UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
Mark One
For the quarterly period ended March 31, 2003
or
For the transition period from to .
Commission file number 000-24939
EAST WEST BANCORP, INC. (Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: (626) 799-5700
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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
Number of shares outstanding of the issuer's common stock on the latest practicable date: 23,989,625 shares of common stock as of April 30, 2003
TABLE OF CONTENTS
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Forward-Looking Statements
Certain matters discussed in this report may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the environment in which the Company operates and projections of future performance. Forward-looking statements are inherently unreliable and actual results may vary. Factors that could cause actual results to differ from these forward-looking statements include economic conditions, changes in the interest rate environment, changes in the competitive marketplace, risks associated with credit quality and other factors discussed in the Company's filings with the Securities and Exchange Commission, and in particular, the Company's Form 10-K under the heading "Risk Factors That May Affect Future Results." The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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PART I—FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
EAST WEST BANCORP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONAT MARCH 31, 2003 AND DECEMBER 31, 2002 (Unaudited)
See accompanying notes to condensed consolidated financial statements.
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EAST WEST BANCORP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOMEFOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (Unaudited)
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EAST WEST BANCORP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYFOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (Unaudited)
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EAST WEST BANCORP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (Unaudited)
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EAST WEST BANCORP, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three Months Ended March 31, 2003 and 2002 (Unaudited)
1. BASIS OF PRESENTATION
Our consolidated financial statements include the accounts of East West Bancorp, Inc. and our wholly owned subsidiaries, East West Bank and its subsidiaries and East West Insurance Agency, Inc. Intercompany transactions and accounts have been eliminated in consolidation.
The interim consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the three months ended March 31, 2003 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2002.
Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
New Accounting Standards
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force ("EITF") Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement did not have an impact on our financial position, results of operations, or cash flows.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions, which provides guidance on the accounting for the acquisition of a financial institution. This statement requires that the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination represents goodwill that should be accounted for under SFAS No. 142, Goodwill and Other Intangible Assets. Thus, the specialized accounting guidance in paragraph 5 of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, will not apply after September 30, 2002. If certain criteria in SFAS No. 147 are met, the amount of the unidentifiable intangible asset will be reclassified to goodwill upon adoption of the statement. Financial institutions meeting conditions outlined in SFAS No. 147 will be required to restate previously issued financial statements. Additionally, the scope of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, is amended to include long-term customer-relationship intangible assets such as depositor- and borrower-relationship intangible assets and credit cardholder
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intangible assets. This statement was effective October 1, 2002. The adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion 25. We adopted the disclosure requirements of SFAS No. 148 effective with our December 31, 2002 consolidated financial statements as well as in our subsequent interim financial statements.
In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Other, an interpretation of SFAS Nos. 5, 57 and 107, and rescission of FIN No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We adopted the provisions of FIN No. 45 to standby letters of credit issued and modified after December 31, 2002. The adoption of this interpretation did not have a material impact on our results of operations, financial position or cash flows.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51. FIN No. 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN No. 46 will apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The adoption of this interpretation did not have an impact on our results of operations, financial position or cash flows.
Stock-Based Compensation
We issue fixed stock options to certain officers and Directors. Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation, encourages, but does not require, companies to account for stock options using the fair value method, which generally results in compensation expense recognition. As also permitted by SFAS No. 123, we account for our fixed stock options using the intrinsic-value method, prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, which generally does not result in compensation expense recognition. Under the intrinsic value method, compensation cost for stock options is measured at the date of grant as the excess, if any, of the quoted market price of our stock over the exercise price of the options. Had
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compensation cost for our plans been determined based on the fair value at the grant dates of options consistent with the method defined in SFAS No. 123, our net income and earnings per share would have been reduced to the pro forma amounts indicated below for the three months ended March 31, 2003 and 2002:
3. ACQUISITION OF PACIFIC BUSINESS BANK
On March 14, 2003, we completed our acquisition of Pacific Business Bank ("PBB") at aggregate cash price of $25.0 million. The results of PBB's operations have been included in the consolidated financial statements since that date. The acquisition was accounted for under the purchase method of accounting, and accordingly, all assets and liabilities of PBB 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. We recorded total goodwill of approximately $9.9 million and core deposit premium of $1.6 million. Core deposit premium will be amortized using the straight-line method over 7 years.
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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
4. GOODWILL AND OTHER INTANGIBLES
Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001. The amortization of existing goodwill ceased on December 31, 2001. Goodwill resulting from acquisitions completed after June 30, 2001 is not amortized. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The adoption of SFAS No. 142 on January 1, 2002 resulted in a cumulative pre-tax income of $1.4 million ($788 thousand after-tax) representing the remaining balance of negative goodwill at December 31, 2001.
