form10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
Mark One
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

or

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

For the transition period from ________ to ________.

Commission file number 000-24939


EAST WEST BANCORP, INC.
(Exact name of registrant as specified in its charter)

Delaware
95-4703316
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

135 N. Los Robles Ave, 7th Floor, Pasadena, California 91101
(Address of principal executive offices) (Zip Code)

(626) 768-6000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the regis­trant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No ¨

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

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

Large accelerated filer ¨
Accelerated filer þ
Non-accelerated filer ¨
Smaller reporting company ¨

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

Number of shares outstanding of the issuer’s common stock on the latest practicable date: 147,977,287 shares of common stock as of July 31, 2010.

 
 

 

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
 
4
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
4-7
 
   
Notes to Condensed Consolidated Financial Statements (Unaudited)
8-43
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
44-73
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
73
 
 
Item 4.
Controls and Procedures
73
 
PART II - OTHER INFORMATION
74
 
 
Item 1.
Legal Proceedings
74
 
 
Item 1A.
Risk Factors
74
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
74
 
 
Item 3.
Defaults Upon Senior Securities
75
 
 
Item 4.
(Removed and Reserved)
75
 
 
Item 5.
Other Information
75
 
 
Item 6.
Exhibits
75
 
SIGNATURE
76
 

 
2

 

Forward-Looking Statements

Certain matters discussed in this Quarterly 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 including future earnings and financial condition. The Company’s actual results, performance, or achievements may differ significantly from the results, performance, or achievements expected or implied in such forward-looking statements. Such risk and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from:

 
·  
our ability to integrate the former acquired institutions’ (through FDIC assisted acquisitions) operations and to achieve expected synergies, operating efficiencies or other benefits within expected time frames, or at all, or within expected cost projections;
 
·  
our ability to integrate and retain former depositors and borrowers of the acquired institutions;
 
·  
our ability to manage the loan portfolio acquired from these institutions within the limits of the loss protection provided by the Federal Deposit Insurance Corporation (“FDIC”);
 
·  
changes in our borrowers’ performance on loans;
 
·  
changes in the commercial and consumer real estate markets;
 
·  
changes in our costs of operation, compliance and expansion;
 
·  
changes in the economy, including inflation;
 
·  
changes in government interest rate policies;
 
·  
changes in laws or the regulatory environment;
 
·  
changes in critical accounting policies and judgments;
 
·  
changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies;
 
·  
changes in the equity and debt securities markets;
 
·  
changes in competitive pressures on financial institutions;
 
·  
effect of additional provision for loan losses;
 
·  
effect of any goodwill impairment;
 
·  
fluctuations of our stock price;
 
·  
success and timing of our business strategies;
 
·  
impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity;
 
·  
changes in our ability to receive dividends from our subsidiaries; and
 
·  
political developments, wars or other hostilities may disrupt or increase volatility in securities or otherwise affect economic conditions.
 
For a more detailed discussion of some of the factors that might cause such differences, see the Company’s 2009 Form 10-K under the heading “ITEM 1A. RISK FACTORS” and the information set forth under “RISK FACTORS” in this Form 10-Q. The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

 
3

 

PART I - FINANCIAL INFORMATION
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Cash and cash equivalents
  $ 1,185,944     $ 835,141  
Short-term investments
    447,168       510,788  
Securities purchased under resale agreements
    230,000       227,444  
Investment securities available for sale, at fair value (with amortized cost of $2,073,239 at
  June 30, 2010 and $2,563,043 at December 31, 2009)
    2,077,011       2,564,081  
Loans held for sale, at fair value
    159,158       28,014  
                 
Loans receivable, excluding covered loans (net of allowance for loan losses of $249,462 at
  June 30, 2010 and $238,833 at December 31, 2009)
    8,018,808       8,218,671  
Covered loans
    5,275,492       5,598,155  
Total loans receivable, net
    13,294,300       13,816,826  
                 
FDIC indemnification asset
    947,011       1,091,814  
                 
Other real estate owned, net
    16,562       13,832  
Other real estate owned covered, net
    113,999       44,273  
Total other real estate owned
    130,561       58,105  
                 
