............................................ 500 --
Investment in subsidiaries.................................. 203,425 150,051
Investment in nonbank entity................................ 500 250
Goodwill.................................................... 351 --
Other assets................................................ 721 36
-------- --------
Total assets............................................ $207,938 $150,337
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES
Junior subordinated debt securities......................... $ 20,750 $ --
Other liabilities........................................... 1,039 257
-------- --------
Total liabilities....................................... 21,789 257
======== ========
STOCKHOLDERS' EQUITY
Common stock (par value $0.001 per share)
Authorized--50,000,000 shares
Issued--24,508,331 shares and 23,908,731 shares in 2000
and 1999, respectively
Outstanding--22,660,590 shares and 22,422,868 shares in
2000 and 1999, respectively............................. 25 24
Additional paid in capital.................................. 118,039 111,306
Retained earnings........................................... 99,764 67,001
Deferred compensation....................................... (1,344) (863)
Treasury stock, at cost: 1,847,741 shares and 1,485,863
shares in 2000 and 1999, respectively..................... (23,060) (14,659)
Accumulated other comprehensive loss, net of tax............ (7,275) (12,729)
-------- --------
Total stockholders' equity.............................. 186,149 150,080
-------- --------
Total liabilities and stockholders' equity............ $207,938 $150,337
======== ========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Dividends from subsidiaries................................. $ 9,578 $17,494 $ 73
Interest income............................................. 10 -- --
Other income................................................ 14 -- --
------- ------- -------
Total income............................................ 9,602 17,494 73
------- ------- -------
Interest expense............................................ 1,377 -- --
Other expense............................................... 1,052 977 73
------- ------- -------
Total expense........................................... 2,429 977 73
------- ------- -------
Income before income taxes and equity in undistributed
income of subsidiaries.................................... 7,173 16,517 --
Income tax benefit.......................................... 1,008 448 --
Equity in undistributed income of subsidiaries.............. 27,286 11,062 18,028
------- ------- -------
Net income.............................................. $35,467 $28,027 $18,028
======= ======= =======
</TABLE>
83
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 35,467 $ 28,027 $ 18,028
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed income of subsidiaries.......... (27,286) (11,062) (18,028)
Depreciation and amortization........................... 20 -- --
Net change in other assets.............................. (13) 6 (42)
Net change in other liabilities......................... 779 215 42
Stock compensation cost................................. 421 249 --
-------- -------- --------
Net cash provided by operating activities............. 9,388 17,435 --
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in loans receivable.............................. (500) -- --
Investment in nonbank entity................................ (250) (250) --
Capital contribution to subsidiary.......................... (20,078) -- --
-------- -------- --------
Net cash used in investing activities................. (20,828) (250) --
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of junior subordinated debt
securities................................................ 20,750 -- --
Payment of debt issue cost.................................. (672) -- --
Proceeds from common stock options exercised................ 164 -- --
Proceeds from stock purchase plan........................... 496 218 --
Proceeds from stock warrants exercised...................... 4,248 -- --
Repurchases of common stock................................. (8,401) (14,659) --
Dividends paid on common stock.............................. (2,704) (2,744) --
-------- -------- --------
Net cash provided by (used in) financing activities... 13,881 (17,185) --
-------- -------- --------
Net increase in cash and cash equivalents................... 2,441 -- --
Cash and cash equivalents, beginning of year................ -- -- --
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 2,441 $ -- $ --
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Noncash financing activity:
Issuance of shares in connection with the acquisition of
Risk Services, Inc., net of deferred compensation....... 869 -- --
</TABLE>
84
<PAGE>
23. SUBSEQUENT EVENTS
ACQUISITION OF PRIME BANK
On January 16, 2001, the Company completed its acquisition of Prime Bank in
a combination of shares and cash valued at $16.6 million. The acquisition of
Prime Bank was accounted for under the purchase method of accounting, and
accordingly, all assets and liabilities were adjusted to and recorded at their
estimated fair values as of the acquisition date. The estimated tax effect of
differences between tax bases and market values has been reflected in deferred
income taxes. The Company recorded total goodwill of approximately $5.6 million
and core deposit premium of $3.9 million, which are being amortized using the
straight-line method over 15 years and 7 years, respectively. At December 31,
2000, Prime Bank had total assets of $128.4 million (unaudited) and total
stockholders' equity of $9.0 million (unaudited).
STOCK REPURCHASE PROGRAM
On January 16, 2001, the Company's Board of Directors authorized the Company
to repurchase another $7 million of its common stock. In connection with this
latest repurchase program, the Company has repurchased a total of 275,000 shares
of common stock at an aggregate cost of $6.4 million through March 20, 2001.
QUARTERLY CASH DIVIDEND
The Company has declared and paid a cash dividend of $0.03 per share on
February 14, 2001 in the amount of $695 thousand.
24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
2000
Interest and dividend income..................... $48,430 $47,289 $46,120 $44,241
Interest expense................................. 25,856 24,711 23,769 22,257
------- ------- ------- -------
Net interest income.............................. 22,574 22,578 22,351 21,984
Provision for loan losses........................ 300 1,300 1,400 1,400
------- ------- ------- -------
Net interest income after provision for loan
losses......................................... 22,274 21,278 20,951 20,584
Noninterest income............................... 3,446 3,660 3,469 4,393
Noninterest expense.............................. 13,799 12,250 12,177 11,734
------- ------- ------- -------
Income before provision for income taxes......... 11,921 12,688 12,243 13,243
Provision for income taxes....................... 2,309 3,910 3,879 4,530
------- ------- ------- -------
Net income....................................... $ 9,612 $ 8,778 $ 8,364 $ 8,713
======= ======= ======= =======
Basic earnings per share......................... $ 0.42 $ 0.39 $ 0.37 $ 0.39
Diluted earnings per share....................... 0.40 0.38 0.37 0.38
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1999
Interest and dividend income..................... $39,525 $37,822 $36,018 $34,662
Interest expense................................. 19,819 19,211 18,681 18,431
------- ------- ------- -------
Net interest income.............................. 19,706 18,611 17,337 16,231
Provision for loan losses........................ 1,433 1,320 1,486 1,200
------- ------- ------- -------
Net interest income after provision for loan
losses......................................... 18,273 17,291 15,851 15,031
Noninterest income............................... 3,590 3,544 4,227 3,332
Noninterest expense.............................. 10,475 10,637 9,580 8,817
------- ------- ------- -------
Income before provision for income taxes......... 11,388 10,198 10,498 9,546
Provision for income taxes....................... 3,502 3,169 3,398 3,534
------- ------- ------- -------
Net income....................................... $ 7,886 $ 7,029 $ 7,100 $ 6,012
======= ======= ======= =======
Basic and diluted earnings per share............. $ 0.35 $ 0.31 $ 0.31 $ 0.26
</TABLE>
86
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Dated: March 27, 2001
EAST WEST BANCORP, INC.
