EAST WEST BANCORP INC - 10-Q Quarterly Report

PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

	September 30, 2004				December 31, 2003
	(In thousands, except share data)
ASSETS
Cash and cash equivalents		$	110,631			$	141,589
Interest-bearing deposits in other banks		596				594
Investment securities available-for-sale, at fair value (with amortized cost of $469,721 in 2004 and $442,875 in 2003)		472,197				445,142
Loans receivable, net of allowance for loan losses of $46,902 in 2004 and $39,246 in 2003		4,672,851				3,234,133
Investment in Federal Home Loan Bank stock, at cost		41,236				17,122
Investment in Federal Reserve Bank stock, at cost		6,923				—
Other real estate owned, net		299				—
Investment in affordable housing partnerships		34,331				28,808
Premises and equipment, net		24,480				24,957
Due from customers on acceptances		14,719				16,119
Premiums on deposits acquired, net, and other intangible assets		8,326				9,163
Goodwill		43,274				28,710
Cash surrender value of life insurance policies		66,668				64,805
Accrued interest receivable and other assets		56,751				34,243
Deferred tax assets—Federal		14,565				10,048
TOTAL		$	5,567,847			$	4,055,433
LIABILITIES AND STOCKHOLDERS’ EQUITY
Customer deposit accounts:
Noninterest-bearing		$	1,135,476			$	922,946
Interest-bearing		3,177,978				2,389,721
Total deposits		4,313,454				3,312,667
Short-term borrowings		—				12,000
Federal Home Loan Bank advances		655,250				281,300
Notes payable		6,913				2,192
Bank acceptances outstanding		14,719				16,119
Accrued expenses and other liabilities		42,805				37,433
Deferred tax liabilities—State		49				37
Junior subordinated debt		42,012				31,702
Total liabilities		5,075,202				3,693,450
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Common stock (par value of $0.001 per share) Authorized—100,000,000 shares Issued—57,174,552 shares and 53,691,638 shares in 2004 and 2003, respectively Outstanding—52,318,866 shares and 48,857,450 shares in 2004 and 2003, respectively		57				54
Additional paid in capital		254,753				171,491
Retained earnings		276,144				228,242
Deferred compensation		(3,264		)		(3,153		)
Treasury stock, at cost: 4,855,686 shares in 2004 and 4,834,188 shares in 2003		(36,481		)		(35,986		)
Accumulated other comprehensive income, net of tax		1,436				1,335
Total stockholders’ equity		492,645				361,983
TOTAL		$	5,567,847			$	4,055,433

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
	(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees	$	62,655	$	41,287	$	162,895	$	116,228
Investment securities available for sale	3,563		3,577		10,791		12,175
Short-term investments	85		463		607		1,616
Federal Home Loan Bank stock	487		100		989		333
Federal Reserve Bank stock	25		—		25		—
Total interest and dividend income	66,815		45,427		175,307		130,352
INTEREST EXPENSE
Customer deposit accounts	9,785		6,637		25,550		23,207
Short-term borrowings	18		10		31		25
Federal Home Loan Bank advances	3,367		753		7,594		1,921
Junior subordinated debt	810		566		2,210		1,698
Total interest expense	13,980		7,966		35,385		26,851
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES	52,835		37,461		139,922		103,501
PROVISION FOR LOAN LOSSES	5,000		2,000		11,750		6,500
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	47,835		35,461		128,172		97,001
NONINTEREST INCOME
Branch fees	1,693		1,855		5,327		5,408
Letters of credit fees and commissions	1,782		1,782		5,971		5,121
Ancillary loan fees	750		1,283		3,876		3,387
Net gain on sales of loans	16		172		273		354
Net gain on sales of investment securities available-for-sale	678		398		1,481		1,385
Net gain (loss) on fixed assets	911		13		931		(156		)
Income from secondary market activities	15		2,170		868		4,292
Income from life insurance policies	694		847		2,268		2,460
Other operating income	637		673		2,006		2,404
Total noninterest income	7,176		9,193		23,001		24,655
NONINTEREST EXPENSE
Compensation and employee benefits	9,386		7,970		27,693		23,579
Net occupancy	3,146		2,631		8,694		7,469
Amortization of investments in affordable housing partnerships	1,784		1,792		5,559		4,776
Deposit-related expenses	1,253		980		3,389		2,799
Amortization of premiums on deposits acquired	575		518		1,612		1,470
Data processing	566		461		1,534		1,321
Deposit insurance premiums and regulatory assessments	211		187		572		550
Other operating expenses	6,289		5,304		16,559		14,582
Total noninterest expense	23,210		19,843		65,612		56,546
INCOME BEFORE PROVISION FOR INCOME TAXES	31,801		24,811		85,561		65,110
PROVISION FOR INCOME TAXES	11,402		8,669		30,188		22,525
NET INCOME	$	20,399	$	16,142	$	55,373	$	42,585
BASIC EARNINGS PER SHARE	$	0.40	$	0.33	$	1.10	$	0.89
DILUTED EARNINGS PER SHARE	$	0.39	$	0.32	$	1.07	$	0.86
AVERAGE NUMBER OF SHARES OUTSTANDING—BASIC	51,210		48,138		50,137		47,952
AVERAGE NUMBER OF SHARES OUTSTANDING—DILUTED	52,884		49,600		51,752		49,254

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

	Common Stock			Additional Paid-In Capital			Retained Earnings			Deferred Compensation				Treasury Stock			Accumulated Other Comprehensive Income (Loss), Net of Tax				Comprehensive Income				Total Stockholders’ Equity
	(In thousands, except share data)
BALANCE, DECEMBER 31, 2002		$	54		$	155,877	$	178,873			$	—		$	(35,955	)		$	3,268							$	302,117
Comprehensive income
Net income for the period							42,585															$	42,585			42,585
Net unrealized loss on securities																		(1,623		)		(1,623		)		(1,623		)
Comprehensive income																						$	40,962
Stock compensation cost					12						240															252
Tax benefit from option exercise					2,514																					2,514
Issuance of 467,624 shares under Stock Option Plan					3,434																					3,434
Issuance of 50,396 shares under Stock Purchase Plan					667																					667
Issuance of 71,700 shares under Restricted Stock Plan					1,192						(1,192		)													—
Issuance of 35,000 shares under Stock Warrants Plan					175																					175
Issuance of 5,270 shares under Directors’ Restricted Stock Plan					100						(100		)													—
Issuance of 4,344 shares in lieu of Board of Director retainer fees					82																					82
Dividends paid on common stock							(7,195		)																	(7,195		)
BALANCE, SEPTEMBER 30, 2003		$	54		$	164,053	$	214,263			$	(1,052	)	$	(35,955	)		$	1,645							$	343,008
BALANCE, DECEMBER 31, 2003		$	54		$	171,491	$	228,242			$	(3,153	)	$	(35,986	)		$	1,335							$	361,983
Comprehensive income
Net income for the period							55,373															$	55,373			55,373
Net unrealized gain on securities																		101				101				101
Comprehensive income																						$	55,474
Stock compensation cost											1,020															1,020
Tax benefit from option exercise					4,445																					4,445
Issuance of 427,886 shares under Stock Option Plan					3,220																					3,220
Issuance of 49,310 shares under Employee Stock Purchase Plan					896																					896
Issuance of 1,622,844 shares under Private Placement		2			38,488																					38,490
Issuance of 56,718 shares under Restricted Stock Plan					1,526						(1,526		)													—
Issuance of 3,290 shares under Directors’ Restricted Stock Plan					100						(100		)													—
Issuance of 3,288 shares in lieu of Board of Director retainer fees					100																					100
Cancellation of 21,498 shares due to forfeitures of issued restricted stock											495			(495		)										—
Issuance of 120,000 shares under Stock Warrants Plan					1,600																					1,600
Issuance of 1,199,578 shares under Trust Bank acquisition		1			32,887																					32,888
Dividends paid on common stock							(7,471		)																	(7,471		)
BALANCE, SEPTEMBER 30, 2004		$	57		$	254,753	$	276,144			$	(3,264	)	$	(36,481	)		$	1,436							$	492,645

	Nine Months Ended
Disclosure of reclassification amounts:	September 30, 2004				September 30, 2003
	(In thousands)
Unrealized holding gain (loss) on securities arising during period, net of tax (expense) benefit of $(709) in 2004 and $492 in 2003		$	980			$	(679	)
Less: Reclassification adjustment for gain included in net income, net of tax benefit of $636 in 2004 and $684 in 2003		(879		)		(944		)
Net unrealized gain (loss) on securities, net of tax (expense) benefit of $(73) in 2004 and $1,175 in 2003		$	101			$	(1,623	)