Accrued interest receivable
    79,515       82,370  
Due from customer acceptances
    44,320       40,550  
Investment in affordable housing partnerships
    120,743       84,833  
Premises and equipment, net
    134,158       59,099  
Premiums on deposits acquired, net
    86,106       89,735  
Goodwill
    337,438       337,438  
Other assets
    693,888       732,974  
TOTAL
  $ 19,967,321     $ 20,559,212  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Customer deposit accounts:
               
Noninterest-bearing
  $ 2,396,087     $ 2,291,259  
Interest-bearing
    12,522,607       12,696,354  
Total deposits
    14,918,694       14,987,613  
Federal Home Loan Bank advances
    1,022,011       1,805,387  
Securities sold under repurchase agreements
    1,051,192       1,026,870  
Notes payable and other borrowings
    53,607       74,406  
Bank acceptances outstanding
    44,320       40,550  
Long-term debt
    235,570       235,570  
Accrued interest payable, accrued expenses and other liabilities
    302,963       104,157  
Total liabilities
    17,628,357       18,274,553  
                 
COMMITMENTS AND CONTINGENCIES (Note 10)
               
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, $0.001 par value, 5,000,000 shares authorized; Series A, non-cumulative
  convertible, 200,000 shares issued and 85,741 shares outstanding in 2010 and  2009;
  Series B, cumulative, 306,546 shares issued and outstanding in 2010 and 2009; Series C,
  cumulative convertible, 335,047 issued and outstanding in 2009
    369,695       693,803  
Common stock, $0.001 par value, 200,000,000 shares authorized; 154,954,876 and 116,754,403
  shares issued in 2010 and 2009, respectively; 147,938,847 and 109,962,965 shares
  outstanding in 2010 and 2009, respectively
    155       117  
Additional paid in capital
    1,424,213       1,091,047  
Retained earnings
    650,617       604,223  
Treasury stock, at cost - 7,016,029 shares in 2010 and 6,791,438 shares in 2009
    (108,018 )     (105,130 )
Accumulated other comprehensive income, net of tax
    2,302       599  
Total stockholders' equity
    2,338,964       2,284,659  
TOTAL
  $ 19,967,321     $ 20,559,212  

See accompanying notes to condensed consolidated financial statements.
 
4

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
INTEREST AND DIVIDEND INCOME
                       
Loans receivable, including fees
  $ 233,783     $ 111,669     $ 521,727     $ 222,485  
Investment securities
    14,741       30,318       34,917       59,693  
Securities purchased under resale agreements
    2,630       1,292       8,893       2,542  
Short-term investments
    1,502       2,509       5,043       5,485  
Investment in Federal Reserve Bank stock
    762       545       1,419       1,051  
Investment in Federal Home Loan Bank stock
    115       -       237       -  
Total interest and dividend income
    253,533       146,333       572,236       291,256  
                                 
INTEREST EXPENSE
                               
Customer deposit accounts
    29,132       30,890       62,580       67,963  
Securities sold under repurchase agreements
    12,045       12,004       24,586       23,876  
Federal Home Loan Bank advances
    6,175       13,142       15,180       27,019  
Long-term debt
    1,591       2,034       3,138       4,451  
Other borrowings
    967       3       1,405       6  
Total interest expense
    49,910       58,073       106,889       123,315  
                                 
Net interest income before provision for loan losses
    203,623       88,260       465,347       167,941  
Provision for loan losses
    55,256       151,422       131,677       229,422  
Net interest income after provision for loan losses
    148,367       (63,162 )     333,670       (61,481 )
                                 
NONINTEREST INCOME (LOSS)
                               
Decrease in FDIC indemnification asset and receivable
    (9,424 )     -       (52,996 )     -  
                                 
Impairment loss on investment securities
    (12,303 )     (100,753 )     (17,102 )     (100,953 )
Less: non-credit related impairment loss recorded in other comprehensive income
    7,661       63,306       7,661       63,306  
Net impairment loss on investment securities recognized in earnings
    (4,642 )     (37,447 )     (9,441 )     (37,647 )
                                 
Net gain on sale of investment securities
    5,847       1,680       21,958       5,201  
Branch fees
    8,219       4,991       16,977       9,784  
Gain on acquisition
    19,476       -       27,571       -  
Letters of credit fees and commissions
    2,865       1,930       5,605       3,784  
Ancillary loan fees
    2,369       1,356       4,058       3,585  
Income from life insurance policies
    1,101       1,096       2,206       2,179  
Net gain on sale of loans
    8,073       3       8,073       11  
Other operating income
    1,801       192       3,223       698  
Total noninterest income (loss)
    35,685       (26,199 )     27,234       (12,405 )
                                 