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The following tables set forth a reconciliation of net income and earnings per share information, before the cumulative effect of changes in accounting principle, for the three months ended March 31, 2003 and 2002:
We also have premiums on acquired deposits which represent the intangible value of depositor relationships resulting from deposit liabilities assumed in various acquisitions. We amortize premiums on acquired deposits using the straight-line method over 7 to 10 years. At March 31, 2003, the balance of deposit premiums totaled $8.7 million, including $1.6 million related to the Pacific Business Bank acquisition (see Note 3). Estimated future amortization expense of premiums on acquired deposits is as follows: $1.5 million for the remaining three quarters of 2003, $2.0 million in 2004 and 2005, $1.8 million in 2006, $819 thousand in 2007, $229 thousand in 2008 and 2009, and $57 thousand in 2010.
5. COMMITMENTS AND CONTINGENCIES
Credit Extensions—In the normal course of business, we have various outstanding commitments to extend credit that are not reflected in the accompanying interim consolidated financial statements. As of March 31, 2003, undisbursed loan commitments, commercial and standby letters of credit, and commitments to fund mortgage loan applications in process amounted to $508.3 million, $27.3 million, and $153.4 million, respectively.
Litigation—We are a party to various legal proceedings arising in the normal course of business. While it is difficult to predict the outcome of such litigation, we do not expect that such litigation will have a material adverse effect on our financial position and results of operations.
6. STOCKHOLDERS' EQUITY
Earnings Per Share—The actual number of shares outstanding at March 31, 2003 was 23,944,956. Basic earnings per share are calculated on the basis of the weighted average number of shares outstanding during the period. Diluted earnings per share are calculated on the basis of the weighted average number of shares outstanding during the period plus shares issuable upon the assumed exercise of outstanding common stock options and warrants.
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The following tables set forth earnings per share calculations for the three months ended March 31, 2003 and 2002:
Quarterly Dividends—During 2003, our Board of Directors declared and paid quarterly common stock cash dividends of $0.10 per share payable on or about February 10, 2003 to shareholders of record on January 27, 2003. For the first quarter of 2003, we paid cash dividends totaling $2.4 million to our shareholders.
7. BUSINESS SEGMENTS
Our management utilizes an internal reporting system to measure the performance of our various operating segments. We have identified four principal operating segments for purposes of management reporting: retail banking, commercial lending, treasury, and residential lending. Information related to our 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 throughout our 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 our northern and southern California production offices. The treasury department's primary focus is managing our investments, liquidity, and interest rate risk; the residential lending segment is mainly responsible for our portfolio of single family and multifamily residential loans.
Operating segment results are based on our 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 our 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. We allocate indirect costs, including overhead expense, to the various segments based on several factors, including, but not limited to, full-time equivalent employees, loan volume and deposit volume. We allocate the provision for credit losses based on new loan originations for the period. We evaluate overall performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses.
Future changes in our 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.
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The following tables present the operating results and other key financial measures for the individual operating segments for the three months ended March 31, 2003 and 2002:
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of East West Bancorp, Inc. and its subsidiaries. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our 2002 annual report on Form 10-K for the year ended December 31, 2002, and the accompanying interim unaudited consolidated financial statements and notes thereto.
Results of Operations
We reported first quarter 2003 net income of $11.8 million, or $0.49 per basic share and $0.48 per diluted share, compared with $11.7 million, or $0.50 per basic share and $0.48 per diluted share, reported during the first quarter of 2002. Excluding the impact of the cumulative effect of a change in accounting principle, net income for the first three months of 2002 totaled $10.9 million, or $0.47 per basic share and $0.45 per diluted share. The 8% increase in net earnings before the cumulative effect of a change in accounting principle is primarily attributable to higher net interest income, noninterest-related revenues and a lower provision for loan losses, partially offset by higher operating expenses and a higher provision for income taxes. Our annualized return on average total assets decreased to 1.42% for the quarter ended March 31, 2003, from 1.66% for the same period in 2002. The annualized return on average stockholders' equity decreased to 15.42% for the first quarter of 2003, compared with 18.78% for the same quarter of 2002.
Components of Net Income
Net Interest Income
Our primary source of revenue is net interest income, which is the difference between interest income on earning assets and interest expense on interest-bearing liabilities. Net interest income for the first quarter of 2003 totaled $31.1 million, a 13% increase over net interest income of $27.6 million for the same period in 2002.
Total interest and dividend income during the quarter ended March 31, 2003 increased 2% to $41.1 million, compared with $40.1 million during the same period in 2002. The marginal increase in interest and dividend income during the first quarter of 2003 is attributable primarily to a 16% growth in average earning assets for the quarter ended March 31, 2003 partially offset by lower yields on all categories of earning assets. Growth in average loans and investment securities is attributable primarily
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to the growth in average earning assets for the first quarter of 2003. The net growth in average earning assets was funded largely by increases in noninterest-bearing demand deposits and time deposits.
Total interest expense during the first quarter of 2003 decreased 20% to $10.0 million, compared with $12.5 million for the same period a year ago. The decrease in interest expense during the first quarter of 2003 is primarily attributable to lower rates paid on all deposit categories compounded by a lower volume of FHLB advances.