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine Months Ended September 30,
	2004			2003
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	55,373		$	42,585
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	8,966			8,804
Stock compensation costs	1,020			252
Deferred tax benefit	(4,693		)	(3,690		)
Provision for loan losses	11,750			6,500
Net gain on sales of investment securities, loans and other assets	(3,560		)	(5,874		)
Federal Home Loan Bank stock dividends	(740		)	(342		)
Proceeds from sale of loans held for sale	79,928			187,262
Originations of loans held for sale	(79,261		)	(183,782		)
Tax benefit from stock options exercised	4,445			2,514
Net change in accrued interest receivable and other assets	(4,909		)	(12,128		)
Net change in accrued expenses and other liabilities	(5,555		)	12,304
Total adjustments	7,391			11,820
Net cash provided by operating activities	62,764			54,405
CASH FLOWS FROM INVESTING ACTIVITIES:
Net loan originations	(1,307,802		)	(406,825		)
Purchases of:
Investment securities available-for-sale	(311,325		)	(125,494		)
Loans receivable	(2,639		)	(74,808		)
Investments in affordable housing partnerships	(11,081		)	(5,218		)
Premises and equipment	(3,943		)	(2,718		)
Federal Home Loan Bank stock	(26,296		)	(756		)
Federal Reserve Bank stock	(6,923		)	—
Proceeds from sale of:
Investment securities available-for-sale	202,990			56,284
Premises and equipment	4,139			0
Proceeds from maturity of interest-bearing deposits in other banks	594			1,479
Repayments, maturity and redemption of investment securities available-for-sale	155,591			180,162
Redemption of Federal Home Loan Bank stock	4,321			—
Cash acquired from purchase of Trust Bank in 2004 and Pacific Business Bank in 2003, net of cash paid	15,889			3,713
Net cash used in investing activities	(1,286,485		)	(374,181		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits	807,428			144,775
Net decrease in short-term borrowings	(12,000		)	—
Proceeds from Federal Home Loan Bank advances	35,410,000			3,148,000
Repayment of Federal Home Loan Bank advances	(35,058,300		)	(3,042,100		)
Repayment of notes payable on affordable housing investments	(1,200		)	(900		)
Proceeds from issuance of common stock	38,490			—
Proceeds from common stock options exercised	3,220			3,434
Proceeds from stock warrants exercised	1,600			175
Proceeds from issuance of commons stock under Director’s retainer plan	100			—
Proceeds from employee stock purchase plan	896			667
Proceeds from junior subordinated debt	10,000			—
Dividends paid on common stock	(7,471		)	(7,195		)
Net cash provided by financing activities	1,192,763			246,856
NET DECREASE IN CASH AND CASH EQUIVALENTS	(30,958		)	(72,920		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	141,589			295,272
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	110,631		$	222,352
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	34,550		$	28,149
Income tax payments, net	44,977			26,855
Noncash investing and financing activities:
Issuance of common stock in connection with Trust Bank acquisition	32,888			—
Real estate investment financed through notes payable	5,921			—

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2004 and 2003
(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 Services, 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 nine months ended September 30, 2004 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, 2003.

Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. Information related to share volume and per share amounts have been adjusted to reflect the two-for-one stock split that became effective on or about June 21, 2004 (see Note 6).

2. SIGNIFICANT ACCOUNTING POLICIES

New Accounting Standards

In December 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”), an interpretation of Accounting Research Bulletin No. 51. FIN No. 46R 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 46R also requires disclosure about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The Company adopted this interpretation effective for the year ended December 31, 2003. As previously reported, the adoption of FIN No. 46R primarily resulted in the reclassification of certain liabilities due to the deconsolidation of statutory business trusts previously consolidated by the Company. FIN No. 46R had no effect on reported net income and cash flows.

In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance would be established

for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004. Management does not expect the adoption of this statement to have a material impact on the Company’s financial position, results of operations, or cash flows.

In March 2004, the Emerging Issues Task Force (EITF) reached consensus on the guidance provided in EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1) as applicable to debt and equity securities that are within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and equity securities that are accounted for using the cost method specified in Accounting Policy Board Opinion No. 18 The Equity Method of Accounting for Investments in Common Stock. An investment is impaired if the fair value of the investment is less than its cost. EITF 03-1 outlines that an impairment would be considered other-than-temporary unless: a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment, and b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. Although not presumptive, a pattern of selling investments prior to the forecasted recovery of fair value may call into question the investor’s intent. In addition, the severity and duration of the impairment should also be considered in determining whether the impairment is other-than-temporary. In September 2004, the FASB staff issued a proposed Board-directed FASB Staff Position, FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1. The proposed FSP would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of Issue 03-1. The Board also issued FSP EITF Issue 03-1-b, which delays the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1. The delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. Adoption of this standard may cause the Company to recognize impairment losses in the Consolidated Statements of Income which would not have been recognized under the current guidance or to recognize such losses in earlier periods, especially those due to increases in interest rates. Since fluctuations in the fair value for available-for-sale securities are already recorded in Accumulated Other Comprehensive Income, adoption of this standard is not expected to have a significant impact on stockholders’ equity.

Stock-Based Compensation

The Company issues fixed stock options to certain employees, officers, and directors. SFAS 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, the Company accounts for its 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 the Company’s stock over the exercise price of the options. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates of options consistent with the method defined in SFAS No. 123, the Company’s net income and earnings per share would have

been reduced to the pro forma amounts indicated below for the three and nine months ended September 30, 2004 and 2003:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	(Dollars in thousands, except per share data)
Net income, as reported	$	20,399		$	16,142		$	55,373		$	42,585
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects	210			64			591			146
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards subject to SFAS No. 123, net of related tax effects	(492		)	(365		)	(1,468		)	(1,062		)
Net income, pro forma	$	20,117		$	15,841		$	54,496		$	41,669
Basic earnings per share
As reported	$	0.40		$	0.33		$	1.10		$	0.89
Pro forma	$	0.39		$	0.33		$	1.09		$	0.87
Diluted earnings per share
As reported	$	0.39		$	0.32		$	1.07		$	0.86
Pro forma	$	0.38		$	0.32		$	1.05		$	0.85

The weighted average fair value for options granted during the nine months ended September 30, 2004 and 2003 was $6.52 and $4.24, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Expected dividend yield	0.7	%	1.1	%	0.8	%	1.2	%
Expected volatility	29.9	%	32.1	%	30.6	%	33.4	%
Risk-free interest rate	2.8	%	2.2	%	2.4	%	2.3	%
Expected lives	3.5 years		3.5 years		3.5 years		3.5 years

In addition to stock options, the Company also grants restricted stock awards to directors, certain officers and employees. The Company records the cost of the restricted shares at market value. The restricted stock grants are reflected as a component of common stock and additional paid-in capital with an offsetting amount of deferred compensation in the consolidated statements of changes in stockholders’ equity. The restricted shares awarded become fully vested after three years of continued employment from the date of grant. The Company becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. The deferred compensation cost reflected in stockholders’ equity is being amortized as compensation expense over three years using the straight-line method. Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions. The Company records forfeitures of restricted stock as treasury share repurchases and any compensation cost previously recognized is reversed in the period of forfeiture.

3. ACQUISITION OF TRUST BANCORP

On August 6, 2004, the Company completed the acquisition of Trust Bancorp, parent company of Trust Bank, in an all-stock transaction valued at approximately $32.9 million. The results of Trust Bank’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 Trust Bank were adjusted to and recorded at their estimated fair values as of the acquisition date. The estimated tax effect of differences between tax bases and market values has been reflected in deferred income taxes. The Company recorded total goodwill of approximately $14.6 million and core deposit premium of $2.4 million. Core deposit premium is amortized over its useful life, which is estimated to be 7 years.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

	Values of Assets Acquired and Liabilities Assumed
Cash, cash equivalents and other investments		$	65,516
Loan receivable		164,011
Premises and equipment		596
Goodwill		14,617
Core deposit premium		2,373
Other assets		3,380
Total assets acquired		250,493
Deposits		193,358
Other liabilities		24,247
Total liabilities assumed		217,605
Net assets acquired		$	32,888

4. GOODWILL AND OTHER INTANGIBLES

Effective January 1, 2002, the Company 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 carrying amount of remaining goodwill amounted to $43.3 million and $28.7 million at September 30, 2004 and December 31, 2003. The increase in goodwill at September 30, 2004, compared to December 31, 2003 is due entirely to the acquisition of Trust Bancorp during the third quarter of 2004 (see Note 3).

The Company also has premiums on acquired deposits which represent the intangible value of depositor relationships resulting from deposit liabilities assumed in various acquisitions. The Company amortizes premiums on acquired deposits using the straight-line method over 7 to 10 years. At September 30, 2004, the balance of deposit premiums totaled $8.3 million. The total amortization expense of deposit premiums totaled $1.6 million and $1.5 million for the nine months ended September 30, 2004 and 2003, respectively. Estimated future amortization expense of premiums on acquired deposits is as follows: $603 thousand for the fourth quarter of 2004, $2.5 million in 2005, $2.2 million in 2006, $1.2 million in 2007, $634 thousand in 2008 and 2009, $369 thousand in 2010 and $198 thousand in 2011.

5. COMMITMENTS AND CONTINGENCIES

Credit Extensions—In the normal course of business, the Company has various outstanding commitments to extend credit that are not reflected in the accompanying interim consolidated financial statements. As of September 30, 2004, undisbursed loan commitments, commercial and standby letters of

credit, and commitments to fund residential mortgage, commercial real estate and commercial business loan applications in process amounted to $978.9 million, $371.0 million, and $542.1 million, respectively.

Guarantees—From time to time, the Company sells loans with recourse in the ordinary course of business. For loans that have been sold with recourse, the recourse component is considered a guarantee. When the Company sells a loan with recourse, it commits to stand ready to perform, if the loan defaults, and to make payments to remedy the default. As of September 30, 2004 and December 31, 2003, loans sold with recourse, comprised entirely of residential single family mortgage loans, totaled $40.5 million and $53.0 million. The Company’s recourse reserve related to these loans totaled $61 thousand and $79 thousand as of September 30, 2004 and December 31, 2003.

The Company also sells loans without recourse that may have to be subsequently repurchased if a defect that occurred during the loans origination process results in a violation of a representation or warranty made in connection with the sale of the loan. When a loan sold to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred and if such defects give rise to a violation of a representation or warranty made to the investor in connection with the sale. If such a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no such defects, the Company has no commitment to repurchase the loan. As of September 30, 2004 and December 31, 2003, the amount of loans sold without recourse totaled $542.0 million and $474.8 million, which substantially represents the unpaid principal balance of the Company’s loans serviced for others portfolio.

Derivatives—During the third quarter of 2004, we offered a promotional equity index certificate of deposit which has an interest rate tied to the Hang Seng China Enterprises Index. We took in approximately $14.5 million in time deposits with 5½ year maturities as a result of this promotion. Under SFAS 133, a certificate of deposit that pays interest based on changes in an equity index is a hybrid instrument with an embedded derivative (i.e. equity call option) that must be accounted for separately from the host contract (i.e. the certificate of deposit). The fair value of the embedded derivative at September 30, 2004 was $2.8 million and is included in interest-bearing deposits on the Consolidated Statements of Financial Condition. To manage our interest rate risk exposure on this product, we have entered into two freestanding interest rate swap agreements with a major investment brokerage firm with notional amounts of $9.4 million and $5.1 million. The fair values of the interest rate swap agreements aggregated $584 thousand at September 30, 2004 and are included in other assets on the Consolidated Statements of Financial Condition. The notional amounts and terms of the interest rate swap agreements match the principal amounts and terms of the issued certificates of deposit. In accordance with SFAS 133, both the embedded equity call option on the certificates of deposit and the freestanding interest rate swap agreements will be marked-to-market every quarter with resulting changes in fair value recorded in the income statement. There was not a material impact on the Consolidated Statements of Income for the quarter ended September 30, 2004.