NONINTEREST EXPENSE
                               
Compensation and employee benefits
    41,579       16,509       92,358       33,617  
Other real estate owned expense
    20,983       8,682       38,995       15,713  
Occupancy and equipment expense
    13,115       6,297       25,059       13,688  
Deposit insurance premiums and regulatory assessments
    4,528       9,568       16,109       12,893  
Prepayment penalty for FHLB advances
    3,900       -       13,832       -  
Amortization of premiums on deposits acquired
    3,310       1,092       6,694       2,217  
Amortization of investments in affordable housing partnerships
    2,638       1,652       5,675       3,412  
Loan related expenses
    5,254       1,642       8,251       3,077  
Legal expense
    6,183       1,755       9,090       3,533  
Data processing
    3,046       1,141       5,528       2,283  
Consulting expense
    1,919       672       4,060       1,120  
Deposit-related expenses
    1,133       1,014       2,142       1,915  
Other operating expenses
    17,730       7,888       36,435       15,850  
Total noninterest expense
    125,318       57,912       264,228       109,318  
                                 
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES
    58,734       (147,273 )     96,676       (183,204 )
PROVISION (BENEFIT) FOR INCOME TAXES
    22,386       (60,548 )     35,412       (74,013 )
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS
    36,348       (86,725 )     61,264       (109,191 )
                                 
Extraordinary item - impact of desecuritization, net of tax
    -       (5,366 )     -       (5,366 )
NET INCOME (LOSS) AFTER EXTRAORDINARY ITEMS
    36,348       (92,091 )     61,264       (114,557 )
PREFERRED STOCK DIVIDENDS AND AMORTIZATION OF
  PREFERRED STOCK DISCOUNT
    6,147       23,623       12,285       32,366  
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
  $ 30,201     $ (115,714 )   $ 48,979     $ (146,923 )
                                 
EARNINGS (LOSS) PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
                         
BASIC
  $ 0.21     $ (1.83 )   $ 0.40     $ (2.33 )
DILUTED
  $ 0.21     $ (1.83 )   $ 0.34     $ (2.33 )
DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.01     $ 0.01     $ 0.02     $ 0.03  
                                 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
                               
BASIC
    146,372       63,105       123,445       63,052  
DILUTED
    147,131       63,105       142,143       63,052  

See accompanying notes to condensed consolidated financial statements.
 
5

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands, except share data)
(Unaudited)
 
         
Additional
                           
Accumulated
             
         
Paid In
                           
Other
             
         
Capital
         
Additional
               
Comprehensive
         
Total
 
   
Preferred
   
Preferred
   
Common
   
Paid In
   
Retained
   
Treasury
   
Loss,
   
Comprehensive
   
Stockholders'
 
   
Stock
   
Stock
   
Stock
   
Capital
   
Earnings
   
Stock
   
Net of Tax
   
Income (Loss)
   
Equity
 
                                                       
BALANCE, DECEMBER 31, 2008
  $ -     $ 472,311     $ 70     $ 695,521     $ 572,172     $ (102,817 )   $ (86,491 )         $ 1,550,766  
Cumulative effect adjustment for
  reclassification of  the previously recognized
  noncredit-related impairment loss  on
  investment securities
                                    8,110               (8,110 )           -  
BALANCE, JANUARY 1, 2009
    -       472,311       70       695,521       580,282       (102,817 )     (94,601 )           1,550,766  
Comprehensive loss
                                                                     