Net interest margin, defined as taxable equivalent net interest income divided by average earning assets, decreased 14 basis points to 4.01% for the first quarter of 2003, compared with 4.15% for the first quarter of 2002. The overall yield on average earning assets decreased 73 basis points to 5.30% in the first quarter of 2003, compared to 6.03% for the same period a year ago. The decrease in overall yields is primarily due to a Fed interest rate cut of 50 basis points during the fourth quarter of 2002 compounded by the accelerated amortization of remaining premiums on a collateralized mortgage obligation security that paid off in January 2003. Similarly, our overall cost of funds for the three months ended March 31, 2003, decreased 70 basis points to 1.74%, in response to the declining interest rate environment, compared with 2.44% for the first quarter of 2002. During the first quarter of 2003, approximately $723 million or 47% of our time deposit portfolio repriced downward, accounting for the majority of the reduction in our cost of funds. We expect another $675 million or 44% to reprice during the second quarter of 2003. We continue to rely heavily on noninterest-bearing demand deposits as a significant funding source, with average noninterest-bearing demand deposits increasing 39% to $677.2 million during the quarter ended March 31, 2003, compared with $485.7 million for the same quarter a year ago. During the quarter ended March 31, 2003, noninterest-bearing demand deposits accounted for 23% of average total deposits compared to 20% for the quarter ended March 31, 2002. If interest rates remain stable, we expect our net interest margin to increase during the remainder of the year as a significant portion of our time deposits continues to reprice downward and as noninterest-bearing demand deposits continue to grow in relation to our total deposit portfolio.
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The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and the average yields and rates by asset and liability component for the three months ended March 31, 2003 and 2002:
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Analysis of Changes in Net Interest Margin
Changes in net interest income are a function of changes in rates and volumes of both interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in interest income and interest expense for the 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.
Provision for Loan Losses
The provision for loan losses amounted to $2.5 million for the first quarter of 2003, compared to $2.6 million for the same period in 2002. 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.
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Noninterest Income
Components of Noninterest Income
Noninterest income includes revenues earned from sources other than interest income. These sources include: service charges and fees on deposit accounts, fees and commissions generated from trade finance activities and the issuance of letters of credit, ancillary fees on loans, net gains on sales of loans and investment securities available-for-sale, and other noninterest-related miscellaneous revenues.
Noninterest income increased 29% to $6.8 million during the three months ended March 31, 2003, compared to $5.3 million for the same quarter in 2002, primarily due to higher branch fees, letter of credit fees and commissions, net gain on sales of loans, and other miscellaneous income, partially offset by a decrease in loan ancillary fees. Also included in noninterest income for the first quarter of 2003 are $347 thousand in net gains on investment securities available-for-sale. There were no such gains recorded in the first quarter of 2002.
Branch fees, which represent revenues derived from branch operations, amounted to $1.7 million during the quarter ended March 31, 2003, an 18% increase from the $1.5 million earned during the same period in 2002. The increase in branch fees is primarily due to continued growth in revenues from analysis charges on commercial deposit accounts, increased commissions from sales of alternative investment products, including mutual funds and annuities, and higher revenues from wire transfer transactions due to increased volume and the introduction of a new wire remittance product during the fourth quarter of 2002.
Letters of credit fees and commissions, which represent revenues from trade finance operations as well as fees related to the issuance and maintenance of standby letters of credit, increased 18% to $1.5 million during the quarter ended March 31, 2003, compared to $1.2 million for the same quarter in 2002. The increase in letters of credit fees and commissions is primarily due to higher commissions from trade finance activities related to import, export and standby letters of credit. The volume of trade finance transactions increased 31% during the quarter ended March 31, 2003 relative to the same period in 2002.
Other contributions to noninterest income include other operating income, which includes insurance commissions and insurance-related service fees, interest earned on officer life insurance policies, branch rental income, and income from operating leases. Other operating income increased to $1.6 million, or 42%, during the first quarter of 2003, from $1.1 million recorded during the same quarter of 2002. The increase in other operating income is primarily due to higher income earned on officer life insurance policies amounting to $802 thousand during the three months ended March 31, 2003, compared to $320 thousand in the same period of 2002. At March 31, 2003, the aggregate cash surrender value of the Company's officer life insurance policies amounted to $58.5 million, compared
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to $27.7 million at March 31, 2002. The sizeable increase in the aggregate cash surrender value of life insurance policies primarily represents the purchase of additional insurance contracts used to fund our benefit obligation under the Supplemental Executive Retirement Plan ("SERP") adopted by the Company during the fourth quarter of 2002.
Noninterest Expense
Components of Noninterest Expense
Noninterest expense, which is comprised primarily of compensation and employee benefits, occupancy and other operating expenses increased 15% to $17.4 million during the first quarter of 2003, from $15.1 million for the same period in 2002.