Litigation—The Company is a party to various legal proceedings arising in the normal course of business. While it is difficult to predict the outcome of such litigation, the Company does not expect that such litigation will have a material adverse effect on its financial position and results of operations.

Regulated Investment Company—As previously reported, the California Franchise Tax Board (the “FTB”) announced that it is taking the position that certain tax deductions related to regulated investment companies (“RICs”) will be disallowed pursuant to California Senate Bill 614 and California Assembly Bill 1601, which were signed into law in the fourth quarter of 2003. East West Securities Company, Inc. (the “Fund”), a regulated investment company formed and funded in July 2000 to raise capital in an efficient and economical manner was dissolved on December 30, 2002 as a result of, among other reasons, proposed legislation to change the tax treatments of RICs. The Fund provided state tax benefits beginning

in 2000 until the end of 2002, when the RIC was officially dissolved. While the Company’s management continues to believe that the tax benefits realized in previous years were appropriate and fully defensible under the existing tax codes at that time, the Company has deemed it prudent to participate in the voluntary compliance initiative (“VCI”) offered by the State of California to avoid certain potential penalties should the FTB choose to litigate its recently announced position about the tax treatment of RICs for periods prior to enactment of the legislation described above and should the FTB be successful in that litigation.

Pursuant to the VCI program, the Company filed amended California income tax returns on April 15, 2004 for all affected years and paid the resulting taxes and interest due to the FTB. This amounted to an aggregate payment of $14.2 million for tax years 2000, 2001, and 2002. The Company’s management continues to believe that the tax deductions are appropriate and, as such, refund claims have also been filed for the amounts paid with the amended returns. These refund claims are reflected as assets in the Company’s consolidated financial statements. As a result of these actions—amending the Company’s California income tax returns and subsequent related filing of refund claims—the Company retains its potential exposure for assertion of an accuracy-related penalty should the FTB prevail in its position, in addition to our risk of not being successful in our refund claim for taxes and interest. The Company’s potential exposure to all other penalties, however, has been eliminated through this course of action. Management will continue to work with counsel to follow the latest developments with regards to this matter as well as actively pursue the Company’s refund claims.

6. STOCKHOLDERS’ EQUITY

Stock Split—On May 18, 2004, the Company’s Board of Directors approved a two-for-one stock split effected in the form of a 100% stock dividend. Shareholders of record at the close of business on June 3, 2004 received one additional share of common stock for each share of common stock held by them on that date. The additional shares were distributed by the Company’s transfer agent on or about June 21, 2004. Prior to the stock split, the Company had 25,141,002 shares of common stock issued and outstanding. The stock dividend increased the number of shares issued and outstanding to 50,282,004. All share information has been retroactively adjusted to reflect the two-for-one stock split.

Earnings Per Share—The actual number of shares outstanding at September 30, 2004 was 52,318,866. 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, restricted stock and warrants.

The following tables set forth earnings per share calculations for the three and nine months ended September 30, 2004 and 2003:

	Three Months Ended September 30,
	2004								2003
	Net Income		Number of Shares		Per Share Amounts				Net Income		Number of Shares		Per Share Amounts
	(In thousands, except per share data)
Basic earnings per share	$	20,399		51,210		$	0.40		$	16,142		48,138		$	0.33
Effect of dilutive securities:
Stock options	—			1,443		(0.01		)	—			1,314		(0.01		)
Restricted stock	—			77		—			—			20		—
Stock warrants	—			154		—			—			128		—
Dilutive earnings per share	$	20,399		52,884		$	0.39		$	16,142		49,600		$	0.32

	Nine Months Ended September 30,
	2004								2003
	Net Income		Number of Shares		Per Share Amounts				Net Income		Number of Shares		Per Share Amounts
	(In thousands, except per share data)
Basic earnings per share	$	55,373		50,137		$	1.10		$	42,585		47,952		$	0.89
Effect of dilutive securities:
Stock options	—			1,400		(0.03		)	—			1,178		(0.03		)
Restricted stock	—			68		—			—			24		—
Stock warrants	—			147		—			—			100		—
Dilutive earnings per share	$	55,373		51,752		$	1.07		$	42,585		49,254		$	0.86

Quarterly Dividends—During 2004, the Company’s Board of Directors declared and paid quarterly common stock cash dividends of $0.05 per share. Quarterly cash dividends were paid on or about February 11, 2004, May 12, 2004, and August 11, 2004 to shareholders of record on January 28, 2004, April 28, 2004, and July 28, 2004, respectively. Cash dividends totaling $7.5 million were paid to the Company’s shareholders during the first nine months of 2004.

7. PRIVATE PLACEMENT OFFERINGS

On March 1, 2004, the Company completed a private placement of common stock with two institutional investors amounting to approximately $30 million. The transaction involved the sale of 1,217,132 shares of common stock at a purchase price of approximately $24.65 per share. In addition, the Company granted the investors a right to purchase up to an additional 405,712 shares of common stock at approximately $24.65 per share, or up to an additional $10.0 million. The investors exercised their purchase option on August 13, 2004. Net proceeds from the offerings were used to support the continued growth of the Company. The Company completed the registration of the common stock sold to the investors as well as the shares covered by the investors’ options with the Securities and Exchange Commission under the Securities Act of 1933 during April 2004.

On June 10, 2004 and November 5, 2004, the Company issued $10.3 million and $15.5 million, respectively, in junior subordinated debt securities in two separate private placement transactions. Similar to previous offerings, these securities were issued through newly formed statutory business trusts, East West Capital Trust IV and East West Capital Trust V (the “Trusts”), which are wholly-owned subsidiaries of the Company. The proceeds from the debt securities are loaned by the Trusts to the Company and are reported in the consolidated balance sheet as junior subordinated debt. The securities issued by East West Capital Trust IV have a scheduled maturity date of June 23, 2034 and bear an initial interest rate of 3.96% per annum. The interest rate adjusts quarterly based on the 3-Month Libor plus 2.55%. Interest payments are due quarterly on January 23, April 23, July 23, and October 23 of each year. Similarly, the securities issued by East West Capital Trust V have a scheduled maturity date of November 23, 2004 and bear an initial interest rate of 4.01% per annum. The interest rate adjusts quarterly based on the 3-Month Libor plus 1.80%. Interest payments are due quarterly on February 23, May 23, August 23, and November 23 of each year. These additional issuances of capital securities provide the Bank with a cost-effective means of obtaining Tier 1 capital for regulatory purposes.

8. BUSINESS SEGMENTS

The Company’s management utilizes an internal reporting system to measure the performance of its various operating segments. The Company has identified four principal operating segments for purposes of management reporting: retail banking, commercial lending, treasury, and residential lending. Information related to the Company’s remaining centralized functions and eliminations of intersegment amounts have been aggregated and included in “Other.” Although all four operating segments offer financial products

and services, they are managed separately based on each segment’s strategic focus. While the retail banking segment focuses primarily on retail operations throughout the Company’s branch network, certain designated branches have responsibility for generating commercial deposits and loans. The commercial lending segment primarily generates commercial loans and deposits through the efforts of commercial lending officers located in the Company’s northern and southern California production offices. The treasury department’s primary focus is managing the Company’s investments, liquidity, and interest rate risk while the residential lending segment is mainly responsible for the Company’s portfolio of single family and multifamily residential loans.

Operating segment results are based on the Company’s internal management reporting process, which reflects assignments and allocations of capital, certain operating and administrative costs and the provision for loan losses. Net interest income is based on the Company’s internal funds transfer pricing system which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or repricing characteristics. Noninterest income and noninterest expense, including depreciation and amortization, directly attributable to a segment are assigned to that business. The Company allocates 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. The provision for credit losses is allocated based on new loan originations for the period. The Company evaluates overall performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses.

Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results. Results for prior periods have been restated for comparability for changes in management structure or reporting methodologies.

The following tables present the operating results and other key financial measures for the individual operating segments for the three and nine months ended September 30, 2004 and 2003:

	Three Months Ended September 30, 2004
	Retail Banking			Commercial Lending			Treasury			Residential Lending				Other		Total
	(In thousands)
Interest income	$	21,252		$	30,924		$	4,096			$	9,734		$	809	$	66,815
Charge for funds used	(9,466		)	(13,172		)	(819		)		(5,220		)	—		(28,677		)
Interest spread on funds used	11,786			17,752			3,277				4,514			809		38,138
Interest expense	(7,398		)	(946		)	(5,636		)		—			—		(13,980		)
Credit on funds provided	16,348			1,945			10,384				—			—		28,677
Interest spread on funds provided	8,950			999			4,748				—			—		14,697
Net interest income	$	20,736		$	18,751		$	8,025			$	4,514		$	809	$	52,835
Depreciation and amortization	$	1,139		$	102		$	246			$	376		$	1,164	$	3,027
Segment pretax profit	$	8,010		$	17,294		$	2,123			$	4,304		$	70	$	31,801
Segment assets as of September 30, 2004	$	1,559,832		$	2,325,163		$	554,032			$	871,297		$	257,523	$	5,567,847