(Registrant)
By: /s/ DOMINIC NG
-----------------------------------------
Dominic Ng
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
Chairman of the Board,
/s/ DOMINIC NG President, Chairman, and
------------------------------------ Chief Executive Officer March 27, 2001
Dominic Ng (principal executive officer)
Executive Vice President,
/s/ JULIA GOUW Chief Financial Officer,
------------------------------------ and Director (principal March 27, 2001
Julia Gouw financial and accounting
officer)
/s/ HERMAN LI
------------------------------------ Director March 27, 2001
Herman Li
/s/ JACK C. LIU
------------------------------------ Director March 27, 2001
Jack C. Liu
/s/ JAMES P. MISCOLL
------------------------------------ Director March 27, 2001
James P. Miscoll
/s/ KEITH W. RENKEN
------------------------------------ Director March 27, 2001
Keith W. Renken
/s/ EDWARD ZAPANTA
------------------------------------ Director March 27, 2001
Edward Zapanta
</TABLE>
87
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>2
<FILENAME>a2043239zex-21_1.txt
<DESCRIPTION>EXHIBIT 21.1
<TEXT>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF EAST WEST BANCORP, INC.
East West Bank 100%
East West Capital Trust I 100%
East West Capital Trust II 100%
Risk Services, Inc. (dba East West Insurance Agency) 100%
East West Leasing (1) 100%
American International Bancorp, Inc. (1) 100%
(1) Not currently active
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>3
<FILENAME>a2043239zex-23_1.txt
<DESCRIPTION>EXHIBIT 23.1
<TEXT>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
East West Bancorp, Inc. on Forms S-8 (Nos. 333-88527, 333-88529 and 333-56468)
and on Forms S-3 (Nos. 333-96193, 333-46718 and 333-54538), of our report dated
February 16, 2001, (March 20, 2001 as to Note 23) appearing in this Annual
Report on Form 10-K of East West Bancorp, Inc. for the year ended December 31,
2000.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 28, 2001
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>4
<FILENAME>a2043239zex-99.txt
<DESCRIPTION>EXHIBIT 99
<TEXT>
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-12
EAST WEST BANCORP, INC.
-----------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
</TABLE>
Payment of Filing Fee (Check the appropriate box):
<TABLE>
<S> <C> <C>
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
----------------------------------------------------------
(2) Aggregate number of securities to which transaction
applies:
----------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
----------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------
</TABLE>
<PAGE>
[LOGO]
EAST WEST BANCORP, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 16, 2001
Notice is hereby given that the annual meeting (the "Meeting") of the
stockholders of East West Bancorp, Inc. will be held at The Ritz-Carlton
Huntington Hotel, 1401 South Oak Knoll Avenue, Pasadena, California on
Wednesday, May 16, 2001, beginning at 10:30 a.m. for the following purposes:
1. ELECTION OF DIRECTORS. The election of two persons as directors for
terms expiring in 2004 and to serve until his or her successors are
elected and qualified, as more fully described in the accompanying Proxy
Statement; and
2. OTHER BUSINESS. The transaction of such other business as may properly
come before the annual meeting or any postponement or adjournment of the
annual meeting.
Properly signed proxy cards permit the proxy holder named therein to vote on
such other business as may properly come before the Meeting and at any and all
adjournments thereof, in their discretion. As of the date of mailing, the Board
of Directors is not aware of any other matters that may come before the Meeting.
Only those stockholders of record at the close of business on April 2, 2001
shall be entitled to notice of and to vote at the Meeting.
YOUR VOTE IS VERY IMPORTANT. STOCKHOLDERS ARE URGED TO SIGN AND RETURN THE
ENCLOSED PROXY IN THE POSTAGE PREPAID ENVELOPE AS PROMPTLY AS POSSIBLE, WHETHER
OR NOT THEY PLAN TO ATTEND THE MEETING IN PERSON. STOCKHOLDERS WHO ATTEND THE
MEETING MAY WITHDRAW THEIR PROXY AND VOTE IN PERSON IF THEY WISH TO DO SO.
BY ORDER OF THE BOARD OF DIRECTORS
DOUGLAS P. KRAUSE
Executive Vice President, General
Counsel
and Corporate Secretary
San Marino, California
March 30, 2001
<PAGE>
[LOGO]
EAST WEST BANCORP, INC.
415 HUNTINGTON DRIVE
SAN MARINO, CALIFORNIA 91108
(626) 583-3500
---------------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 16, 2001
---------------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors ("Board of Directors") of East West Bancorp,
Inc. for use at the annual meeting ("Meeting") of the stockholders
("Stockholders") to be held on May 16, 2001 at The Ritz-Carlton Huntington
Hotel, 1401 South Oak Knoll Avenue, Pasadena, California, at 10:30 a.m. and at
any adjournment thereof. This Proxy Statement and the enclosed proxy card
("Proxy") and other enclosures are first being mailed to Stockholders on or
about April 12, 2001. Only Stockholders of record on April 2, 2001 ("Record
Date") are entitled to vote in person or by proxy at the Meeting or any
adjournment thereof.
MATTERS TO BE CONSIDERED
The matters to be considered and voted upon at the Meeting will be:
1. ELECTION OF DIRECTORS. The election of two persons as directors for
terms expiring in 2004 and to serve until his or her successors are
elected and qualified. The Board of Directors' nominees are:
JULIA GOUW
EDWARD ZAPANTA
2. OTHER BUSINESS. The transaction of such other business as may properly
come before the annual meeting or any postponement or adjournment of the
annual meeting.
COSTS OF SOLICITATION OF PROXIES
This solicitation of Proxies is made on behalf of the Board of Directors of
East West Bancorp and East West Bancorp will bear the costs of solicitation. The
expense of preparing, assembling, printing and mailing this Proxy Statement and
the materials used in this solicitation of Proxies also will be borne by East
West Bancorp. It is contemplated that Proxies will be solicited principally
through the mail, but directors, officers and regular employees of East West
Bancorp may solicit Proxies personally or by telephone. Although there is no
formal agreement to do so, East West Bancorp may reimburse
2
<PAGE>
banks, brokerage houses and other custodians, nominees and fiduciaries for their
reasonable expenses in forwarding these proxy materials to their principals.
East West Bancorp does not intend to utilize the services of other individuals
or entities not employed by or affiliated with it in connection with the
solicitation of Proxies.
OUTSTANDING SECURITIES AND VOTING RIGHTS; REVOCABILITY OF PROXIES
The authorized capital of East West Bancorp consists of 50,000,000 shares of
common stock, par value $.001 per share ("Common Stock"), of which 23,051,735
shares were issued and outstanding on the Record Date, and 5,000,000 shares of
serial preferred stock, par value $.001 per share, of which no shares were
issued and outstanding on the Record Date. A majority of the outstanding shares
of Common Stock constitutes a quorum for the conduct of business at the Meeting.
Abstentions will be treated as shares present and entitled to vote for purposes
of determining the presence of a quorum. Each Stockholder is entitled to one
vote, in person or by proxy, for each share of Common Stock standing in his or
her name on the books of the Company as of the Record Date on any matter
submitted to the Stockholders.
East West Bancorp's Certificate of Incorporation does not authorize
cumulative voting. For the Proposal, the election of directors, the person
receiving the highest number of votes "FOR" will be elected. Accordingly,
abstentions from voting and votes "WITHHELD" in the election of directors have
no legal effect.
Unless otherwise required by law, the Certificate of Incorporation, or
Bylaws, other proposals that may properly come before the meeting require the
affirmative vote of the majority of shares present in person or by proxy at the
meeting and entitled to vote.
A Proxy for use at the Meeting is enclosed. The Proxy must be signed and
dated by you or your authorized representative or agent. You may revoke a Proxy
at any time before it is exercised at the Meeting by submitting a written
revocation to the Secretary of East West Bancorp or a duly executed proxy
bearing a later date or by voting in person at the Meeting.