Compensation and employee benefits increased 23% to $7.7 million during the first quarter of 2003, compared to $6.3 million for the same quarter last year. The rise in compensation and employee benefits is primarily due to increased staffing levels related to the opening of five 99 Ranch Market in-store branches, two of which were opened in February 2002, two in August 2002 and one during February 2003. Additionally, compensation expense related to the acquisition of Pacific Business Bank in mid-March 2003 as well as the impact of annual salary adjustments and related cost increases for existing employees further contributed to the rise in compensation expense during the first quarter of 2003.
The amortization of investments in affordable housing partnerships increased 27% to $1.3 million during the three months ended March 31, 2003, compared with $1.0 million for the corresponding period in 2002. The increase in amortization expense reflects the $11.2 million in additional affordable housing investment purchases made since the first quarter of 2002. Total investments in affordable housing partnerships amounted to $27.7 million at March 31, 2003 compared to $23.8 million at December 31, 2002.
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 18% to $5.1 million for the first quarter of 2003, from $4.3 million for the same period a year ago. The increase in other operating expenses is due primarily to our
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continued organic expansion through the 99 Ranch in-store branches and our new Beijing representative office as well as through our acquisition of PBB.
Our efficiency ratio remained flat at 41% for the quarters ended March 31, 2003 and 2002. Despite our continued expansion and growth, we have managed to capitalize on operational efficiencies from infrastructure investments made in the past two years compounded by a general company-wide effort to monitor overall operating expenses.
Provision for Income Taxes
The provision for income taxes increased 47% to $6.2 million for the first quarter of 2003, compared with $4.2 million for the same period in 2002. The increase in the tax provision is primarily attributable to a 19% increase in pretax earnings during the first quarter of 2003 and the absence of state tax benefits previously realized through the East West Securities Company, Inc., a regulated investment company formed and funded in July 2000 (the "Fund"). The Fund was dissolved on December 30, 2002 and we have received notification from the Securities and Exchange Commission that the Fund has been officially deregistered. The realization of state tax benefits through this regulated investment company ceased effective December 30, 2002.
The provision for income taxes for the first quarter of 2003 also reflects the utilization of tax credits totaling $953 thousand, compared to $1.0 million utilized during the first quarter of 2002. The first quarter 2003 provision reflects an effective tax rate of 34.5%, compared with 27.8% for the same quarter in 2002.
Balance Sheet Analysis
Our total assets increased $198.3 million, or 6%, to $3.52 billion, as of March 31, 2003, relative to total assets at December 31, 2002. The increase in total assets was comprised primarily of net loan growth totaling $238.8 million, an increase of $14.9 million in cash and due from banks, an increase of $5.1 million in interest-bearing deposits in other banks as a result of the PBB acquisition, and an increase of $9.9 million in goodwill also as a consequence of the PBB acquisition. Partially offsetting these increases to total assets were a decrease in federal funds sold and securities purchased under agreements to resell of $42.0 million and investment securities available-for-sale of $41.7 million. The net increase in total assets was largely funded by an increase in deposits totaling $181.4 million.
Investment Securities Available-for-Sale
Total investment securities available-for-sale decreased 8% to $489.9 million as of March 31, 2003, compared with $531.6 million at December 31, 2002. In addition to repayments, maturities and sales of investment securities, $65.0 million of U.S. government agency securities were called during the first quarter of 2003. Total repayments/maturities and proceeds from sales of available-for-sale securities amounted to $88.7 million and $9.0 million, respectively, during the three months ended March 31, 2003. Proceeds from repayments, maturities, sales, and redemptions were applied towards additional investment securities purchases totaling $51.3 million as well as funding a portion of loan originations made during the first three months of 2003. We also added $4.0 million in investment securities available-for-sale to our existing portfolio through our acquisition of PBB in March 2003. We recorded net gains totaling $347 thousand on sales of available-for-sale securities during the first quarter of 2003.
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The following table sets forth the amortized cost and the estimated fair values of investment securities available-for-sale as of March 31, 2003 and December 31, 2002:
Loans
We experienced strong loan demand during the first three months of 2003. Net loans receivable increased $238.8 million, or 10% to $2.6 billion at March 31, 2003. Excluding the $110.1 million of net loans acquired from Pacific Business Bank, organic loan growth during the first quarter of 2003 amounted to $129.0 million, or 6%, compared to year-end 2002 levels. The increase in loans was funded primarily through deposit growth and through repayments, maturities, sales and redemptions of investment securities available-for-sale.
The growth in loans, excluding loans acquired from Pacific Business Bank, is comprised primarily of increases in single family loans of $22.7, or 21%, multifamily loans of $36.9 million or 6%, commercial real estate loans of $39.5 million or 4%, construction loans of $11.7 million or 7%, and commercial business loans of $20.4 million, or 6%. Partially offsetting the growth in these loan categories was the decrease in consumer loans of $2.2 million or 2%.