	Three Months Ended September 30, 2003
	Retail Banking			Commercial Lending			Treasury			Residential Lending				Other			Total
	(In thousands)
Interest income	$	12,037		$	21,431		$	4,091			$	7,548		$	320		$	45,427
Charge for funds used	(4,013		)	(6,502		)	(3,012		)		(3,128		)	—			(16,655		)
Interest spread on funds used	8,024			14,929			1,079				4,420			320			28,772
Interest expense	(5,880		)	(228		)	(1,858		)		—			—			(7,966		)
Credit on funds provided	11,871			580			4,204				—			—			16,655
Interest spread on funds provided	5,991			352			2,346				—			—			8,689
Net interest income	$	14,015		$	15,281		$	3,425			$	4,420		$	320		$	37,461
Depreciation and amortization	$	967		$	32		$	217			$	339		$	1,684		$	3,240
Segment pretax profit	$	2,243		$	17,148		$	2,177			$	5,837		$	(2,594	)	$	24,811
Segment assets as of September 30, 2003	$	938,463		$	1,485,862		$	561,294			$	547,826		$	230,031		$	3,763,476

	Nine Months Ended September 30, 2004
	Retail Banking			Commercial Lending			Treasury			Residential Lending				Other		Total
	(In thousands)
Interest income	$	54,408		$	81,171		$	12,230			$	25,418		$	2,080	$	175,307
Charge for funds used	(22,284		)	(32,751		)	(3,131		)		(12,907		)	—		(71,073		)
Interest spread on funds used	32,124			48,420			9,099				12,511			2,080		104,234
Interest expense	(20,211		)	(2,175		)	(12,999		)		—			—		(35,385		)
Credit on funds provided	41,549			4,211			25,313				—			—		71,073
Interest spread on funds provided	21,338			2,036			12,314				—			—		35,688
Net interest income	$	53,462		$	50,456		$	21,413			$	12,511		$	2,080	$	139,922
Depreciation and amortization	$	3,116		$	280		$	428			$	989		$	4,153	$	8,966
Segment pretax profit	$	17,046		$	49,176		$	7,179			$	11,903		$	257	$	85,561
Segment assets as of September 30, 2004	$	1,559,832		$	2,325,163		$	554,032			$	871,297		$	257,523	$	5,567,847

	Nine Months Ended September 30, 2003
	Retail Banking			Commercial Lending				Treasury			Residential Lending				Other			Total
	(In thousands)
Interest income	$	55,045			$	36,405		$	14,024			$	21,011		$	3,867		$	130,352
Charge for funds used	(19,403		)		(13,038		)	(7,758		)		(9,947		)	(1,484		)	(51,630		)
Interest spread on funds used	35,642				23,367			6,266				11,064			2,383			78,722
Interest expense	(20,134		)		(539		)	(6,178		)		—			—			(26,851		)
Credit on funds provided	37,668				1,314			6,778				—			5,870			51,630
Interest spread on funds provided	17,534				775			600				—			5,870			24,779
Net interest income	$	53,176			$	24,142		$	6,866			$	11,064		$	8,253		$	103,501
Depreciation and amortization	$	2,848			$	50		$	157			$	1,078		$	4,670		$	8,804
Segment pretax profit	$	16,071			$	23,372		$	7,123			$	9,399		$	9,145		$	65,110
Segment assets as of September 30, 2003	$	1,557,427			$	866,899		$	561,263			$	547,519		$	230,368		$	3,763,476

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

The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of East West Bancorp, Inc. and its subsidiaries. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2003, and the accompanying interim unaudited condensed consolidated financial statements and notes thereto. Information related to share volume and per share amounts have been adjusted to reflect the two-for-one stock split that became effective on or about June 21, 2004.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our consolidated financial statements and accompanying notes. We believe that the judgments, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances as of September 30, 2004.

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified four accounting policies that, due to judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to the classification and valuation of investment securities, the methodologies that determine our allowance for loan losses, the valuation of retained interests and mortgage servicing assets related to securitizations and sales of loans, and the calculation of accrued income taxes. In each area, we have identified the variables most important in the estimation process. We have used the best information available to make the estimations necessary to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables could change future valuations and impact net income.

Our significant accounting principles are described in greater detail in our 2003 Annual Report on Form 10-K in the “Critical Accounting Policies” section of Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial Statements—“Significant Accounting Policies” which are essential to understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition.

Overview

During the third quarter of 2004, we again generated record earnings totaling $20.4 million, or $0.40 per basic share and $0.39 per diluted share, compared with $16.1 million, or $0.33 per basic share and $0.32 per diluted share, reported during the third quarter of 2003. Continued strong growth in loans, improved efficiencies in our operating platform, and continued solid asset quality contributed to our earnings performance for the third quarter of 2004. The annualized return on average assets during the third quarter of 2004 was 1.55%, compared with 1.77% for the same quarter in 2003. The annualized return on average equity decreased to 17.84% during the third quarter of 2004, compared to 19.52% during the same period in 2003. Based on the operating results for the first nine months of the year, the completion of the Trust Bancorp acquisition, and the additional 50 basis point increase in interest rates during the third quarter of 2004, management expects net income per diluted common share for the full year of 2004 to be approximately 23% to 25% higher than the net income per diluted common share for 2003. This updated guidance, which is higher than previously reported, is based on a stable efficiency ratio

and interest rate environment for the last quarter of the year, and a loss provision level and tax rate roughly equal to those of the third quarter of 2004.

During the third quarter of 2004, we completed our acquisition of Trust Bancorp, parent company of Trust Bank. Trust Bank, which was founded in 1981, offers community banking services to a range of retail and commercial customers through four branches located in Monterey Park, Rowland Heights, West Covina, and Arcadia. We completed the conversion and integration of all Trust Bank operating systems during the first week of October 2004. The acquisition added over 4,000 deposit customers to the East West franchise and we have already begun to cultivate these new relationships to generate additional lending and deposit opportunities for the Company. We estimate the acquisition to be accretive to 2004 earnings by approximately $0.02 per share.

Another highlight of the third quarter of 2004 was the securitization of approximately $24.6 million of multifamily loans through the Federal National Mortgage Association (“FNMA”). We undertook the securitization for liquidity and capital management purposes, retaining all of the resulting securities on our balance sheet. The securitization was accounted for as a pass-through transaction which did not generate any gains or losses to operations. We also recorded approximately $278 thousand in mortgage servicing assets as a result of the securitization since the Bank continues to service the underlying loans. We plan to securitize additional multifamily loans in the foreseeable future as a means of managing our liquidity and capital positions.

Total consolidated assets at September 30, 2004 increased 37% to $5.57 billion, compared with $4.06 billion at December 31, 2003. A 44% growth in gross loans was the primary driver of this increase, rising to a record $4.72 billion at September 30, 2004. We attribute overall loan growth to the continued expansion of lending relationships with new as well as established customers, increased loan origination volume from our branch network, and the addition of personnel to enhance and support loan and deposit growth. Excluding the impact of the Trust Bank acquisition, organic loan growth totaled 39% through September 30, 2004. Based on our current production levels and pipeline of quality lending opportunities, we project loan growth for the full year of 2004 to be approximately 50% over yearend 2003 levels. This growth projection, which takes into consideration additional securitization activity expected to close during the fourth quarter of 2004, reflects the favorable economic conditions in our markets, our expanded delivery platforms and loan origination capabilities at the branch level, as well as enhanced lending opportunities afforded by the Trust Bank acquisition.

Total deposits grew 30% to $4.31 billion at September 30, 2004, compared to $3.31 billion at December 31, 2003. Core deposits, which include all deposit categories other than time deposits, increased 27% to $2.28 billion at September 30, 2004 predominantly as a result of expanded commercial relationships, as well as programs and products in the retail branches that better align with the needs of both smaller businesses and retail customers. Excluding the impact of the Trust Bank acquisition, organic deposit growth year-to-date totaled 24%. Time deposits increased 33% to $2.03 billion at September 30, 2004 relative to December 31, 2003, benefiting directly from the implementation of a retail promotional program that spanned the first and second quarters of 2004. Additionally, for a limited time during the third quarter of 2004, we offered a promotional equity index certificate of deposit which has an interest rate tied to the Hang Seng China Enterprises Index. We took in approximately $14.5 million in time deposits with 5½ year maturities as a result of this promotion. We are currently doing a second offering of this product for a limited time which commenced in late September 2004 to mid-November 2004. To augment our liquidity sources, we also took advantage of attractive market pricing for FHLB advances which increased 133% to $655.3 million at September 30, 2004, compared to $281.3 million at December 31, 2003. This will provide us with cost-effective longer-term financing to support our anticipated loan production activity for the remainder of the year.

Total average assets increased 44% to $5.27 billion during the third quarter of 2004, compared to $3.65 billion for the same quarter in 2003, primarily due to growth in average loans. Proceeds from sales and repayments of investment securities were used to fund a portion of the Company’s loan growth. Total average loans grew to $4.45 billion during the quarter ended September 30, 2004, an increase of 58% over the prior year quarter. All loan categories experienced double-digit growth during the quarter, with the most significant contributions coming from residential multifamily and commercial real estate loans. Total average deposits rose 26% during the third quarter of 2004 to $3.89 billion, compared to $3.10 billion for the same quarter in 2003. Noninterest-bearing demand deposits, money market accounts, and time deposits had the most noteworthy impact on deposit growth during the period.

Net interest margin decreased to 4.24% during the quarter ended September 30, 2004, compared to 4.39% during the same quarter in 2003. The decline in net interest margin can be primarily attributed to the addition of approximately $300.0 million in low cost, fixed rate FHLB advances during the first quarter of 2004 as well as the higher percentage of variable rate and hybrid adjustable rate loan originations compared to earlier periods. The emphasis on variable rate and shorter-term hybrid loans, which provide a lower initial interest spread than fixed rate or longer-term hybrid loans, was a strategic move on our part in anticipation of a higher interest rate environment. Although the yield on average earning assets for the third quarter of 2004 rose to 5.37%, compared to 5.33% for the prior year quarter, the increase was primarily due to significant volume growth. The average cost of deposits during the third quarter of 2004 increased to 1.00%, compared to 0.86% for the third quarter of 2003, primarily due to the higher cost of deposits from Trust Bank and, to a lesser extent, on a higher market interest rate on selected deposit categories, including time deposits. In light of these factors, including the retail time deposit promotional program mentioned earlier, we anticipate that our cost of deposits will increase slightly during the fourth quarter of 2004. Overall, however, we anticipate our net interest margin to increase to a range of 4.25% to 4.28% during the last quarter of 2004 in response to the recent Fed interest rate increases that took effect in the third quarter of 2004.