If you hold your Common Stock in "street name" and you fail to instruct your
broker or nominee as to how to vote your Common Stock, your broker or nominee
may, in its discretion, vote your Common Stock "FOR" the election of the Board
of Director's nominee.
Unless revoked, the shares of Common Stock represented by properly executed
Proxies will be voted in accordance with the instructions given thereon. In the
absence of any instruction in the Proxy, your shares of Common Stock will be
voted "FOR" the election of the nominee for director set forth herein.
The enclosed Proxy confers discretionary authority with respect to matters
incident to the Meeting and any other proposals which management did not have
notice of at least 45 days prior to the date on which East West Bancorp mailed
its proxy material for last year's annual meting of Stockholders. As of the date
hereof, management is not aware of any other matters to be presented for action
at the Meeting. However, if any other matters properly come before the Meeting,
the Proxies solicited hereby will be voted by the Proxyholders in accordance
with the recommendations of the Board of Directors.
3
<PAGE>
BENEFICIAL STOCK OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock as
of the Record Date by (i) each person known to East West Bancorp to own more
than 5% of the outstanding Common Stock, (ii) the directors and nominees for
director of East West Bancorp, (iii) the Chief Executive Officer and the four
other executive officers of East West Bancorp and its subsidiaries whose total
annual compensation in 2000 exceeded $100,000 (the "Named Executives"), and (iv)
all executive officers and directors of East West Bancorp and its subsidiaries,
as a group:
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
NUMBER OF SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY OF
OF BENEFICIAL OWNER OWNED(1)(2) CLASS(2)
- ------------------- ---------------- --------
<S> <C> <C>
Westfield Capital Management Co. Inc. ...................... 1,839,000 7.98%
One Financial Center
Boston, MA 02111
Continental Casualty Corporation ........................... 1,280,000(3) 5.55%
CNA Plaza 23
South Chicago, IL 60685
Dominic Ng.................................................. 566,557(4) 2.46%
Julia Gouw.................................................. 301,786(5) 1.31%
Herman Li................................................... 10,000 *
Jack Liu.................................................... 11,250(6) *
James Miscoll............................................... 12,521(7) *
Keith Renken................................................ 7,500(8) *
Edward Zapanta.............................................. 16,250(9) *
Sandra Wong................................................. 6,687 *
Douglas Krause.............................................. 46,391 *
Donald Chow................................................. 20,045(10) *
All Directors and Executive Officers, as a group 998,987(11) 4.33%
(10 persons)..............................................
</TABLE>
- ------------------------------
* Less than 1%.
(1) Except as otherwise noted and except as required by applicable community
property laws, each person has sole voting and disposition powers with
respect to the shares.
(2) Shares which the person (or group) has the right to acquire within 60 days
after the Record Date are deemed to be outstanding in calculating the
ownership and percentage ownership of the person (or group).
(3) CNA Financial Corporation and Loews Corporation have filed a Schedule 13(G)
dated February 12, 2001 indicating shared dispositive power under SEC
interpretations regarding subsidiary control. CNA Financial Corporation and
Loews Corporation have each disclaimed beneficial ownership of these
securities.
(4) 434,937 of these shares are unexercised exercisable options held by Mr. Ng.
(5) 138,312 of these shares are unexercised exercisable options held by Ms.
Gouw. 9,000 of such shares are owned by the Gouw Family Foundation of which
Ms. Gouw is trustee; 300 shares are owned by family members for whom Ms.
Gouw has voting power; Ms. Gouw disclaims any beneficial interest in such
shares.
(6) 6,250 of these shares are unexercised exercisable options held by Mr. Liu.
5,000 of these shares are owned by Yuan Yi Tsui, the wife of Mr. Liu; Mr.
Liu disclaims any beneficial ownership in such shares.
(7) 2,500 of these shares are unexercised exercisable options held by Mr.
Miscoll.
4
<PAGE>
(8) 2,500 of these shares are unexercised exercisable options held by Mr.
Renken.
(9) 6,250 of these shares are unexercised exercisable options held by Mr.
Zapanta.
(10) 5,000 of these shares are unexercised exercisable options held by Mr. Chow.
(11) Included in this amount are 595,749 unexercised exercisable stock options
for all directors and executive officers as a group.
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16(A)
Under Section 16(a) of the Exchange Act, East West Bancorp's directors,
executive officers and any persons holding five percent or more of the Common
Stock are required to report their ownership of Common Stock and any changes in
that ownership to the Securities and Exchange Commission (the "SEC") and to
furnish East West Bancorp with copies of such reports. Specific due dates for
these reports have been established and East West Bancorp is required to report
in this Proxy Statement any failure to file on a timely basis by such persons.
Based solely upon a review of copies of reports provided during the fiscal year
ended December 31, 2000, all persons subject to the reporting requirements of
Section 16(a) filed all required reports on a timely basis.
ELECTION OF DIRECTORS
BOARD OF DIRECTORS AND NOMINEES
East West Bancorp's Certificate of Incorporation and Bylaws provide that the
number of directors shall be determined from time to time by the Board of
Directors but may not be less than five. The Board of Directors is currently
composed of seven members. The Bylaws further provide for the division of the
initial directors into three classes of approximately equal size. Two members
shall be elected to a three year term at the annual meeting of Stockholders in
2001, two members shall be elected to a three year term at the annual meeting of
Stockholders in 2002, and three members shall be elected to a three year term at
the annual meeting of Stockholders in 2003.
The directors proposed for re-election, Julia Gouw and Edward Zapanta, were
appointed to the Board of Directors in 1997 and 1998, respectively. Ms. Gouw and
Dr. Zapanta have indicated their willingness to serve and unless otherwise
instructed, Proxies will be voted in such a way as to effect, if possible, the
election of Ms. Gouw and Dr. Zapanta. In the event that Ms. Gouw or Dr. Zapanta
should be unable to serve as a director, it is intended that the Proxies will be
voted for the election of such substitute nominee, if any, as shall be
designated by the Board of Directors. Management has no reason to believe that
Ms. Gouw or Dr. Zapanta will be unavailable.
None of the directors, nominees for director or executive officers were
selected pursuant to any arrangement or understanding, other than with the
directors and executive officers of East West Bancorp acting within their
capacity as such. There are no family relationships among directors or executive
officers of East West Bancorp. As of the date hereof, no directorships are held
by any director with a company which has a class of securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or subject to the requirements of Section 15(d) of the Exchange
Act or any company registered as an investment company under the Investment
Company Act of 1940 except that Mr. Ng is a director of ESS Technology, Inc.;
Dr. Zapanta is a director of Edison International; Mr. Renken is a director of
Pacific Gulf Properties; and Mr. Miscoll is a director of Westinghouse Air Brake
Company, 21st Century Industries, Chela Financial, Encore Productions, and MK
Gold Company: Ms. Gouw and Mr. Krause are directors of East West Securities
Company, Inc., a registered investment company under the Investment Company Act
of 1940.
The following table sets forth certain information with respect to the
Board's nominees for director and the current directors of East West Bancorp.
All directors of East West Bancorp are also directors of East West Bank (the
"Bank"), the principal subsidiary of East West Bancorp. Officers will serve at
5
<PAGE>
the pleasure of the Board of Directors, subject to restrictions set forth in
their employment agreements. SEE "ELECTION OF DIRECTORS--Compensation of
Executive Officers--EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS".