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The following table sets forth the composition of the loan portfolio as of the dates indicated:
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, loans past due 90 days or more but not on nonaccrual, restructured loans and other real estate owned, net. Nonperforming assets, as a percentage of total assets, were 0.18% and 0.17% at March 31, 2003 and December 31, 2002, respectively. Nonaccrual loans totaled $9.3 million at March 31, 2003, compared with $8.9 million at year-end 2002. Loans totaling $4.6 million were placed on nonaccrual status during the first quarter of 2003. These additions to nonaccrual loans were offset by $2.1 million in payoffs and principal paydowns, $727 thousand in loans brought current and $1.3 million in gross chargeoffs. Additions to nonaccrual loans during the first quarter of 2003 were comprised of a $1.8 million commercial real estate loan, $2.7 million in commercial business loans, and $33 thousand in consumer loans.
Restructured loans and loans that have had their original terms modified totaled $3.3 million at March 31, 2003 and December 31, 2002. We received principal paydowns totaling $19 thousand during the first quarter of 2003. There were no new restructured loans during the quarter ended March 31, 2003.
Other real estate owned ("OREO") includes properties acquired through foreclosure or through full or partial satisfaction of loans. We had no OREO properties at March 31, 2003 and December 31, 2002.
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The following table sets forth information regarding nonaccrual loans, loans past due 90 days or more but not on nonaccrual, restructured loans and other real estate owned as of the dates indicated:
We evaluate loan impairment according to the provisions of SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended. Under SFAS No. 114, loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as an expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses.
At March 31, 2003, we classified $12.6 million of our loans as impaired, compared with $12.2 million at December 31, 2002. There were no specific reserves on impaired loans at March 31, 2003 and December 31, 2002. Our average recorded investment in impaired loans for the three months ended March 31, 2003 and 2002 were $13.2 million and $10.8 million, respectively. During the three months ended March 31, 2003 and 2002, gross interest income that would have been recorded on impaired loans, had they performed in accordance with their original terms, totaled $280 thousand and $262 thousand, respectively. Of this amount, actual interest recognized on impaired loans, on a cash basis, was $84 thousand and $109 thousand, respectively.
Allowance for Loan Losses
Our management 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, our management performs an ongoing assessment of the risks inherent in the portfolio. While we believe that the allowance for loan losses is adequate at March 31, 2003, future additions to the allowance will be subject to continuing evaluation of estimated and known, as well as inherent, risks in the loan portfolio.
The allowance for loan losses is increased by the provision for loan losses which is charged against current period operating results, and is decreased by the amount of net chargeoffs during the period. At March 31, 2003, the allowance for loan losses amounted to $39.5 million, or 1.53% of total loans, compared with $35.3 million, or 1.50% of total loans, at December 31, 2002, and $29.2 million, or 1.29% of total loans, at March 31, 2002. The $4.2 million increase in the allowance for loan losses at March 31, 2003, from year-end 2002, is comprised of $2.8 million in loss reserves acquired from Pacific Business Bank, $2.5 million in additional loss provisions reduced by $1.1 million in net chargeoffs recorded during the period.
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The provision for loan losses of $2.5 million for the first quarter of 2003 represents a 2% decrease from the $2.6 million in loss provisions recorded during the first quarter of 2002. First quarter 2003 net chargeoffs amounting to $1.1 million represent 0.18% of average loans outstanding for the three months ended March 31, 2003. This compares to net chargeoffs of $1.0 million, or 0.17% of average loans outstanding for the same period in 2002. We continue to record loss provisions to compensate for both the continued growth of our loan portfolio, which grew 10% during the first three months of 2003, and our continued lending focus on increasing our portfolio of commercial real estate, commercial business and construction loans.
The following table summarizes activity in the allowance for loan losses for the three months ended March 31, 2003 and 2002:
Our total allowance for loan losses is comprised of two components—allocated and unallocated. We utilize several methodologies to determine the allocated portion of the allowance and to test overall adequacy. The two primary methodologies, the classification migration model and the individual loan review analysis methodology, provide the basis for determining allocations between the various loan categories as well as the overall adequacy of the allowance. These methodologies are augmented by ancillary analyses, which include historical loss analyses, peer group comparisons, and analyses based on the federal regulatory interagency policy for loan and lease losses.
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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:
Despite a 22% increase in the volume of single family loans at March 31, 2003 from year-end 2002 levels, allocated loss reserves on these loans decreased $14 thousand, or 4%, to $372 thousand at March 31, 2003. This is primarily due to the decrease in criticized (i.e. rated "special mention") and classified (i.e. rated "substandard" and "doubtful") loans relative to December 31, 2002. There were no single family loans rated "special mention" at March 31, 2003, compared to $309 thousand at December 31, 2002. Moreover, "substandard" single family loans totaled $80 thousand at March 31, 2003, compared with $223 thousand at December 31, 2002.