Total noninterest income decreased 22% to $7.2 million during the third quarter of 2004, compared to the $9.2 million for the corresponding quarter in 2003. The rising interest rate environment has considerably curtailed our secondary market activities which contributed significantly to noninterest revenues in previous periods. Although we continue to experience a healthy volume of single family mortgage originations, there is a substantial shift away from fixed rate mortgages which we sell into the secondary market, in favor of adjustable rate loans which we generally maintain in our portfolio. Offsetting this reduction in noninterest income during the third quarter of 2004 were net gains on fixed assets and higher net gains from the sale of investment securities available-for-sale during the period. The net gain from fixed assets is comprised of a $1.4 million gain from the sale of a building that houses a branch location reduced by a $480 thousand writedown of a corporate administrative building as a result of future relocation plans. The net gain from investment securities sales during the third quarter is predominantly due to the sale of securities acquired through Trust Bank.

Total noninterest expense increased 17% to $23.2 million during the third quarter of 2004, compared with $19.8 million for the prior year quarter. This is primarily due to higher compensation expense related to the addition of Trust Bank personnel and increased staffing of account officers, higher occupancy expenses from the addition of Trust Bank branches, and higher other expenses, which can be attributed to overall deposit and loan growth. Despite the increase in overall expenses, however, our efficiency ratio, which represents noninterest expense (excluding the amortization of intangibles and investments in affordable housing partnerships) divided by the aggregate of net interest income before provision for loan losses and noninterest income decreased to 35% during the third quarter of 2004, compared to 38% during the same period in 2003. We believe this to be a reflection of our ability to efficiently utilize our resources and operating platform to support our continuing growth.

The effective tax rate for the third quarter of 2004 was 35.9%, compared to 34.9% for the same period in 2003. We anticipate our effective tax rate for the fourth quarter of 2004 to be approximately equal to that of the third quarter. With respect to recent developments regarding our former regulated investment company, East West Securities Company, Inc., the Franchise Tax Board is currently in the process of reviewing and assessing our refund claims for the amounts we paid when we filed amended returns pursuant to our participation in the voluntary compliance initiative offered by the State of California. Pursuant to this program, we filed amended California income tax returns for all affected years on April 15, 2004 and paid the resulting taxes and interest due to the Franchise Tax Board. Management continues to believe that the tax benefits realized in previous years were appropriate and fully defensible under the existing tax codes at that time.

Total nonperforming assets amounted to $2.9 million, or 0.05% of total assets at September 30, 2004, compared with $6.6 million, or 0.16%, at December 31, 2003. The reduction in nonperforming assets is due primarily to the resolution of a trade finance loan that is fully insured by the Ex-Im Bank and the payoff of several loans. During the third quarter of 2004, we foreclosed on a condominium unit that is partially collateralizing a nonperforming commercial loan. This property represents the balance of other real estate owned amounting to $299 thousand at September 30, 2004. The allowance for loan losses totaled $46.9 million at September 30, 2004, or 0.99% of outstanding total loans. Net loan chargeoffs totaled $3.3 million, or an annualized 0.30% of average loans, during the third quarter of 2004, compared with net recoveries of $467 thousand, or an annualized 0.07% of average loans, during the same quarter in 2003. We anticipate our overall asset quality to remain sound throughout the remainder of 2004. We project that nonperforming assets will continue to be below 0.50% of total assets and that net chargeoffs will remain below an annualized 0.35% of average loans in 2004.

We continue to be well-capitalized under all regulatory guidelines with a Tier 1 risk-based capital ratio of 9.7%, a total risk-based capital ratio of 10.7%, and a Tier 1 leverage ratio of 9.2% at September 30, 2004. As previously reported, we completed a private placement of common stock during the first quarter with two institutional investors amounting to approximately $30 million. During August 2004, these investors exercised their option to purchase an additional $10.0 million of the Company’s common stock, resulting in the issuance of 405,712 new shares. In a separate private placement transaction, we issued $10.0 million in junior subordinated debt securities during June 2004 through a newly formed statutory business trust, East West Capital Trust IV. This additional issuance of capital securities provides the Bank with a cost-effective means of obtaining Tier 1 capital for regulatory purposes. These additional sources of capital will provide us with the financial capacity to continue to capitalize on lending opportunities in our markets as well as facilitate the sustained growth of the Bank.

Results of Operations

We reported third quarter 2004 net income of $20.4 million, or $0.40 per basic share and $0.39 per diluted share, compared with $16.1 million, or $0.33 per basic share and $0.32 per diluted share, reported during the third quarter of 2003. The 26% increase in net income for the three months ended September 30, 2004 is primarily attributable to higher net interest income, partially offset by a higher provision for loan losses, lower noninterest-related revenues, higher operating expenses and a higher provision for income taxes. Our annualized return on average total assets decreased to 1.55% for the quarter ended September 30, 2004, from 1.77% for the same period in 2003. The annualized return on average stockholders’ equity decreased to 17.84% for the third quarter of 2004, compared with 19.52% for the third quarter of 2003.

Net income for the nine months ended September 30, 2004 increased 30% to $55.4 million, or $1.10 per basic share and $1.07 per diluted share, from $42.6 million, or $0.89 per basic and $0.86 per diluted share for the nine months ended September 30, 2003. The 30% increase in year-to-date net income is primarily attributable to higher net interest income, partially offset by a higher provision for loan losses, lower noninterest-related revenues, higher operating expenses and a higher provision for income taxes. Our annualized return on average total assets decreased to 1.56% for the first nine months of 2004, from 1.63% for the same period in 2003. The annualized return on average stockholders’ equity decreased to 17.77% for the nine months ended September 30, 2004, from 17.88% for the corresponding period in 2003.

Components of Net Income

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	(In millions)
Net interest income	$	52.8		$	37.4		$	139.9		$	103.5
Provision for loan losses	(5.0		)	(2.0		)	(11.7		)	(6.5		)
Noninterest income	7.2			9.2			23.0			24.7
Noninterest expense	(23.2		)	(19.8		)	(65.6		)	(56.6		)
Provision for income taxes	(11.4		)	(8.7		)	(30.2		)	(22.5		)
Net income	$	20.4		$	16.1		$	55.4		$	42.6
Annualized return on average total assets	1.55		%	1.77		%	1.56		%	1.63		%

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 third quarter of 2004 totaled $52.8 million, a 41% increase over net interest income of $37.5 million for the same quarter in 2003. For the nine months ended September 30, 2004, net interest income increased 35% to $139.9 million, compared with $103.5 million for the corresponding period in 2003.

Total interest and dividend income during the quarter ended September 30, 2004 increased 47% to $66.8 million, compared with $45.4 million during the same period in 2003. Year-to-date interest and dividend income also increased 34% to $175.3 million, compared with $130.4 million during the first nine months of 2003. The increase in interest and dividend income during both the third quarter and the first nine months of 2004 is attributable primarily to a 46% and 36% growth in average earning assets for the quarter and nine months ended September 30, 2004, respectively, partially offset by lower yields on investment securities and loans receivable. Growth in average loans was the primary driver for the growth in average earning assets for the quarter and nine months ended September 30, 2004. The net growth in average earning assets for both periods was funded largely by increases in noninterest-bearing demand deposits, money market accounts, time deposits and FHLB advances.

Total interest expense during the third quarter of 2004 increased 75% to $14.0 million, compared with $8.0 million for the same period a year ago. Similarly, total interest expense increased 32% to $35.4 million for the first nine months of 2004, from $26.9 million for the first nine months of 2003. The increase in interest expense during both the third quarter and first nine months of 2004 can be attributed to a 56% and 40% combined growth in average interest-bearing liabilities, predominantly FHLB advances and time deposits.

Net interest margin, defined as taxable equivalent net interest income divided by average earning assets, decreased by 15 basis points to 4.24% for the third quarter of 2004, compared with 4.39% for the third quarter of 2003. For the first nine months of 2004, the net interest margin decreased 4 basis points to

4.19%, from 4.23% for the same period a year ago. The overall yield on average earning assets increased 4 basis points to 5.37% in the third quarter of 2004, compared to 5.33% for the third quarter of 2003, while the yield on average earning assets for the first nine months of 2004 decreased 7 basis points to 5.26%, from 5.33% for the same period in 2003. The increase in the overall yield for the three months ended September 30, 2004 is primarily due to the significant growth in loan volume during the third quarter compounded by three Fed rate increases, totaling 75 basis points, which took effect during the third quarter of 2004. For the nine months ended September 30, 2004, the decrease in the overall yield can be attributed to a higher percentage of variable rate and shorter-term hybrid adjustable rate loan originations during 2004 relative to 2003 in anticipation of a higher interest rate environment. These loans generally provide a lower initial spread than fixed rate or longer-term hybrid loans. Additionally, a 25 basis point Fed interest rate cut which took effect at the beginning of the second quarter of 2003 further contributed to the decline in overall yields on earning assets for the first nine months of 2004.

As a result of the recent Fed interest rate increases which took effect during the third quarter of 2004, our overall cost of funds for the three months ended September 30, 2004 increased 16 basis points to 1.49%, compared with 1.33% for the third quarter of 2003. For the first nine months of 2004, our overall cost of funds decreased 9 basis points to 1.43%, from 1.52% for the same period a year ago. The decrease in the overall cost of funds during the first nine months of the year is predominantly due to the addition of $300.0 million in FHLB advances during the first quarter of 2004 to capitalize on attractive market pricing for longer term-funding to help support the Bank’s flourishing loan growth. We were able to lock in low cost, fixed rate advances that ranged in maturity from one to three years.

We continue to rely heavily on noninterest-bearing demand deposits as a significant funding source, with average noninterest-bearing demand deposits increasing 11% to $964.8 million, and 19% to $926.3 million, during the third quarter and first nine months of 2004, respectively. This compares with $871.2 million for the third quarter of 2003 and $778.4 million for the first nine months of 2003. In light of the current composition of fixed rate and adjustable rate loans in our portfolio, our strategy to lock in low-cost, longer-term fixed rate FHLB advances to augment our funding sources, and the continued growth of our non-interest bearing demand deposit base, we expect our net interest margin for the remainder of 2004 to be favorably impacted by the recent 75 basis point Fed interest rate increases which took effect during the third quarter of 2004.