<TABLE>
<CAPTION>
YEAR FIRST CURRENT
ELECTED OR TERM TO
NAME OF DIRECTOR AGE(1) APPOINTED(2) EXPIRE
- ---------------- -------- ------------ --------
<S> <C> <C> <C>
NOMINEES FOR TERM EXPIRING 2004:
Julia Gouw.................................................. 41 1997 2004
Edward Zapanta.............................................. 62 1998 2004
CONTINUING DIRECTORS:
Dominic Ng.................................................. 42 1991 2002
Herman Li................................................... 48 1998 2002
Jack Liu.................................................... 43 1998 2003
James Miscoll............................................... 66 2000 2003
Keith Renken................................................ 66 2000 2003
</TABLE>
- ------------------------
(1) As of March 1, 2001.
(2) Refers to the earlier of the year the individual first became a director of
East West Bancorp or the Bank.
The principal occupation during the past five years of each director and
nominee is set forth below. All directors have held their present positions for
at least five years, unless otherwise stated.
DOMINIC NG has served as a director of the Bank since 1991, as President and
Chief Executive Officer of the Bank since October 1992, and as Chairman of the
Board since 1998. Mr. Ng has held the same positions with East West Bancorp
since its formation. Prior to joining the Bank, he was President and CEO of
Seyen Investment Inc. While he was a CPA with Deloitte & Touche, he headed
Chinese Business Services Group. Mr. Ng serves on the Board of ESS Technology,
Inc. He is also the Campaign Chairman of United Way of Greater Los Angeles and a
member of the Board of Visitors of The Anderson School at UCLA and the Board of
Regents of Loyola Marymount University. Mr. Ng has received numerous awards in
the professional and philanthropic communities during the past decade.
JULIA GOUW has served as Executive Vice President and Chief Financial
Officer of the Bank since 1994 and as a director of the Bank since 1997, and has
held these same positions with East West Bancorp since its formation. Prior to
joining East West Bank in 1989 as Vice President and Controller. Ms. Gouw was a
Senior Audit Manager with KPMG LLP. She is on the Board of Visitors of UCLA
School of Medicine, a member of the Financial Executives' Institute and the
California Society of CPA's.
HERMAN Y. LI is Chairman of the C&L Restaurant Group, a franchisee of Burger
King and Denny's which owns and operates over 85 restaurants throughout the
nation. He is a member of the executive committe of Burger King Corporation's
Diversity Action Council. Mr. Li was honored by the Asian Business Association
of Los Angeles in 1997 as "Asian Business Owner of the Year."
JACK C. LIU, ESQ., is president of the Asia region of Global Gateway, L.P.,
an international company that is a leading provider of telecommunications real
estate facilities throughout the Western United States and Asia Pacific Rim,
which he joined in September 2000. Previously, he was an attorney with a
practice in Los Angeles and Taiwan, where he also served as managing partner of
SilkRoad Capital Corp., an investment firm for Asia-related projects. He
practiced with the law firm of Deacons
6
<PAGE>
Graham & James, Taipei office, which he joined in 1999. Mr. Liu was also
formerly of counsel to the international law firm of Morgan Lewis & Bockius LLP
and to the law firm of Sheppard, Mullin, Richter & Hampton. Mr. Liu's legal
expertise is in corporate, banking regulation and real estate investment
matters.
JAMES P. MISCOLL is a corporate director and private investor. Mr. Miscoll
had a 30-year career at Bank of America, where he served as Vice Chairman of the
Board for three years and as a member of the managing committee for ten years.
His responsibilities included heading operations throughout Europe and Asia,
Global Retail Bank operations, and the Corporate Account Division. Mr. Miscoll
currently serves as a director of Westinghouse Air Brake Company, 21st Century
Industries, Chela Financial, Encore Productions, MK Gold Company, and several
private companies. He is currently also a trustee of the Giannini Family
Foundation.
KEITH W. RENKEN is the Managing Partner of Renken Enterprises, a consulting
company. He was a leading advisor to Southern California and Pacific Rim
businesses during his 33 years with Deloitte & Touche LLP. He is now a professor
in the University of Southern California "Executive in Residence Program." Mr.
Renken is a director of Pacific Gulf Properties and several private companies.
His many honors include the "Distinguished Business Leader Award" from the Los
Angeles Area Chamber of Commerce.
EDWARD ZAPANTA, M.D. has served as Vice-Chairman of the Board of the Bank
since June 1998 and has held the same position with East West Bancorp since its
formation. Dr. Zapanta is the Senior Medical Director of HealthCare Partners
Medical Group. Dr. Zapanta is also a clinical Professor of Surgery, Department
of Neurosurgery, at the University of Southern California Keck School of
Medicine and also serves on its Overseers Board. He was the founder of Universal
Medi-Co, a multi-specialty medical group, which merged with HealthCare Partners
in 1992. Dr. Zapanta is on the Board of Directors of Edison International and of
The James Irvine Foundation and also serves on the Board of Trustees of the
University of Southern California.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE ELECTION OF THE BOARD OF DIRECTORS' NOMINEES.
7
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The business of East West Bancorp's Board of Directors is conducted through
its meetings, as well as through meetings of its committees. Set forth below is
a description of the committees of the Board.
The Audit Committee of East West Bancorp reviews and reports to the Board on
various auditing and accounting matters, including the annual audit report from
the independent public accountants. The Audit Committee currently consists of
Jack Liu, Keith Renken, and Herman Li as its Chairman. East West Bank also has
an Audit Committee, which consists of the same directors who comprise the Audit
Committee of East West Bancorp and which meets at the same time as the Audit
Committee of East West Bancorp. The Audit Committees met six times in 2000.
The Executive Committee of East West Bancorp is authorized to exercise
certain powers of the Board of Directors during intervals between the meetings
of the Board of Directors. The Executive Committee currently consists of Dominic
Ng and Julia Gouw. East West Bank also has an Executive Committee, which
consists of the same directors who comprise the Executive Committee of East West
Bancorp. The Executive Committee of East West Bancorp met three times in 2000
and the Executive Committee of East West Bank met 22 times in 2000.
The Compensation Committee of East West Bank establishes executive
compensation policies as well as the actual compensation of the Chief Executive
Officer. The Compensation Committee currently consists of Herman Li, James
Miscoll, and Edward Zapanta as its Chairman. East West Bancorp does not have a
separate Compensation Committee. The Compensation Committee met one time in
2000.
The Board of Directors of East West Bancorp met seven times during 2000. All
of the persons who were directors of East West Bancorp during 2000 attended 100%
of the aggregate of the total number of meetings of the Board of Directors and
the total number of meetings held by the committees on which he or she served in
2000, except that one director did not attend one Board meeting.
COMPENSATION OF DIRECTORS
Employees of East West Bancorp and its subsidiaries are not compensated for
service as directors of East West Bancorp or its subsidiaries. Nonemployee
directors receive an annual retainer of $10,000, plus $1,000 for each Board
meeting attended and $300 for each committee meeting attended. The committee
chair receives an additional $200 for each committee meeting attended. During
the year ended December 31, 2000, pursuant to East West Bancorp's Stock
Incentive Plan, Messrs. Li, Liu, and Zapanta received 5,000 options to purchase
Common Stock at an exercise price of $15.875 per share, Mr. Renken received
10,000 options to purchase Common Stock at an exercise price of $12.1875 per
share, and Mr. Miscoll received 10,000 options to purchase Common Stock at an
exercise price of $11.375 per share; all of these options vest at the rate of
25% per year on each anniversary of the grant.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE. It is expected that until the officers of East
West Bancorp begin to devote significant time to the separate management of East
West Bancorp and East West Bank, which is not expected to occur until such time
as East West Bancorp becomes actively involved in additional businesses, the
officers will only receive compensation for services as officers and employees
of East West Bank, and no separate compensation will be paid for their services
to East West Bancorp.