Net loss after extraordinary item
                                    (114,557 )                   $ (114,557 )     (114,557 )
Net unrealized gain/(loss) on investment securities
  available-for-sale
                                                    60,915       60,915       60,915  
Net unrealized loss as a result of
  desecuritization
                                                    30,551       30,551       30,551  
Noncredit-related impairment loss on
  investment securities recorded in the
  current year
                                                    (36,717 )     (36,717 )     (36,717 )
Total comprehensive loss
                                                          $ (59,808 )        
Stock compensation costs
                            2,908                                       2,908  
Tax benefit from stock plans
                            (404 )                                     (404 )
Preferred stock issuance cost
            (44 )                                                     (44 )
Issuance of 385,722 shares pursuant to various
  stock plans and agreements
                    1       389                                       390  
Cancellation of 45,268 shares due to forfeitures
  of issued restricted stock
                            1,087               (1,087 )                     -  
Purchase of 8,978 shares of treasury stock due
  to the vesting of restricted stock
                                            (35 )                     (35 )
Amortization of Series B preferred stock discount
      2,158                       (2,158 )                             -  
Preferred stock dividends
                                    (15,435 )                             (15,435 )
Common stock dividends
                                    (1,570 )                             (1,570 )
Inducement of preferred stock conversion
                            14,773       (14,773 )                             -  
BALANCE, JUNE 30, 2009
  $ -     $ 474,425     $ 71     $ 714,274     $ 431,789     $ (103,939 )   $ (39,852 )           $ 1,476,768  
                                                                         
BALANCE, JANUARY 1, 2010
  $ -     $ 693,803     $ 117     $ 1,091,047     $ 604,223     $ (105,130 )   $ 599             $ 2,284,659  
Comprehensive income
                                                                       
Net income
                                    61,264                     $ 61,264       61,264  
Net unrealized gain on investment securities
  available-for-sale
                                                    6,147       6,147       6,147  
Noncredit-related impairment loss on
  investment securities recorded in the
  current year
                                                    (4,444 )     (4,444 )     (4,444 )
Total comprehensive income
                                                          $ 62,967          
Stock compensation costs
                            3,876                                       3,876  
Tax benefit from stock plans
                            (216 )                                     (216 )
Issuance of 1,096,739 shares pursuant to various
  stock plans and agreements
                    1       1,800                                       1,801  
Conversion of 335,047 shares of Series C
  Preferred Stock into 37,103,734 shares of
  common stock
            (325,299 )     37       325,262                                       -  
Cancellation of 200,806 shares due to forfeitures
  of issued restricted stock
                            2,444               (2,444 )                     -  
Purchase of 23,785 shares of treasury stock due
  to the vesting of restricted stock
                                            (444 )                     (444 )
Amortization of Series B preferred stock discount
      1,191                       (1,191 )                             -  
Preferred stock dividends
                                    (11,094 )                             (11,094 )
Common stock dividends
                                    (2,585 )                             (2,585 )
BALANCE, JUNE 30, 2010
  $ -     $ 369,695     $ 155     $ 1,424,213     $ 650,617     $ (108,018 )   $ 2,302             $ 2,338,964  
                                                                         
                                                           
Six Months Ended June 30,
 
                                                              2010       2009  
                                                           
(In thousands)
 
Disclosure of reclassification amounts:
                                                                 
Unrealized holding gain on securities arising during the period, net of tax expense of $(9,439) in 2010 and $(52,607) in 2009
            $ 13,034     $ 72,647  
Less: Reclassification adjustment for gain included in net income (loss), net of tax expense of $8,206 in 2010 and $(13,628) in 2009
      (11,331 )     18,819  
Net unrealized gain on securities, net of tax expense of $(1,233) in 2010 and $(66,235) in 2009
                            $ 1,703     $ 91,466  

See accompanying notes to condensed consolidated financial statements.
 
6

 
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Six Months Ended June 30,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss)
  $ 61,264     $ (114,557 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
         
Depreciation and amortization
    33,563       11,572  
Accretion of discount and premium
    (140,678 )     -  
Decrease in FDIC indemnification asset and receivable
    59,239       -  
Gain on acquisition
    (27,571 )     -  
Impairment writedown on investment securities available-for-sale
    9,441       37,647  
Stock compensation costs
    3,876       2,908  
Deferred tax benefit
    28,373       (11,856 )
Provision for loan losses
    131,677       238,684  
Impairment on other real estate owned
    28,840       15,938  
Impairment loss on other equity investment
    -       581  
Net gain on sales of investment securities, loans and other assets
    (28,814 )     616  
Originations of loans held for sale
    (17,717 )     (25,785 )
Proceeds from sale of loans held for sale
    260,707       25,846  
FHLB advance prepayment penalty
    13,832       -  
Tax provision from stock plans
    216       404  
Net change in accrued interest receivable and other assets
    180,161       (6,507 )
Net change in accrued expenses and other liabilities
    152,235       (13,747 )
Total adjustments
    687,380       276,301  
Net cash provided by operating activities
    748,644       161,744  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Acquisition of WFIB assets
    67,186       -  
Net decrease in loans
    656,906       180,368  
Net decrease (increase) in short-term investments
    63,620       (376,097 )
Purchases of:
               