Allocated reserves on multifamily loans increased $601 thousand, or 19%, to $3.7 million as of March 31, 2003 partially due to a 7% increase in the volume of loans in this loan category from year-end 2002 levels. Furthermore, during the first quarter of 2003, we established additional reserves on "pass" loans placed on the watchlist in response to an informal recommendation by federal examiners. As of March 31, 2003, we had $23.3 million in multifamily loans on the watchlist for which additional reserves were established.
Allocated reserves on commercial real estate loans increased $2.5 million, or 32%, to $10.2 million at March 31, 2003 primarily due to four factors. First, there was an 11% increase in the volume of loans in this loan category relative to year-end 2002 predominantly due to the acquisition of Pacific Business Bank. Second, the concentration risk allocation ratio for hotels and motels was increased to 2.5% as of March 31, 2003, from 1.5% as of December 31, 2002 in response to the continued weakened state of the travel and tourism industry. A sustained disinterest in business and consumer travel has resulted in recent airline bankruptcies and financial difficulties for travel agencies and tour operators in general. This condition continues to weigh heavily on an already beleaguered travel and tourism industry that has not fully recovered from the crippling effects of the September 11th tragedy. Although the hotel industry concentration risk allocation was initially established in response to the anticipated fallout from the events of September 11th, management has deemed it prudent to continue to maintain this hotel concentration risk allocation to compensate for these developing situations. Third, additional reserves were established for the $27.3 million in commercial real estate loans that were on the watchlist as of March 31, 2003. And finally, further warranting additional loss reserves is an increase of $3.6 million in commercial real estate loans rated "special mention" at March 31, 2003. There were no "special mention" commercial real estate loans as of December 31, 2002.
Allocated reserves on construction loans increased $418 thousand, or 9%, to $4.8 million at March 31, 2003 primarily due to a 10% increase in the volume of loans in this loan category relative to December 31, 2002.
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Allocated loss reserves on commercial business loans increased $161 thousand, or 1%, to $14.5 million at March 31, 2003. This is primarily due to a 14% increase in the volume of loans in this loan category at March 31, 2003 from year-end 2002 levels partially offset by a decrease in criticized and classified commercial business loans at March 31, 2003 relative to December 31, 2002. Specifically, commercial business loans rated "special mention" totaled $3.0 million at March 31, 2003, compared to $7.9 million at December 31, 2002. Furthermore, commercial business loans rated "substandard" and "doubtful" totaled $15.9 million and $120 thousand, respectively, at March 31, 2003, compared to $17.0 million and $2.0 million, respectively, at December 31, 2002.
Allocated reserves on automobile loans increased $49 thousand, or 123%, to $89 thousand as of March 31, 2003, primarily due to the increase in criticized and classified automobile loans relative to year-end 2002. Automobile loans rated "special mention" and "substandard" totaled $28 thousand and $62 thousand, respectively, at March 31, 2003. There were no criticized or classified automobile loans as of December 31, 2002.
Allocated reserves on consumer loans increased slightly by $17 thousand, or 6%, to $305 thousand as of March 31, 2003. Consumer loans are comprised predominantly of home equity loans and home equity lines of credit, and to a lesser extent, credit card and overdraft protection lines. The increase in allocated reserves on consumer loans is due primarily to a 7% increase in home equity lines of credit at March 31, 2003 relative to December 31, 2002.
The allowance for loan losses of $39.5 million at March 31, 2003 exceeded the allocated allowance by $5.5 million, or 14% of the total allowance. This compares to an unallocated allowance of $5.0 million, or 14%, as of December 31, 2002. The $5.5 million unallocated allowance at March 31, 2003 is comprised of three elements. First, we have set aside $231 thousand for foreign transaction risk associated with credit lines totaling $78.6 million extended to financial institutions in foreign countries. Loss factors, ranging from 0.1% to 3.0% of the total credit facility, are multiplied by anticipated usage volumes to determine 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 ranging from BB to AAA. The second element, which accounts for approximately $1.7 million of the unallocated allowance, represents a 5% economic risk factor that takes into consideration the recessionary state of the national economy. Despite concerted efforts by the government to stimulate the economy through various tax cuts and incentives and through its aggressive policy of lowering interest rates, the previous year has been characterized by eroding consumer confidence, increasing jobless rates, substantial shortfalls in sales and earnings, business closures and company downsizing. This economic downturn has been exacerbated by corporate scandals linked to various large companies, and more recently, by the geopolitical turmoil in the Middle East. The economic forecast in the foreseeable future is not positive. In consideration of this uncertain economic outlook, our management has deemed it prudent to continue to set aside an additional 5% of the required allowance amount to compensate for this current economic risk. The third and final element, which accounts for approximately $3.4 million, or approximately 10% of the allocated allowance amount of $34.0 million at March 31, 2003, was established to compensate for the modeling risk associated with the classification migration and individual loan review analysis methodologies.