8
<PAGE>
The following table sets forth the name and compensation of the Named Executive
Officers for the fiscal years ended December 31, 2000, 1999, and 1998:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------------
RESTRICTED NUMBER OF
AWARDS OPTIONS
ANNUAL ANNUAL STOCK STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS ($)(2) GRANTED COMPENSATION(3)
- --------------------------- -------- --------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Dominic Ng ...................... 2000 $479,755 $500,000 -- 500 43,550
Chairman, President, and Chief 1999 477,000 393,000 14,260 -- 59,447
Executive Officer 1998 431,104 225,000 -- 1,069,875 7,500
Julia Gouw ...................... 2000 $215,496 $200,000 -- 500 35,075
Executive Vice President, Chief 1999 207,333 180,000 1,969 -- 19,038
Financial Officer and Director 1998 187,763 80,000 -- 356,625 7,361
Sandra Wong ..................... 2000 $157,020 $ 35,000 -- 5,500 15,376
Executive Vice President and 1999 153,349 42,770 1,449 5,000 606
Chief Credit Officer 1998 18,750 5,625 -- 10,000 --
Douglas Krause ..................
Executive Vice President, 2000 $149,099 $100,000 -- 500 16,885
General Counsel, and Corporate 1999 143,371 90,000 1,363 -- 5,938
Secretary 1998 135,864 40,800 -- 25,000 --
Donald Chow ..................... 2000 $143,144 $ 45,000 -- 500 14,475
Executive Vice President, and 1999 121,768 65,000 1,147 -- 7,500
Director of Commercial Lending 1998 116,615 42,500 -- 10,000 5,553
</TABLE>
- ------------------------------
(1) Includes compensation deferred at election of executive and the year upon
which such compensation was earned.
(2) Dividends are paid on all restricted shares at the same rate and time as on
common shares. The number and aggregate value of restricted stock holdings
as of December 31, 2000 for the Named Executives are as follow: Dominic
Ng--14,260 shares valued at $355,609; Julia Gouw--1,969 shares valued at
$49,102; Sandra Wong--1,449 shares valued at $36,134; Doug Krause--1,363
shares valued at $33,990; and Don Chow--1,147 shares valued at $28,603.
(3) Represents employer contributions to the 401(k) Plan, unused vacation pay,
automobile allowances, and financial planning services. The named executive
officers are also provided with certain group life, health, medical and
other non-cash benefits generally available to all salaried employees and
not included in this column pursuant to SEC rules.
9
<PAGE>
OPTION GRANTS
The following stock options were granted during 2000 to the Named Executives
pursuant to East West Bancorp's Stock Incentive Plan.
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF
TOTAL OPTIONS HYPOTHETICAL
NUMBER OF GRANTED TO EXERCISE VALUE AT
OPTIONS EMPLOYEES IN PRICE GRANT
NAME GRANTED(1) FY 2000 ($/SHARE) EXPIRATION DATE DATE(2)
- ---- ---------- ------------- --------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Dominic Ng.......................... 500 0.15% $15.875 8/31/2010 $ 4,275
Julia Gouw.......................... 500 0.15% $15.875 8/31/2010 $ 4,275
Douglas P. Krause................... 500 0.15% $15.875 8/31/2010 $ 4,275
Donald Chow......................... 500 0.15% $15.875 8/31/2010 $ 4,275
Sandra Wong......................... 500 0.15% $15.875 8/31/2010 $ 4,275
5,000 1.47% $20.625 11/16/2010 $42,750
</TABLE>
- ------------------------------
(1) The options were granted pursuant to the Stock Incentive Plan. The options
become exercisable in annual installments of 25% on each of the first,
second, third and fourth anniversary dates of the grant. The options may be
exercised at any time prior to their expiration by tendering the exercise
price in cash, check or in shares of stock valued at fair market value on
the date of exercise. In the event of a change in control (as defined), the
options will become exercisable in full. The options may be amended by
mutual agreement of the optionee and East West Bancorp.
(2) The estimated present value at grant date of options granted during fiscal
year 2000 has been calculated using the Black-Scholes option pricing model,
based upon the following assumptions: estimated time until exercise of 6.0
years; a risk-free interest rate of 5.1%, representing the interest rate on
a U.S. government zero-coupon bond with a maturity corresponding to the
estimated time until exercise; a volatility rate of 47.5%; and a dividend
yield of 0.8%, representing the current $0.03 per share annualized dividends
divided by the fair market value of the common stock on the date of grant.
The approach used in developing the assumptions upon which the Black-Scholes
valuation was done is consistent with the requirements of Statement of
Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION."
10
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information concerning options held
by the Named Executives under East West Bancorp's Stock Incentive Plan:
AGGREGATED OPTION EXERCISES DURING FISCAL YEAR 2000
OPTION VALUES ON DECEMBER 31, 2000
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 2000 AT DECEMBER 31, 2000
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dominic Ng........................ -- -- 534,937 535,438 $7,990,621 $7,995,168
Julia Gouw........................ -- -- 178,312 178,813 $2,663,536 $2,668,082
Douglas Krause.................... -- -- 12,500 13,000 $ 186,719 $ 191,250
Sandra Wong....................... -- -- 6,250 14,250 $ 93,359 $ 156,797
Donald Chow....................... -- -- 5,000 5,500 $ 74,688 $ 79,219
</TABLE>
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
East West Bank has entered into employment agreements with certain of its
executive officers intended to ensure that the Bank will be able to maintain a
stable and competent management base. The agreements provide that should any of
the executives be terminated without cause or, for certain executives, should
they resign for good reason, including a detrimental change in responsibilities
or a reduction in salary or benefits, the Bank shall pay such executive a
designated lump sum. The payments range from six months to three years of base
salary plus certain benefits and bonuses. If all agreements were terminated
without cause following a change in control, such executive officers would be
entitled to receive payments, which are estimated to have an aggregate value of
approximately $6.0 million at March 1, 2001.
Although the above-described employment agreements could increase the cost
of any acquisition of control of East West Bancorp or East West Bank, management
does not believe that the terms thereof would have a significant anti-takeover
effect.
11
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
East West Bank's Compensation Committee (the "Compensation Committee")
establishes the general policies regarding compensation of the Chief Executive
Officer and approves the specific compensation levels for the Chief Executive
Officer. During 2000, the members of the Compensation Committee were Herman Li,
James Miscoll, and Edward Zapanta as its Chairman. Each member of the
Compensation Committee is a non-employee director of East West Bancorp and East
West Bank.
Set forth below is a report of the Compensation Committee of the Bank
addressing the compensation policies for 2000 applicable to the Bank's Chief
Executive Officer.
THE REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION SHALL NOT
BE DEEMED INCORPORATED BY REFERENCE BY ANY GENERAL STATEMENT INCORPORATING BY
REFERENCE THIS PROXY STATEMENT INTO ANY FILING UNDER THE SECURITIES ACT OF 1933
(THE "SECURITIES ACT") OR UNDER THE EXCHANGE ACT, EXCEPT TO THE EXTENT THAT EAST
WEST BANCORP SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE, AND SHALL
NOT OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.