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 September 30, 2004 and 2003:

	Three Months Ended September 30,
	2004								2003
	Average Balance			Interest		Average Yield/ Rate(1)			Average Balance			Interest		Average Yield/ Rate(1)
	(Dollars in thousands)
ASSETS
Interest-earning assets:
Short-term investments	$	22,712		$	85		1.50	%	$	155,750		$	463		1.19	%
Taxable investment securities(2)(3)	469,550			3,563			3.04	%	428,033			3,577			3.34	%
Loans receivable(2)(4)	4,448,099			62,655			5.63	%	2,816,697			41,287			5.86	%
Federal Home Loan Bank stock	38,750			487			5.03	%	10,131			100			3.95	%
Federal Reserve Bank stock	1,580			25			6.33	%	—			—			0.00	%
Total interest-earning assets	4,980,691			66,815			5.37	%	3,410,611			45,427			5.33	%
Noninterest-earning assets:
Cash and due from banks	92,808								77,725
Allowance for loan losses	(44,806		)						(41,664		)
Other assets	243,409								202,059
Total assets	$	5,272,102							$	3,648,731
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Checking accounts	$	287,506		275			0.38	%	$	282,026		177			0.25	%
Money market accounts	460,529			1,285			1.12	%	224,478			370			0.66	%
Savings deposits	329,466			123			0.15	%	298,150			89			0.12	%
Time deposits	1,852,565			8,102			1.75	%	1,420,053			6,001			1.69	%
Short-term borrowings	4,014			18			1.79	%	2,685			10			1.49	%
Federal Home Loan Bank advance	771,002			3,367			1.75	%	150,821			753			2.00	%
Junior subordinated debt	42,012			810			7.71	%	20,750			566			10.91	%
Total interest-bearing liabilities	3,747,094			13,980			1.49	%	2,398,963			7,966			1.33	%
Noninterest-bearing liabilities:
Demand deposits	964,794								871,196
Other liabilities	102,768								47,839
Stockholders’ equity	457,446								330,733
Total liabilities and stockholders’ equity	$	5,272,102							$	3,648,731
Interest rate spread							3.87	%							4.00	%
Net interest income and net interest margin				$	52,835		4.24	%				$	37,461		4.39	%

(1) Annualized

(2) Includes amortization of premiums and accretion of discounts on investment securities and loans receivable. Also includes the amortization of deferred loan fees.

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

(4) Average balances include nonperforming loans.

	Nine Months Ended September 30,
	2004								2003
	Average Balance			Interest		Average Yield/ Rate(1)			Average Balance			Interest		Average Yield/ Rate(1)
	(Dollars in thousands)
ASSETS
Interest-earning assets:
Short-term investments	$	70,890		$	607		1.14	%	$	162,099		$	1,616		1.33	%
Taxable investment securities(2)(3)	431,451			10,791			3.33	%	459,792			12,175			3.53	%
Loans receivable(2)(4)	3,914,055			162,895			5.55	%	2,627,692			116,228			5.90	%
Federal Home Loan Bank stock	30,757			989			4.29	%	9,693			333			4.58	%
Federal Reserve Bank stock	531			25			6.28	%	—			—			0.00	%
Total interest-earning assets	4,447,684			175,307			5.26	%	3,259,276			130,352			5.33	%
Noninterest-earning assets:
Cash and due from banks	87,556								79,959
Allowance for loan losses	(42,807		)						(39,470		)
Other assets	225,739								193,374
Total assets	$	4,718,172							$	3,493,139
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Checking accounts	$	283,054		743			0.35	%	$	261,104		583			0.30	%
Money market accounts	381,914			2,836			0.99	%	209,063			1,259			0.80	%
Savings deposits	316,116			338			0.14	%	283,571			262			0.12	%
Time deposits	1,704,818			21,633			1.69	%	1,475,524			21,103			1.91	%
Short-term borrowings	2,545			31			1.62	%	1,916			25			1.74	%
Federal Home Loan Bank advances	579,886			7,594			1.75	%	100,929			1,921			2.54	%
Junior subordinated debt	35,916			2,210			8.20	%	20,750			1,698			10.91	%
Total interest-bearing liabilities	3,304,249			35,385			1.43	%	2,352,857			26,851			1.52	%
Noninterest-bearing liabilities:
Demand deposits	926,339								778,433
Other liabilities	71,996								44,303
Stockholders’ equity	415,588								317,546
Total liabilities and stockholders’ equity	$	4,718,172							$	3,493,139
Interest rate spread							3.83	%							3.81	%
Net interest income and net interest margin				$	139,922		4.19	%				$	103,501		4.23	%

(1) Annualized

(2) Includes amortization of premiums and accretion of discounts on investment securities and loans receivable. Also includes the amortization of deferred loan fees.

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

(4) Average balances include nonperforming loans.

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 periods 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.

	Three Months Ended September 30, 2004 vs 2003											Nine Months Ended September 30, 2004 vs 2003
	Total			Changes Due to								Total			Changes Due to
	Change			Volume(1)				Rates(1)				Change			Volume(1)				Rates(1)
	(In thousands)
INTEREST-EARNINGS ASSETS:
Short-term investments	$	(378	)		$	(474	)		$	96		$	(1,009	)		$	(807	)	$	(202	)
Taxable investment securities	(14		)		331				(345		)	(1,384		)		(729		)	(655		)
Loans receivable, net	21,368				23,039				(1,671		)	46,667				53,898			(7,231		)
Federal Home Loan Bank stock	387				353				34			656				679			(23		)
Federal Reserve Bank stock	25				25				—			25				25			—
Total interest and dividend income	$	21,388			$	23,274			$	(1,886	)	$	44,955			$53,066			$	(8,111	)
INTEREST-BEARING LIABILITIES:
Checking accounts	$	98			$	4			$	94		$	160			$	52		$	108
Money market accounts	915				552				363			1,577				1,230			347
Savings deposits	34				10				24			76				32			44
Time deposits	2,101				1,885				216			530				3,065			(2,535		)
Short-term borrowings	8				6				2			6				8			(2		)
FHLB advances	2,614				2,720				(106		)	5,673				6,448			(775		)
Junior subordinated debt	244				448				(204		)	512				1,011			(499		)
Total interest expense	$	6,014			$	5,625			$	389		$	8,534			$	11,846		$	(3,312	)
CHANGE IN NET INTEREST INCOME	$	15,374			$	17,649			$	(2,275	)	$	36,421			$	41,220		$	(4,799	)

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

Provision for Loan Losses

The provision for loan losses amounted to $5.0 million for the third quarter of 2004, compared to $2.0 million for the same period in 2003. For the first nine months of 2004, the provision for loan losses totaled $11.8 million, compared to $6.5 million for the same period in 2003. 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.

Noninterest Income

Components of Noninterest Income

	Three Months Ended September 30,							Nine Months Ended September 30,
	2004			2003				2004			2003
	(In millions)
Letters of credit fees and commissions		$	1.78		$	1.78	$		5.97	$		5.12
Branch fees		1.69			1.86		5.33			5.41
Net gain (loss) on fixed assets		0.91			0.01		0.93			(0.16			)
Ancillary loan fees		0.75			1.28		3.88			3.39
Income from life insurance policies		0.69			0.85		2.27			2.46
Net gain on sales of investment securities available-for-sale		0.68			0.40		1.48			1.39
Net gain on sales of loans		0.02			0.17		0.27			0.35
Income from secondary market activities		0.02			2.17		0.87			4.29
Other		0.64			0.67		2.00			2.40
Total		$	7.18		$	9.19	$		23.00	$		24.65

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, income from secondary market activities, ancillary fees on loans, net gains on sales of loans and investment securities available-for-sale, and other noninterest-related miscellaneous revenues.

Noninterest income decreased 22% to $7.2 million during the quarter ended September 30, 2004, compared to $9.2 million for the same quarter in 2003. The decline can be attributed primarily to a 99%, or $2.2 million, decrease in income from secondary market activities and a 42%, or $533 thousand, decrease in ancillary loan fees. Partially offsetting these decreases to noninterest income during the third quarter of 2004 were a $911 thousand net gain on fixed assets and a 70%, or $280 thousand, increase in net gain on sales of securities available-for-sale. The net gain from fixed assets is comprised of a $1.4 million gain from the sale of a building that houses a branch location reduced by a $480 thousand writedown of a corporate administrative building as a result of future relocation plans. The increase in net gain from investment securities sales during the third quarter is predominantly due to the sale of securities acquired through Trust Bank. Sales of available-for-sale securities provide additional liquidity to sustain the increase in loan production activity throughout the year, and served to replace the lower yields on investment securities with higher yields on loans. For the first nine months of 2004, noninterest income decreased by 7% to $23.0 million, from $24.7 million for the same period a year ago. The decrease in noninterest income for the nine months ended September 30, 2004 is primarily due to lower income from secondary market activities and other income, partially offset by increases in ancillary loan fees, letters of credit fees and commissions, and net gain on fixed assets.

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, remained at $1.8 million for the quarters ended September 30, 2004 and 2003. For the first nine months of 2004, letters of credit fees and commissions increased 17% to $6.0 million, from $5.1 million for the same period a year ago. The increase in letters of credit fees and commissions for the nine months ended September 30, 2004 is primarily due to higher maintenance fees related to additional issuances of standby letters of credit and, to a lesser extent, an increase in the volume of trade finance transactions during 2004, relative to 2003. The 18% increase in trade finance transactions during the nine months ended September 30, 2004 was primarily related to the export side of international trade.