Deposits
Deposits increased $181.4 million, or 6%, to $3.11 billion at March 31, 2003, from $2.93 billion at December 31, 2002. The increase in deposits reflects $134.9 million in deposits acquired from Pacific Business Bank in mid-March 2003. Excluding this transaction, internal deposit growth amounted to $46.5 million, or 2%, over December 31, 2002. This organic deposit growth was comprised primarily of increases in non-interest bearing demand accounts of $46.6 million, or 6%, money market accounts of $21.1 million, or 13%, savings accounts of $15.8 million, or 6%, and checking accounts of $7.5 million, or 3%. Partially offsetting the increases in these deposit categories is a decrease of $44.5 million, or
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3%, in time deposits. A majority of the reduction in time deposits represent brokered deposits totaling $26.6 million. The decrease in brokered deposits reflects the replacement of such deposits with the increasing volume of commercial and retail deposit accounts.
Borrowings
We regularly use FHLB advances and short-term borrowings, which consist of federal funds purchased and securities sold under agreements to repurchase, to manage our liquidity position. FHLB advances increased 7% to $36.4 million as of March 31, 2003, an increase of $2.4 million from December 31, 2002. The increase was due to an FHLB advance assumed through the Pacific Business Bank acquisition. There were no outstanding short-term borrowings at March 31, 2003 and December 31, 2002.
Capital Resources
Our primary source of capital is the retention of net after tax earnings. At March 31, 2003, stockholders' equity totaled $312.2 million, a 3% increase from $302.1 million as of December 31, 2002. The increase is due primarily to: (1) net income of $11.8 million during the first three months of 2003; (2) an increase of $122 thousand in unrealized gains on available-for-sale securities, (3) stock compensation costs amounting to $38 thousand related to our Restricted Stock Award Program, (4) tax benefits of $174 thousand resulting from the exercise of nonqualified stock options, and (5) net issuance of common stock totaling $416 thousand, representing 27,209 shares, from the exercise of stock options and stock warrants. These transactions were offset by (1) payment of first quarter 2003 cash dividends totaling $2.4 million, and (2) a decrease of $59 thousand in deferred gains related to the securitization of residential single family loans in September 2002. The decrease in deferred gains represents the amortization, net of tax, of such gains recorded during the first quarter of 2003.
Our management is committed to maintaining capital at a level sufficient to assure our shareholders, our customers and our regulators that our company and our bank subsidiary are financially sound. We are subject to risk-based capital regulations adopted by the federal banking regulators in January 1990. These guidelines are used to evaluate capital adequacy and are based on an institution's asset risk profile and off-balance sheet exposures. According to the regulations, institutions whose Tier 1 and total capital ratios meet or exceed 6% and 10%, respectively, are deemed to be "well-capitalized." At March 31, 2003, East West Bank's Tier 1 and total capital ratios were 9.5% and 10.7%, respectively, compared to 10.2% and 11.5%, respectively, at December 31, 2002.
The following table compares East West Bancorp, Inc.'s and East West Bank's actual capital ratios at March 31, 2003, to those required by regulatory agencies for capital adequacy and well-capitalized classification purposes:
ASSET LIABILITY AND MARKET RISK MANAGEMENT
Liquidity
Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers' credit needs and ongoing repayment of borrowings. Our liquidity is actively
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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 our liquidity needs, including adequate cash flow for off-balance sheet instruments.
Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and 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 three months ended March 31, 2003, we experienced net cash inflows from operating activities of $25.7 million, compared to net cash outflows of $6.6 million for the three months ended March 31, 2002. Net cash inflows from operating activities for the first quarter of 2003 were primarily due to net income earned during the period and net proceeds from the sale of loans held for sale. For the first quarter of 2002, net cash outflows from operating activities were primarily due to the payment of accrued federal income taxes related to the 2001 fiscal year and the origination of loans held for sale.
Net cash outflows from investing activities totaled $97.0 million and $96.9 million for the three months ended March 31, 2003 and 2002, respectively. Net cash outflows from investing activities for both periods can be attributed primarily to the growth in our loan portfolio and purchases of available-for-sale securities. These activities were partially offset by repayments, maturities, redemptions and net sales proceeds from investment securities.
We experienced net cash inflows from financing activities of $44.2 million for the first three months of 2003 primarily due to deposit growth. During the same period in 2002, growth in deposits partially offset by net repayments of FHLB advances largely accounted for net cash inflows from financing activities totaling $83.7 million.
As a means of augmenting our liquidity sources, we have established federal funds lines with four correspondent banks and several master repurchase agreements with major brokerage companies. At March 31, 2003, our available borrowing capacity includes approximately $127.0 million in repurchase arrangements, $92.0 million in federal funds line facilities, and $125.9 million in unused FHLB advances. We believe our liquidity sources to be stable and adequate. At March 31, 2003, we are not aware of any information that was reasonably likely to have a material effect on our liquidity position.