OVERALL PHILOSOPHY
The goals of the executive compensation and benefits programs are to enable
the Bank to attract and retain high caliber executives, provide a total
compensation package in a cost effective manner, encourage management ownership
of East West Bancorp common stock and to maximize return to its shareholders.
The philosophy of the Bank is to provide a compensation program that is
designed to reward achievement of the Bank's goals and objectives and to provide
total compensation opportunities that are competitive when compared with those
of comparable financial institutions.
To achieve the compensation and benefits program objectives:
- The principal objective of the salary program is to maintain salaries that
are targeted at the median for comparable positions in similarly sized
financial institutions,
- Annual incentives are designed to reward for overall Bank success and
individual performance and provide total cash compensation opportunities
above competitive levels when warranted by performance,
- The principal objective of the long-term stock-based incentive plan is to
align management's financial interests with those of East West Bancorp's
shareholders, provide incentive for management ownership of East West
Bancorp common stock, support the achievement of long-term financial
objectives, and provide for long term incentive reward opportunities,
Employee benefits are offered to provide a competitive total compensation
program and to encourage retention of key employees.
ROLE OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors of East West Bank
establishes executive compensation policies as well as the actual salary, bonus
and discretionary benefits of the Chief Executive Officer. Decisions of the
Compensation Committee of East West Bank are subject to review and approval by
the Board of Directors. The Compensation Committee is comprised of three non-
employee directors of East West Bank.
ELEMENTS OF THE COMPENSATION PROGRAM
There are three principal elements of the executive compensation
program--base salary, bonus compensation (annual incentive) and long-term
stock-based incentive compensation (stock options). In
12
<PAGE>
determining each component of compensation, the total compensation package of
each executive is considered.
BASE SALARIES
The salary of each executive officer is determined initially according to
competitive pay practices, level of responsibility, prior experience, and
breadth of knowledge, as well as internal equity issues. The Bank uses its
discretion rather than a formal weighting system to evaluate these factors and
to determine individual base salary levels. Thereafter, base salaries are
reviewed on an annual basis, and increases are made based on a subjective
assessment of each executive's performance, as well as the factors described
above.
ANNUAL INCENTIVES
The Bank provides annual incentives to all employees, including executives.
Annual incentives are intended to reward for overall Bank success and individual
performance and provide total cash compensation opportunities above competitive
levels when warranted by performance. The Bank considers individual
contributions, business unit performance, overall corporate performance, and
performance compared to peer banks. Actual awards, if any, are also based on a
subjective assessment of each executive's individual performance. No formal
weightings are assigned to these levels of performance.
Each executive is assigned a bonus range as a percentage of salary, with a
maximum bonus achievable at above average performance from the executive.
LONG-TERM STOCK-BASED INCENTIVES
The Bank believes that long-term incentive compensation opportunities should
be dependent on stock-based measures to strengthen the alignment between
management's interests and those of East West Bancorp's shareholders. Under its
1998 Stock Incentive Plan, East West Bancorp generally grants stock options to
all executives of East West Bancorp and of the Bank. All options have been
granted at an option price not less than the fair market value of the common
stock on the date of grant. Thus, stock options have value only if the stock
price appreciates from the date the options are granted. The result is a focus
by all executives on the creation of shareholder value over the long term.
In determining the number of options granted to individual executives,
individual contributions, business unit performance, competitive practices, the
number of options previously granted, and value of the stock on the date of the
grant are considered. Formal weightings have not been assigned to these factors.
CHIEF EXECUTIVE OFFICER COMPENSATION
The determination of the Chief Executive Officer's salary, bonus and grants
of stock options followed the policies described above for the determination of
all executives' compensation subject to the additional considerations described
below.
Compensation for the Chief Executive Officer, Mr. Ng, was made in accordance
with a three-year employment agreement entered into in June 1998 in connection
with the sale of the Bank by its prior shareholders. The terms of the employment
agreement are described in "Employment and Change of Control Agreements." The
base salary of the Chief Executive Officer is described in the Summary
Compensation Table.
The bonus of the Chief Executive Officer is described in the Summary
Compensation Table. This indicated bonus was determined pursuant to the terms of
Mr. Ng's employment contract and is based primarily on the satisfaction of
performance criteria determined by the Board. The performance criteria
13
<PAGE>
include the satisfaction by the Bank of goals relating to return on equity,
return on assets, ratio of non-performing assets to total assets, and increase
in stock price.
The Chief Executive Officer received stock options in 2000 to purchase 500
shares of East West Bancorp's common stock as part of a general grant of 500
shares to each employee of East West Bancorp and its subsidiaries. No other new
options were granted in 2000. All of the options granted have an exercise price
equal to the fair market value of the stock on the date of grant.
POLICY WITH RESPECT TO DEDUCTIBILITY
Section 162(m) of the Internal Revenue Code of 1987, as amended (the
"Code"), generally limits the corporate deduction for compensation paid to
executive officers named in the Proxy Statement to $1,000,000, unless the
compensation qualifies as "performance based" and has been approved in advance
by a vote of its shareholders. Section 162(m) excludes from its deduction limits
any compensation received pursuant to the exercise of a stock option granted
prior to the first shareholder meeting at which directors are to be elected that
occurs after the close of the first calendar year following the calendar year in
which East West Bancorp became publicly held; all stock options currently
granted to executive officers named in the Proxy Statement comply with this
grandfather clause.
Neither East West Bancorp nor East West Bank is currently compensating any
named executive officers at a level that would cause this limitation on
corporate tax deductions to apply (other than for certain possible payments in
the event of a termination without cause or a resignation for good cause, as
specified in certain employment agreements). The Compensation Committee has
accordingly not adopted a formal policy concerning the application of the
Section 162(m) limitation on tax deductions. The Compensation Committee will
continue to monitor the applicability of Section 162(m), and if applicable, will
review whether such payments should be structured so as to qualify as deductible
performance-based compensation.
<TABLE>
<S> <C>
Dated: March 30, 2001 THE 2000 COMPENSATION COMMITTEE
Edward Zapanta, Chairman
Herman Li
James Miscoll
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No person who served as a member of the Compensation Committee during the
2000 fiscal year is, or ever has been, an officer or employee of East West
Bancorp or any of its subsidiaries.
Except as provided herein, there are no existing or proposed material
transactions between East West Bancorp or East West Bank and any of its
executive officers, directors, or the immediate family or associates of any of
the foregoing persons.
REPORT BY THE AUDIT COMMITTEE
The Audit Committee operates pursuant to a written charter adopted by East
West Bancorp's Board of Directors on May 10, 2000, a copy of which is attached
as Appendix A to this proxy statement.
The Board of Directors, in its business judgment, has determined that each
of the members of the Audit Committee is independent, as required by the
applicable listing standards of the NASDAQ Stock Market, Inc.
14
<PAGE>
In performing its function, the Audit Committee has:
- reviewed and discussed the audited financial statements of East West
Bancorp as of and for the year ended December 31, 2000 with management;
- discussed with East West Bancorp's independent auditors the matters
required to be discussed by Statement of Auditing Standards No. 61
(Communication with Audit Committee), as currently in effect; and
- received the written disclosures and the letter from the independent
auditors required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees), as currently in effect,
and has discussed with the independent auditors the independent auditors'
independence.