Ancillary fees on loans include fees and service charges related to appraisal services, loan documentation, processing and underwriting. Ancillary loan fees decreased 42% to $750 thousand during the third quarter of 2004, compared to $1.3 million for the third quarter of 2003. The decrease in ancillary loan fees for the three months ended September 30, 2004 is primarily due to lower appraisal fee income collected during the quarter relative to expenses paid to outside service providers. For the most part, this represents a timing issue that will reverse in future periods. For the first nine months of 2004, ancillary fees increased 14% to $3.9 million, from $3.4 million for the same period in 2003. The growth in ancillary loan fees for the nine months ended September 30, 2004 is primarily attributable to the significant increase in residential, multifamily, commercial real estate and construction loan originations during 2004 relative to 2003. The addition of several seasoned and skilled banking professionals as well as increased loan origination volume from our branch network both contributed to the substantial increase in loan originations during 2004.

Income from secondary market activities decreased 99% to $15 thousand during the third quarter of 2004, compared to $2.2 million during the same quarter in 2003. For the first nine months of 2004, secondary market-related revenues decreased 80% to $868 thousand, from $4.3 million during the same period in 2003. The significant decrease in income from secondary market activities for both periods is propelled, to a large degree, by the recent rise in interest rates that favors the origination of adjustable rate mortgages over fixed rate mortgages. We typically sell only fixed rate mortgage loans to the secondary market while adjustable rate mortgage loans are generally maintained in our portfolio.

Other noninterest income, which includes insurance commissions and insurance-related service fees and income from operating leases, decreased 5% to $637 thousand during the third quarter of 2004, from $673 thousand recorded during the same quarter of 2003. For the first nine months ended September 30, 2004, other noninterest income decreased to $2.0 million, or 17%, from $2.4 million earned during the same period of 2003. The decrease in other operating income is primarily due to lower revenues generated from insurance commissions and insurance-related service fees which amounted to $242 thousand and $374 thousand for the quarters ended September 30, 2004 and 2003, respectively and decreased 19% to $928 thousand for the first nine months of 2004, compared with $1.1 million for the corresponding period in 2003. Moreover, a decrease in income earned from operating leases further contributed to the decrease in noninterest income during the three and nine months ended September 30, 2004. Income from operating leases amounted to $77 thousand and $229 thousand during the quarter and nine months ended September 30, 2004, as compared to $132 thousand and $555 thousand during the same periods in 2003. These revenues represent income from equipment leased to third parties in connection with operating leases entered into by the Company. Operating leases, net of accumulated depreciation, totaled $326 thousand and $589 thousand at September 30, 2004 and 2003, respectively.

Noninterest Expense

Components of Noninterest Expense

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	(In millions)
Compensation and other employee benefits	$	9.39		$	7.97		$	27.69		$	23.58
Net occupancy	3.15			2.63			8.69			7.47
Amortization of affordable housing investments	1.78			1.79			5.56			4.78
Deposit-related expenses	1.25			0.98			3.39			2.80
Amortization of positive intangibles	0.57			0.52			1.61			1.47
Data processing	0.57			0.46			1.53			1.32
Deposit insurance premiums and regulatory assessments	0.21			0.19			0.57			0.55

Other	6.29			5.30			16.57			14.58
Total	$	23.21		$	19.84		$	65.61		$	56.55
Efficiency Ratio(1)	35		%	38		%	36		%	39		%

(1) Represents noninterest expense (excluding the amortization of intangibles and investments in affordable housing partnerships) divided by the aggregate of net interest income before provision for loan losses and noninterest income.

Noninterest expense, which is comprised primarily of compensation and employee benefits, occupancy and other operating expenses increased 17% to $23.2 million during the third quarter of 2004, from $19.8 million for the same quarter in 2003. For the first nine months of 2004, noninterest expense increased 16% to $65.6 million, compared with $56.6 million during the same period a year ago.

Compensation and employee benefits increased 18% to $9.4 million during the third quarter of 2004, compared to $8.0 million for the same quarter last year. For the first nine months of 2004, compensation and employee benefits increased 17% to $27.7 million, compared with $23.6 million for the same period in 2003. The rise in compensation and employee benefits for both periods is primarily due to additional expenses related to the Trust Bank acquisition and increased staffing of account officers to enhance and support the growth in our loan and deposit portfolio. In addition, the impact of annual salary adjustments and related cost increases for existing employees further contributed to the rise in compensation expense during the first nine months of 2004 as compared to the same period in 2003.

Occupancy expenses increased 20% to $3.1 million and 16% to $8.7 million during the third quarter and first nine months of 2004, respectively, compared with $2.6 million and $7.5 million during the same period in 2003. The increase in occupancy expenses during the third quarter of 2004 can be attributed to the addition of four branch locations as a result of the Trust Bank acquisition and a rise in computer and software related expenses associated with the ongoing upgrade of the Company’s hardware and related desktop operating system as well as the conversion of the Bank’s teller platform system. The system upgrade and teller platform conversion were initiated during the second quarter of 2004 and we anticipate their completion sometime during the fourth quarter of 2004. Furthermore, computer-related and furniture expenses also grew during the third quarter and the first nine months of 2004 in proportion to the increase in staffing levels during 2004 to support the growth of the Bank.

The amortization of investments in affordable housing partnerships remained at $1.8 million for the three months ended September 30, 2004 and 2003, and increased 16% to $5.6 million during the nine months ended September 30, 2004, compared with $4.8 million for the corresponding period in 2003. The increase in amortization expense for the nine months ended September 30, 2004 reflects the $17.6 million in additional affordable housing investment purchases made since the third quarter of 2003. Total

investments in affordable housing partnerships amounted to $34.3 million at September 30, 2004 compared to $28.8 million at December 31, 2003.

Deposit-related expenses increased 28% to $1.3 million during the third quarter of 2004, compared to $1.0 million for the same quarter last year. For the first nine months of 2004, deposit-related expenses also increased 21% to $3.4 million, compared to $2.8 million for the corresponding period in 2003. Deposit-related expenses, which represent various business-related expenses paid by the Bank on behalf of its commercial account customers, are eventually recouped by the Bank through account analysis charges to individual customer accounts. The increase in deposit-related expenses is directly correlated to the growth in the volume of commercial deposit accounts during the quarter and first nine months of 2004.

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 $6.3 million for the third quarter of 2004, from $5.3 million for the same quarter in 2003. For the first nine months of 2004, other operating expenses increased 14% to $16.6 million, from $14.6 million during the same period a year ago. The increase in other operating expenses is primarily attributable to the Trust Bank acquisition as well as our continued organic expansion to support our loan and deposit growth.

Our efficiency ratio decreased to 35% for the quarter ended September 30, 2004, compared to 38% for the corresponding period in 2003. For the first nine months of 2004, our efficiency ratio decreased to 36%, from 39% for the same period a year ago. Despite our continued expansion and growth, we have managed to capitalize on operational efficiencies from infrastructure investments made in the past few years compounded by a general company-wide effort to monitor overall operating expenses.

Provision for Income Taxes

The provision for income taxes increased 32% to $11.4 million for the third quarter of 2004, compared with $8.7 million for the same quarter in 2003. For the first nine months of 2004, the provision for income taxes totaled $30.2 million, a 34% increase from the $22.5 million income tax expense recorded for the same period a year ago. The increase in the tax provision is primarily attributable to a 28% and 31% increase in pretax earnings during the third quarter and first nine months of 2004. The provision for income taxes for the third quarter of 2004 also reflects the utilization of tax credits totaling $1.5 million, compared to $1.4 million utilized during the third quarter of 2003. The third quarter 2004 provision reflects an effective tax rate of 35.9%, compared with 34.9% for the same quarter in 2003. For the first nine months of 2004, the effective tax rate of 35.3% reflects tax credits of $4.4 million, compared with an effective tax rate of 34.6% for the first nine months of 2003 reflecting tax credits of $3.5 million.

As previously reported, the California Franchise Tax Board announced that it is taking the position that certain tax deductions related to regulated investment companies will be disallowed pursuant to California Senate Bill 614 and California Assembly Bill 1601, which were signed into law in the fourth quarter of 2003. East West Securities Company, Inc., a regulated investment company formed and funded in July 2000 to raise capital in an efficient and economical manner was dissolved on December 30, 2002 as a result of, among other reasons, proposed legislation to change the tax treatments of RICs. The Fund provided state tax benefits beginning in 2000 until the end of 2002, when the RIC was officially dissolved. While the Company’s management continues to believe that the tax benefits realized in previous years were appropriate and fully defensible under the existing tax codes at that time, the Company has deemed it prudent to participate in the voluntary compliance initiative offered by the State of California to avoid certain potential penalties should the FTB choose to litigate its recently announced position about the tax treatment of RICs for periods prior to enactment of the legislation described above and should the FTB be successful in that litigation.

Pursuant to the VCI program, we filed amended California income tax returns on April 15, 2004 for all affected years and paid the resulting taxes and interest due to the FTB. This amounted to an aggregate payment of $14.2 million for tax years 2000, 2001, and 2002. We continue to believe that the tax deductions are appropriate and, as such, we have also filed refund claims for the amounts paid with the amended returns. These refund claims are reflected as assets in the Company’s consolidated financial statements. As a result of these actions—amending our California income tax returns and subsequent related filing of refund claims—we retain our potential exposure for assertion of an accuracy-related penalty should the FTB prevail in its position, in addition to our risk of not being successful in our refund claim for taxes and interest. Our potential exposure to all other penalties, however, has been eliminated through this course of action.

The Franchise Tax Board is currently in the process of reviewing and assessing our refund claims for taxes and interest for tax years 2000 through 2002. In addition to actively pursuing our refund claims, we will also continue to work with counsel to follow the latest developments with regards to this matter.

Balance Sheet Analysis

Our total assets increased $1.51 billion, or 37%, to $5.57 billion, as of September 30, 2004, relative to total assets at December 31, 2003. The increase in total assets was comprised primarily of net loan growth totaling $1.44 billion. The net increase in total assets was largely funded by an increase in deposits totaling $1.00 billion, an increase in FHLB advances amounting to $374.0 million, and an increase in junior subordinated debt of $10.3 million.