Securities purchased under resale agreements
    (450,000 )     (25,000 )
Investment securities held-to-maturity
    -       (672,336 )
Investment securities available-for-sale
    (1,895,119 )     (1,021,779 )
Loans receivable
    (370,339 )     (91,238 )
Federal Reserve Bank stock
    (10,500 )     (9,196 )
Investments in affordable housing partnerships
    (539 )     (19 )
Premises and equipment
    (82,353 )     (360 )
Proceeds from sale of:
               
Investment securities
    863,565       237,379  
Securities purchased under resale agreements
    450,000       -  
Loans receivable
    48,265       38,768  
Other real estate owned
    46,142       36,961  
Premises and equipment
    44       -  
Maturity of short term investments
    -       50,245  
Repayments, maturity and redemption of investment securities available-for-sale
    1,573,368       875,483  
Dividends/redemption of Federal Home Loan Bank stock
    6,770       -  
Net cash provided by (used in) investing activities
    967,016       (776,821 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net (payment for) proceeds from:
               
Deposits
    (464,829 )     516,859  
Short-term borrowings
    (14,643 )     (6,350 )
Proceeds from:
               
Issuance of short-term borrowings
    22,385       -  
Issuance of long-term borrowings
    350,000       -  
Issuance of common stock pursuant to various stock plans and agreements
    1,801       390  
Payment for:
               
Repayment of long-term borrowings
    (1,215,812 )     (179,997 )
Repayment of notes payable and other borrowings
    (29,420 )     (4,928 )
Repurchase of treasury shares
    (444 )     (35 )
Issuance and conversion costs of preferred stock & common stock
    -       (44 )
Cash dividends on preferred stock
    (11,094 )     (14,583 )
Cash dividends on common stock
    (2,585 )     (1,570 )
Tax provision from stock plans
    (216 )     (404 )
Net cash (used in) provided by financing activities
    (1,364,857 )     309,338  
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    350,803       (305,739 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    835,141       878,853  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 1,185,944     $ 573,114  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
  $ 109,749     $ 131,380  
Income tax (refunds) payments
    18,828       (13,133 )
Noncash investing and financing activities:
               
Transfers to real estate owned/affordable housing partnership
    132,102       78,872  
Conversion of preferred stock to common stock
    325,299       -  
Desecuritization of loans receivable
    -       635,614  
Loans to facilitate sales of real estate owned
    1,167       27,982  
Loans transferred to loans held for sale
    381,433       -  

See accompanying notes to condensed consolidated financial statements.
 
7

 

EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2010 and 2009
(Unaudited)

1.  
BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) and its wholly-owned subsidiaries, East West Bank and subsidiaries (the “Bank”) and East West Insurance Services, Inc. Intercompany transactions and accounts have been eliminated in consolidation.  East West also has nine wholly-owned subsidiaries that are statutory business trusts (the “Trusts”).  In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 810, (previously FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R)), the Trusts are not consolidated into the accounts of East West Bancorp, Inc.

The interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments 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 and six months ended June 30, 2010 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. Events subsequent to the condensed consolidated balance sheet date have been evaluated through the date the financial statements are issued for inclusion in the accompanying financial statements.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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

2.  
SIGNIFICANT ACCOUNTING POLICIES

 
Recent Accounting Standards

In June 2009, the FASB issued ASC 860 (previously SFAS No. 166, Accounting for Transfers of Financial Assets, which amends Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities), which requires more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. It was effective for the Company on January 1, 2010. The adoption of this guidance did not have a material impact to the Company’s condensed consolidated financial statements.

In June 2009, the FASB issued ASC 810 (previously SFAS No. 167, Amendments to FASB Interpretation No. 46(R)), which is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. It was effective for the Company on January 1, 2010. The adoption of this guidance does not have a material effect on its financial condition, results of operations, or cash flows.