Based on the foregoing review and discussions, the Audit Committee
recommended to the Board of Directors that East West Bancorp's audited financial
statements be included in its Company's Annual Report on Form 10-K for the year
ended December 31, 2000 for filing with the Securities and Exchange Commission.
<TABLE>
<S> <C>
Dated: March 30, 2001 THE 2000 AUDIT COMMITTEE
Herman Li, Chairman
Jack Liu
Keith Renken
</TABLE>
THE REPORT OF THE AUDIT COMMITTEE SHALL NOT BE DEEMED INCORPORATED BY
REFERENCE INTO ANY FILING UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES
EXCHANGE ACT OF 1934, EXCEPT TO THE EXTENT THAT EAST WEST BANCORP SPECIFICALLY
INCORPORATES IT BY REFERENCE, AND SHALL NOT OTHERWISE BE DEEMED TO BE FILED
UNDER SUCH ACTS.
15
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph shows a comparison of stockholder return on East West
Bancorp's Common Stock based on the market price of Common Stock assuming the
reinvestment of dividends, with the cumulative total returns for the companies
in the Standard & Poor's 500 Index and the SNL Western Bank Index for the period
beginning on February 8, 1999, the first day of trading in East West Bancorp's
Common Stock, through December 31, 2000. The graph was derived from a limited
period of time, and, as a result, may not be indicative of possible future
performance of the Common Stock.
COMPARISON OF CUMULATIVE TOTAL RETURNS AMONG EAST WEST BANCORP,
THE STANDARD & POOR'S 500 INDEX AND THE SNL WESTERN BANK INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EAST WEST BANCORP, INC. S&P 500 SNL WESTERN BANK INDEX
<S> <C> <C> <C>
2/8/99 100 100 100
6/30/99 104.86 110.93 119.48
12/31/99 119.81 119.48 115.91
6/30/00 151.3 118.98 108.69
12/31/00 263.36 108.6 153.45
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDING
----------------------------------------------------
INDEX 02/08/99 06/30/99 12/31/99 06/30/00 12/31/00
- ----- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
East West Bancorp, Inc............................. 100.00 104.86 119.81 151.30 263.36
S&P 500............................................ 100.00 110.93 119.48 118.98 108.60
SNL Western Bank Index............................. 100.00 119.48 115.91 108.69 153.45
</TABLE>
- ------------------------------
NOTES:
A. The lines represent semiannual index levels derived from compounded daily
returns that include all dividends.
B. If the semiannual interval is not a trading day, the preceding trading day
is used.
C. The index level for all series was set to 100.00 on February 8, 1999.
16
<PAGE>
CERTAIN TRANSACTIONS
None of the directors or executive officers of East West Bancorp and its
subsidiaries, or any associate or affiliate of such person, had any other
material interest, direct or indirect, in any transaction during the past year
or any proposed transaction with East West Bancorp and its subsidiaries.
INDEPENDENT AUDITORS
The auditors of East West Bancorp and the Bank are Deloitte & Touche LLP,
Certified Public Accountants. Deloitte & Touche LLP performs both audit and
non-audit professional services for and on behalf of East West Bancorp and its
subsidiaries. During 2000, the audit services included examination of the
consolidated financial statements of East West Bancorp and a review of certain
filings with the Securities and Exchange Commission. All professional services
rendered by Deloitte & Touche LLP during 2000 were furnished at customary rates
and terms.
The following table sets forth information regarding the aggregate fees
billed for services rendered by Deloitte & Touche LLP for the fiscal year ended
December 31, 2000:
<TABLE>
<S> <C>
Audit Fees.................................................. $189,220
Financial Information Systems Design and Implementation
Fees...................................................... $ 0
All Other Fees.............................................. $ 64,030
</TABLE>
Representatives of Deloitte & Touche LLP will be present at the Meeting and
will be provided the opportunity to make a statement and to respond to
appropriate questions which may be asked by stockholders.
PROPOSALS OF STOCKHOLDERS
Proposals of Stockholders intended to be included in the proxy materials for
the 2002 Annual Meeting of Stockholders must be received by the Secretary of
East West Bancorp, 415 Huntington Drive, San Marino, California 91108, by
November 16, 2001.
Under Rule 14a-8 adopted by the Securities and Exchange Commission under the
Exchange Act, proposals of stockholders must conform to certain requirements as
to form and may be omitted from the proxy statement and proxy under certain
circumstances. In order to avoid unnecessary expenditures of time and money by
stockholders and by East West Bancorp, stockholders are urged to review this
rule and, if questions arise, to consult legal counsel prior to submitting a
proposal.
SEC rules also establish a different deadline for submission of shareholder
proposals that are not intended to be included in East West Bancorp's proxy
statement with respect to discretionary voting (the "Discretionary Vote
Deadline"). The Discretionary Vote Deadline for the year 2002 annual meeting is
February 26, 2002 (45 calendar days prior to the anniversary of the mailing date
of this proxy statement). If a shareholder gives notice of such a proposal after
the Discretionary Vote Deadline, proxy holders will be allowed to use their
discretionary voting authority to vote against the shareholder proposal without
discussion when and if the proposal is raised at the year 2002 annual meeting.
East West Bancorp has not been notified by any shareholder of his or her
intent to present a shareholder proposal from the floor at this year's Annual
Meeting. The enclosed proxy card grants the proxy holders discretionary
authority to vote on any matter properly brought before the Annual Meeting.
17
<PAGE>
ANNUAL REPORT
The Annual Report for the fiscal year ended December 31, 2000 will also be
mailed to all shareholders. The Annual Report contains consolidated financial
statements of East West Bancorp and its subsidiaries and the report thereon of
Deloitte & Touche LLP, East West Bancorp's independent auditors.
STOCKHOLDERS MAY OBTAIN WITHOUT CHARGE A COPY OF THE ANNUAL REPORT ON FORM
10-K INCLUDING FINANCIAL STATEMENTS REQUIRED TO BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2000 BY WRITING TO EAST WEST BANCORP AT 415
HUNTINGTON DRIVE, SAN MARINO, CALIFORNIA 91108.
OTHER BUSINESS
Management knows of no business, which will be presented for consideration
at the Meeting other than as stated in the Notice of Meeting. If, however, other
matters are properly brought before the Meeting, it is the intention of the
Proxyholders to vote the shares represented thereby on such matters in
accordance with the recommendation of the Board of Directors and authority to do
so is included in the Proxy.
EAST WEST BANCORP, INC.
Douglas P. Krause
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL, AND CORPORATE
SECRETARY
San Marino, California
March 30, 2001
18
<PAGE>
APPENDIX A
EAST WEST BANCORP, INC.
AUDIT COMMITTEE CHARTER
(Rev. May 10, 2000)
MISSION
The Audit Committee is appointed by the Board to assist the Board in
monitoring
i. the integrity of the financial statements of the Company;
ii. the compliance by the Company with legal and regulatory requirements;
and
iii. the independence and performance of the Company's internal and external
auditors.
MEMBERSHIP
The Audit Committee shall consist of at least three members. The members of
the Audit Committee shall meet the independence and experience requirements of
the NASDAQ Stock Market, Inc. The members of the Audit Committee shall be
appointed by the Board. Each Committee member shall be financially literate or
shall become financially literate within a reasonable period of time after
appointment to the Committee. At least one member of the Committee shall have
accounting or related financial management expertise.