The liquidity of East West Bancorp, Inc. is primarily dependent on the payment of cash dividends by our subsidiary, East West Bank, subject to limitations imposed by the Financial Code of the State of California. For the three months ended March 31, 2003, total dividends paid by East West Bank to East West Bancorp, Inc. totaled $2.6 million, compared with $1.7 million for the same period in 2002. As of March 31, 2003, approximately $115.3 million of undivided profits of East West Bank were available for dividends to East West Bancorp, Inc.
Interest Rate Sensitivity Management
Our success is largely dependent upon our ability to manage interest rate risk, which is the impact of adverse fluctuations in interest rates on our net interest income and net portfolio value. Although in the normal course of business we manage other risks, such as credit and liquidity risk, we consider interest rate risk to be our most significant market risk and could potentially have the largest material effect on our financial condition and results of operations.
The fundamental objective of the asset liability management process is to manage our exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. Our strategy is
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formulated by the Asset/Liability Committee, which coordinates with the Board of Directors to monitor our overall asset and liability composition. The Committee meets regularly to evaluate, among other things, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses on our available-for-sale portfolio (including those attributable to hedging transactions), purchase and securitization activity, and maturities of investments and borrowings.
Our overall strategy is to minimize the adverse impact of immediate incremental changes in market interest rates (rate shock) on net interest income and net portfolio value. Net portfolio value is defined as the present value of assets, minus the present value of liabilities and off-balance sheet instruments. The attainment of this goal requires a balance between profitability, liquidity and interest rate risk exposure. To minimize the adverse impact of changes in market interest rates, we simulate the effect of instantaneous interest rate changes on net interest income and net portfolio value on a monthly basis. The table below shows the estimated impact of changes in interest rates on our net interest income and market value of equity as of March 31, 2003 and December 31, 2002, assuming a parallel shift of 100 to 200 basis points in both directions:
All interest-earning assets, interest-bearing liabilities and related derivative contracts are included in the interest rate sensitivity analysis at March 31, 2003 and December 31, 2002. At March 31, 2003 and December 31, 2002, our estimated changes in net interest income and net portfolio value were within the ranges established by the Board of Directors.
Our primary analytical tool to gauge interest rate sensitivity is a simulation model used by many major banks and bank regulators, and is based on the actual maturity and repricing characteristics of interest-rate sensitive assets and liabilities. The model attempts to predict changes in the yields earned on assets and the rates paid on liabilities in relation to changes in market interest rates. As an enhancement to the primary simulation model, prepayment assumptions and market rates of interest provided by independent broker/dealer quotations, an independent pricing model and other available public sources are incorporated into the model. Adjustments are made to reflect the shift in the Treasury and other appropriate yield curves. The model also factors in projections of anticipated activity levels by Bank product line and takes into account our increased ability to control rates offered on deposit products in comparison to our ability to control rates on adjustable-rate loans tied to published indices.
The following tables provide the outstanding principal balances and the weighted average interest rates of our non-derivative financial instruments as of March 31, 2003. We do 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
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information presented below is based on the repricing date for variable rate instruments and the expected maturity date for fixed rate instruments.
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. We utilize assumptions supported by documented analyses for the expected maturities of our loans and repricing of our deposits. We also rely 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 our 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.
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The Asset/Liability Committee is authorized to utilize a wide variety of off-balance sheet financial techniques to assist in the management of interest rate risk. We sometimes use derivative financial instruments, primarily interest rate swap and interest rate cap agreements, as part of our asset and liability management strategy, with the overall goal of minimizing the impact of interest rate fluctuations on our net interest margin and stockholders' equity. The use of derivatives has been declining since 1999, and derivatives have not had a material effect on our operating results or financial position. We had no outstanding derivative positions at March 31, 2003 and December 31, 2002.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISKS
For quantitative and qualitative disclosures regarding market risks in our portfolio, see, "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations—Asset Liability and Market Risk Management."
ITEM 4: CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-14. Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our company (including our consolidated subsidiaries) required to be included in our periodic Securities and Exchange Commission ("SEC") filings. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date we carried out this evaluation.
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any material legal proceedings. Our subsidiary, East West Bank, from time to time is party to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. In the opinion of our management, based upon the advice of legal counsel, the resolution of any such issues would not have a material adverse impact on our financial position, results of operations, or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 28, 2003, we granted 35,850 shares of restricted stock to various officers of the Company. The aggregate fair value of the restricted shares awarded totaled approximately $1.2 million on the date of grant. The restricted shares awarded will become fully vested after three years of continued employment from the date of grant. The shares are currently unregistered and we anticipate the registration of these shares to be completed during the second quarter of 2003.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No events have transpired which would make response to this item appropriate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
All other material referenced in this report which is required to be filed as an exhibit hereto has previously been submitted.
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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.
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CERTIFICATIONS
EAST WEST BANCORP, INC.CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Dominic Ng, certify that:
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EAST WEST BANCORP, INC.CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Julia Gouw, certify that:
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