In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and reasons for the transfers and separate presentation of information about purchases, sales, issuances, and settlements in the reconciliation for Level 3 fair value measurements. Additionally, ASU 2010-06 clarifies existing disclosures regarding level of disaggregation and inputs and valuation techniques. The new disclosures and clarifications of existing disclosures under ASU 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years ending after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the disclosure requirements of significant transfers in and out of Level 1 and Level 2 fair value measurements (see Note 3). The Company does not expect the adoption of the disclosure requirements to have a material effect on its financial condition, results of operations, or cash flows.

 
8

 
In April 2010, the FASB issued ASU 2010-18, Receivables, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, which amends ASC 310-30. This ASU clarifies the treatment of loan modifications for loans accounted for within a loan pool. Loans accounted for under ASC 310-30, should not be removed from the pool even if the loan modification would otherwise be considered a troubled debt restructuring. An entity is still required to assess the entire pool for impairment. The update does not require additional disclosures. This clarified treatment of loan modifications is effective for interim and annual reporting periods beginning after July 15, 2010.  The Company does not expect the adoption of this guidance to have a material effect on its financial condition, results of operations, or cash flows.

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivable and Allowance for Credit Losses, which amends FASB Accounting Standards Codification™ (“ASC”) Topic 310, Receivables. ASU 2010-10 is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses.  Companies will be required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class.  The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure. The disclosures as of the end of a reporting period will be effective for interim and annual reporting periods ending on or after December 15, 2010. The Company does not expect the adoption of the disclosure requirements to have a material effect on its financial condition, results of operations or cash flows.

 
3.  
FAIR VALUE

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

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

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

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

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

 
9

 
In determining the appropriate hierarchy levels, the Company performs a detailed analysis of assets and liabilities that are subject to fair value disclosure. The following tables present both financial and non-financial assets and liabilities that are measured at fair value on a recurring and non-recurring basis. These assets and liabilities are reported on the condensed consolidated balance sheets at their fair values as of June 30, 2010 and December 31, 2009. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. There were no transfers in and out of Levels 1 and 2 during the first half of 2010. There were also no transfers in and out of levels 1 and 3 or levels 2 and 3.

 
 
   
Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of June 30, 2010
 
   
Fair Value Measurements
June 30, 2010
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
   
(In thousands)
 
Investment securities available-for-sale
                       
U.S. Treasury securities
  $ 55,867     $ 55,867     $ -     $ -  
U.S. Government agency and U.S. Government
  sponsored enterprise debt securities
    908,483       -       908,483       -  
U.S. Government agency and U.S. Government
  sponsored enterprise mortgage-backed securities:
                               
Commercial mortgage-backed securities
    25,639       -       25,639       -  
Residential mortgage-backed securities
    393,143       -       393,143       -  
Municipal securities
    5,511       -       5,511       -  
Other residential mortgage-backed securities,
  non-investment grade
    12,506       -       -       12,506  
Corporate debt securities:
                               
Investment grade
    637,028       -       637,028       -  
Non-investment grade
    29,857       -       27,013       2,844  
Debt issued by foreign governments
    7,714       -       7,714       -  
Other securities
    1,263       -       1,263       -  
Total investment securities available-for-sale
  $ 2,077,011     $ 55,867     $ 2,005,794     $ 15,350  
                                 
Equity swap agreements
  $ 1,832     $ -     $ 1,832     $ -  
Derivatives payable
    (1,888 )     -       -       (1,888 )
Foreign exchange options
    2,417       -       2,417       -  
 
 
 
 
10

 
   
Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of December 31, 2009
 
   
Fair Value Measurements
December 31, 2009
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
   
(In thousands)
 
Investment securities available-for-sale
                       
U.S. Treasury securities
  $ 303,472     $ 303,472     $ -     $ -  
U.S. Government agency and U.S. Government
  sponsored enterprise debt securities
    832,025       -       832,025       -  
U.S. Government agency and U.S. Government
  sponsored enterprise mortgage-backed securities:
                               
Commercial mortgage-backed securities
    26,355       -       26,355       -  
Residential mortgage-backed securities
    724,348       -       724,348       -  
Municipal securities
    60,193       -       60,193       -  
Other residential mortgage-backed securities:
                               