KEY RESPONSIBILITIES
The Company's management is responsible for preparing the Company's
financial statements and the independent auditors are responsible for auditing
those financial statements. The Committee is responsible for overseeing the
conduct of these activities by the Company's management and the independent
auditors. The financial management and the independent auditors of the Company
have more time, knowledge and more detailed information on the Company than do
Committee members. Consequently, in carrying out its oversight responsibilities,
the Committee is not providing any expert or special assurance as to the
Company's financial statements or any professional certification as to the
independent auditor's work. In carrying out its oversight responsibilities, the
Committee shall perform the following functions:
OVERSIGHT OF INDEPENDENT AUDITORS. In the course of its oversight of the
independent auditors as provided under this Charter, the Committee will be
guided by the premise that the independent auditor is ultimately accountable to
the Board and the Committee.
The Committee, subject to any action that may be taken by the full Board,
shall have the ultimate authority and responsibility to select, evaluate and,
where appropriate, replace the independent auditor.
The Committee shall:
i. receive from the independent auditors annually, a formal written
statement delineating the relationships between the auditors and the
Company consistent with Independence Standards Board Standard Number 1;
ii. discuss with the independent auditors the scope of any such disclosed
relationships and their impact or potential impact on the independent
auditor's independence and objectivity; and
iii. recommend that the Board take appropriate action in response to the
independent auditor's report to satisfy itself of the auditor's
independence.
The Committee shall review the original proposed scope of the annual
independent audit of the Company's financial statements and the associated fees,
as well as any significant variations in the actual scope of the independent
audit and the associated fees.
19
<PAGE>
The Committee shall review the independent auditors' report relating to
reportable conditions in the internal control structure and financial reporting
practices.
OVERSIGHT OF INTERNAL AUDITORS. The Committee shall review and discuss with
management and the independent auditors:
i. The quality and adequacy of the Company's internal accounting controls.
ii. Organization of the internal audit department, the adequacy of its
resources and the competence of the internal audit staff.
iii. The audit risk assessment process and the proposed scope of the
internal audit department for the upcoming year and the coordination of
that scope with independent auditors.
iv. Results of the internal auditors' examination of internal controls
together with management's response thereto.
OVERSIGHT OF MANAGEMENT'S CONDUCT OF THE COMPANY'S FINANCIAL REPORTING
PROCESS.
AUDITED FINANCIAL STATEMENTS. The Committee shall review and discuss with
independent auditors the audited financial statements to be included in the
Company's Annual Report on Form 10-K (or the Annual Report to Shareowners if
distributed prior to the filing of Form 10-K) and review and consider with the
independent auditors the matters required to be discussed by the applicable
Statement of Auditing Standards ("SAS"). Based on these discussions, the
Committee will advise the Board of Directors whether it recommends that the
audited financial statements be included in the Annual Report on Form 10-K (or
the Annual Report to Shareowners).
INTERIM FINANCIAL STATEMENTS. The Committee, through its Chairman or the
Committee as a whole, will review, prior to the filing thereof, the Company's
interim financial results to be included in the Company's quarterly reports on
Form 10-Q and the matters required to be discussed by the applicable SAS.
FINANCIAL REPORTING PRACTICES. The Committee shall review, as appropriate,
unless already being reviewed by the Board:
i. Changes in the Company's accounting policies and practices and
significant judgments that may affect the financial results.
ii. The nature of any unusual or significant commitments or contingent
liabilities together with the underlying assumptions and estimates of
management.
ASSIST THE BOARD IN OVERSIGHT OF THE COMPANY'S COMPLIANCE WITH POLICIES AND
PROCEDURES. The Committee shall review and monitor, as appropriate, unless
already being reviewed by the Board:
i. Results of compliance programs.
ii. Significant findings of any examination by regulatory authorities or
agencies.
iii. The adequacy of this Charter. The Committee will recommend to the Board
any modifications to this Charter, which the Committee deems
appropriate, for approval by the Board.
While the Audit Committee has the responsibilities and powers set forth in
this Charter, it is not the duty of the Audit Committee to conduct audits or to
determine that the Company's financial statements are complete and accurate and
are in accordance with generally accepted accounting principles. This is the
responsibility of management and the independent auditor. Nor is it the duty of
the Audit Committee to conduct investigations, to resolve disagreements, if any,
between management and the independent auditor or to assure compliance with laws
and regulations and the Company's Code of Conduct.
OUTSIDE ADVISORS
The Audit Committee shall have the authority to retain special legal,
accounting or other consultants to advise the Committee as deemed appropriate by
the Committee.
20
<PAGE>
REVOCABLE PROXY
EAST WEST BANCORP, INC.
ANNUAL MEETING OF STOCKHOLDERS--MAY 16, 2001
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned stockholder(s) of East West Bancorp, Inc. (the "Company")
hereby nominates, constitutes and appoints Julia Gouw and Douglas P. Krause, and
each of them, the attorney, agent and proxy of the undersigned, with full power
of substitution, to vote all stock of the Company which the undersigned is
entitled to vote at the Annual Meeting of Stockholders of the Company (the
"Meeting") to be held at The Ritz-Carlton Huntington Hotel, 1401 South Oak Knoll
Avenue, Pasadena, California at 10:30 a.m., on Wednesday, May 16, 2001, and any
adjournments thereof, as fully and with the same force and effect as the
undersigned might or could do if personally present thereat, as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE OF "FOR" THE ELECTION OF THE BOARD
OF DIRECTORS' NOMINEES LISTED. IF ANY OTHER BUSINESS IS PRESENTED AT THE
MEETING, THIS PROXY SHALL BE VOTED BY THE PROXYHOLDERS IN ACCORDANCE WITH THE
RECOMMENDATIONS OF A MAJORITY OF THE BOARD OF DIRECTORS.
EAST WEST BANCORP, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY
This Proxy will be voted "FOR" the election of the Board of Directors' nominees
unless authority to do so is withheld.
<TABLE>
<S> <C> <C> <C>
1. ELECTION OF DIRECTORS--
Nominee: Julia Gouw For / / Withhold Authority / /
Term Expires 2004
Nominee: Edward Zapanta For / / Withhold Authority / /
Term Expires 2004
</TABLE>
PLEASE SIGN AND DATE ON REVERSE SIDE
<PAGE>
<TABLE>
<S> <C> <C>
2. OTHER BUSINESS. In their discretion, the proxyholders are authorized to
transact such other business as may properly come before the
Meeting and any adjournment or adjournments thereof.
</TABLE>
The undersigned hereby ratifies and confirms all that said attorneys and
proxyholders, or either of them, or their substitutes, shall lawfully do or
cause to be done by virtue hereof, and hereby revokes any and all proxies
heretofore given by the undersigned to vote at the Meeting. The undersigned
hereby acknowledges receipt of the Notice of Annual Meeting and the Proxy
Statement accompanying said notice.
(Please date this Proxy and sign your
name as it appears on your stock
certificates. Executors,
administrators, trustees, etc., should
give their full titles. All joint
owners should sign.)
I (We) / / do / / do not expect to
attend the Meeting.
Dated: _________________, 2001.
_______________________________________
Signature
_______________________________________
Signature
PLEASE SIGN, DATE AND RETURN THIS PROXY AS PROMPTLY AS POSSIBLE IN THE POSTAGE
PREPAID ENVELOPE PROVIDED.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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