Investment grade
    95,517       -       95,517       -  
Non-investment grade
    41,610       -       28,872       12,738  
Corporate debt securities:
                               
Investment grade
    460,895       -       459,917       978  
Non-investment grade
    8,861       -       6,906       1,955  
U.S. Government sponsored enterprise equity securities
    1,782       -       1,782       -  
Other securities
    9,023       9,023       -       -  
Total investment securities available-for-sale
  $ 2,564,081     $ 312,495     $ 2,235,915     $ 15,671  
                                 
Equity swap agreements
  $ 14,177     $ -     $ 14,177     $ -  
Derivatives payable
    (14,185 )     -       -       (14,185 )
 
 
 
11

 
 
   
Assets Measured at Fair Value on a Non-Recurring Basis for the Three Months Ended June 30, 2010
 
   
Fair Value Measurements
June 30, 2010
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Gains (Losses)
 
   
(In thousands)
 
                               
Mortgage servicing assets
  (single, multi family, and
  commercial)
  $ 18,233     $ -     $ -     $ 18,233     $ (30 )
                                         
Non-covered impaired loans:
                                       
Residential single family
    6,494       -       -       6,494       (917 )
Residential multifamily
    5,398       -       -       5,398       (3,797 )
Commercial and industrial real
  estate, land
    24,899       -       -       24,899       (5,983 )
Construction
    33,378       -       -       33,378       (9,444 )
Commercial business
    3,698       -       -       3,698       (3,158 )
Other consumer
    -       -       -       -       (350 )
Total non-covered impaired loans
  $ 73,867     $ -     $ -     $ 73,867     $ (23,649 )
                                         
Non-covered OREO
  $ 6,206     $ -     $ -     $ 6,206     $ (666 )
                                         
   
Assets Measured at Fair Value on a Non-Recurring Basis for the Three Months Ended June 30, 2009
 
   
Fair Value Measurements
June 30, 2009
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Gains (Losses)
 
   
(In thousands)
 
                                         
Mortgage servicing assets
  (single, multi family, and
  commercial)
  $ 9,466     $ -     $ -     $ 9,466     $ (86 )
                                         
Non-covered impaired loans:
                                       
Residential single family
    4,713       -       -       4,723       (1,557 )
Residential multifamily
    14,078       -       -       14,105       (5,984 )
Commercial and industrial real
  estate, land
    22,337       -       -       19,523       (3,801 )
Construction
    18,204       -       -       12,778       (4,134 )
Commercial business
    29,192       -       -       38,653       (82 )
Other consumer
    409       -       -       409       (210 )
Total non-covered impaired loans
  $ 88,933     $ -     $ -     $ 90,191     $ (15,768 )
                                         
Non-covered OREO
  $ 15,986     $ -     $ -     $ 15,986     $ (4,182 )
 
 
 
12

 
   
Assets Measured at Fair Value on a Non-Recurring Basis for the Six Months Ended June 30, 2010
 
   
Fair Value Measurements
June 30, 2010
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Gains (Losses)
 
   
(In thousands)
 
                               
Mortgage servicing assets
  (single, multi family, and
  commercial)
  $ 18,233     $ -     $ -     $ 18,233     $ (64 )
                                         
Non-covered impaired loans:
                                       
Residential single family
    9,229       -       -       9,229       (1,783 )
Residential multifamily
    6,393       -       -       6,393       (4,086 )
Commercial and industrial real
  estate, land
    39,745       -       -       39,745       (16,249 )
Construction
    34,139       -       -       34,139       (11,365 )
Commercial business
    8,097       -       -       8,097       (6,549 )
Other consumer
    -       -       -       -       (432 )
Total non-covered impaired loans
  $ 97,603     $ -     $ -     $ 97,603     $ (40,464 )
                                         
Non-covered OREO
  $ 6,746     $ -     $ -     $ 6,746     $ (2,913 )
                                         
   
Assets Measured at Fair Value on a Non-Recurring Basis for the Six Months Ended
June 30, 2009
 
   
Fair Value Measurements
June 30, 2009
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Gains (Losses)
 
   
(In thousands)
 
                                         
Mortgage servicing assets
  (single, multi family, and
  commercial)
  $ 9,466     $ -     $ -     $ 9,466     $ 680