Investment Securities Available-for-Sale

Total investment securities available-for-sale increased 6% to $472.2 million as of September 30, 2004, compared with $445.1 million at December 31, 2003. Total repayments/maturities and proceeds from sales of available-for-sale securities amounted to $155.6 million and $203.0 million, respectively, during the nine months ended September 30, 2004. Proceeds from repayments, maturities, sales, and redemptions were applied towards additional investment securities purchases totaling $335.9 million as well as funding a portion of loan originations made during the first nine months of 2004. We recorded net gains totaling $1.5 million on sales of available-for-sale securities during the first nine months of 2004.

During the second quarter of 2004, we recorded a $757 thousand impairment writedown on a Freddie Mac preferred stock held in our available-for-sale investment portfolio. The carrying value of this security was $4.7 million as of June 30, 2004. We do not anticipate any further impairment on this security in the foreseeable future.

During the third quarter of 2004, we acquired investment securities with a total net carrying value of $48.5 million from Trust Bank, a large portion of which were sold within the same quarter. We recorded $554 thousand in net gains from the sale of these securities. Only agency equity securities with a net carrying value of $8.2 at September 30, 2004 were retained in our portfolio at quarter end.

Also during the third quarter of 2004, we securitized approximately $24.6 million of multifamily loans through FNMA for liquidity and capital management purposes. All of the resulting securities were retained in our available-for-sale investment portfolio. The securitization was accounted for as a pass-through transaction which did not generate any gains or losses to operations.

The following table sets forth the amortized cost and the estimated fair values of investment securities available-for-sale as of September 30, 2004 and December 31, 2003:

	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses				Estimated Fair Value
	(In thousands)
As of September 30, 2004:
US Treasury securities	$	2,510		$	—		$	(8	)	$	2,502
US Government agency securities	306,503			820			(961		)	306,362
Mortgage-backed securities	99,644			1,418			(134		)	100,928
Corporate debt securities	18,989			—			(468		)	18,521
Agency equity securities	42,075			1,006			—			43,081
Residual interest in securitized loans	—			803			—			803
Total	$	469,721		$	4,047		$	(1,571	)	$	472,197
As of December 31, 2003:
US Treasury securities	$	26,188		$	40		$	—		$	26,228
US Government agency securities	271,021			2,376			(292		)	273,105
Mortgage-backed securities	67,259			644			(142		)	67,761
Corporate debt securities	31,902			—			(1,852		)	30,050
Agency equity securities	46,505			224			(676		)	46,053
Residual interest in securitized loans	—			1,945			—			1,945
Total	$	442,875		$	5,229		$	(2,962	)	$	445,142

Loans

We experienced strong loan demand during the first nine months of 2004. Net loans receivable increased $1.44 billion, or 44% to $4.67 billion at September 30, 2004. Excluding the $163.1 million of net loans acquired from Trust Bank, organic loan growth during the first nine months of 2004 amounted to $1.27 billion, or 39%, compared to year-end 2003 levels. The increase in loans was funded primarily through deposit growth, an increase in FHLB advances, and through repayments, maturities, sales and redemptions of investment securities available-for-sale.

The growth in loans, excluding loans acquired from Trust Bank, is comprised primarily of net increases in single family loans of $120.7 million or 82%, multifamily loans of $185.8 million or 23%, commercial real estate loans of $727.8 million or 47%, construction loans of $119.3 million or 66%, commercial business loans, including trade finance products, of $99.3 million or 23% and consumer loans, including home equity lines of credit, of $29.7 million or 20%.

As previously mentioned, we securitized approximately $24.6 million of multifamily loans through FNMA during the third quarter of 2004. The securitization was undertaken for liquidity and capital management purposes, with all of the resulting securities retained in our available-for-sale investment portfolio. The securitization was accounted for as a pass-through transaction which did not generate any gains or losses to operations. We also recorded approximately $278 thousand in mortgage servicing assets as a result of the securitization since the Bank continues to service the underlying loans.

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

	September 30, 2004						December 31, 2003
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
Residential, one to four units	$	274,341			5.8	%	$	146,686		4.5	%
Residential, multifamily	1,057,585				22.4	%	809,311			24.7	%
Commercial and industrial real estate	2,362,038				50.0	%	1,558,594			47.6	%
Construction	317,729				6.7	%	179,544			5.5	%
Total real estate loans	4,011,693				84.9	%	2,694,135			82.3	%
Other loans:
Business, commercial	532,308				11.3	%	431,942			13.2	%
Automobile	10,973				0.2	%	13,696			0.4	%
Other consumer	166,227				3.6	%	133,454			4.1	%
Total other loans	709,508				15.1	%	579,092			17.7	%
Total gross loans	4,721,201				100.0	%	3,273,227			100.0	%
Unearned fees, premiums and discounts, net	(1,448		)				152
Allowance for loan losses	(46,902		)				(39,246		)
Loan receivable, net	$	4,672,851					$	3,234,133

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 0.05% and 0.16% at September 30, 2004 and December 31, 2003, respectively. Nonaccrual loans totaled $2.6 million at September 30, 2004, compared with $5.3 million at year-end 2003. Loans totaling $4.2 million were placed on nonaccrual status during the third quarter of 2004. These additions to nonaccrual loans were offset by $2.1 million in payoffs and principal paydowns, $1.9 million in gross chargeoffs, and $505 thousand in loans brought current. Additions to nonaccrual loans during the third quarter of 2004 were comprised of $347 thousand in residential multifamily loans, $3.9 million in commercial business loans, and $17 thousand in automobile loans. For the nine months ended September 30, 2004, nonaccrual loans decreased $2.7 million due to payoffs and principal paydowns of $6.4 million, gross chargeoffs of $3.2 million, and loans brought current of $2.3 million, partially offset by additions to nonaccrual loans of $9.6 million.

There were no loans past due 90 days or more but not on nonaccrual at September 30, 2004. This compares to $636 thousand at December 31, 2003. The decrease is attributable to a trade finance loan that was brought current in February 2004.

There were no restructured loans or loans that have had their original terms modified at September 30, 2004. This compares to $638 thousand at December 31, 2003 representing one commercial real estate loan that was fully paid off in February 2004.

Other real estate owned (“OREO”) includes properties acquired through foreclosure or through full or partial satisfaction of loans. At September 30, 2004, we had one OREO property, with a carrying value of $299 thousand, representing a condominium unit that was held as partial collateral for a commercial business loan. We had no OREO properties at December 31, 2003.

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:

	September 30, 2004				December 31, 2003
	(Dollars in thousands)
Nonaccrual loans		$	2,600			$	5,311
Loans past due 90 days or more but not on nonaccrual		—				636
Total nonperforming loans		2,600				5,947
Restructured loans		—				638
Other real estate owned, net		299				—
Total nonperforming assets		$	2,899			$	6,585
Total nonperforming assets to total assets		0.05		%		0.16		%
Allowance for loan losses to nonperforming loans		1803.92		%		659.93		%
Nonperforming loans to total gross loans		0.06		%		0.18		%

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 September 30, 2004, we classified $2.6 million of our loans as impaired, compared with $5.9 million at December 31, 2003. There were no specific reserves on impaired loans at September 30, 2004 and December 31, 2003. Our average recorded investment in impaired loans for the nine months ended September 30, 2004 and 2003 were $4.2 million and $7.3 million, respectively. During the nine months ended September 30, 2004 and 2003, gross interest income that would have been recorded on impaired loans, had they performed in accordance with their original terms, totaled $234 thousand and $294 thousand, respectively. Of this amount, actual interest recognized on impaired loans, on a cash basis, was $123 thousand and $152 thousand, respectively.

Allowance for Loan Losses

We are 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 September 30, 2004, 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 September 30, 2004, the allowance for loan losses amounted to $46.9 million, or 0.99% of total loans, compared with $39.2 million, or 1.20% of total loans, at December 31, 2003, and $37.5 million, or 1.28% of total loans, at September 30, 2003. The $7.7 million increase in the allowance for loan losses at September 30, 2004, from year-end 2003, is comprised primarily of $1.6 million in loss reserves acquired from Trust Bank and $11.8 million in additional loss provisions, reduced by $4.3 million in net chargeoffs

recorded during the period. Additionally, we reclassed $368 thousand and $1.4 million from the allowance for loan losses to other liabilities during the third quarter and first nine months of 2004. This amount represents additional loss allowances required for unfunded loan commitments and off-balance sheet credit exposures related primarily to our trade finance and affordable housing activities.

The provision for loan losses of $5.0 million for the third quarter of 2004 represents a 150% increase from the $2.0 million in loss provisions recorded during the third quarter of 2003. The third quarter 2004 net chargeoffs amounting to $3.3 million represent 0.30% of average loans outstanding for the three months ended September 30, 2004. This compares to net recoveries of $467 thousand, or 0.07% of average loans outstanding for the same period in 2003. For the first nine months of 2004, the provision for loan losses totaled $11.8 million, an 81% increase from the $6.5 million provision recorded during the same period in 2003. Net chargeoffs for the first nine months of 2004 totaling $4.3 million represent 0.15% of average loans outstanding for the nine months ended September 30, 2004. This compares to net chargeoffs of $1.4 million or 0.07% of average loans outstanding for the first nine months of 2003. We continue to record loss provisions to compensate for both the continued growth of our loan portfolio, which grew 44% during the first nine months of 2004, and our continued lending focus on increasing our portfolio of commercial real estate, commercial business, including trade finance, and construction loans.

The following table summarizes activity in the allowance for loan losses for the three and nine months ended September 30, 2004 and 2003:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	(Dollars in thousands)
Allowance balance, beginning of period	$	43,999		$	40,750		$	39,246		$	35,292
Allowance from acquisition	1,583			—			1,583			2,821
Allowance for off-balance sheet credit exposures	(368		)	(5,703		)	(1,385		)	(5,703		)
Provision for loan losses	5,000			2,000			11,750			6,500
Chargeoffs:
1-4 family residential real estate	—			—			—			—
Multifamily real estate	—			—			—			—
Commercial and industrial real estate	—			—			—			—
Business, commercial	3,408			130			4,833			2,344
Automobile	12			41			94			127
Other	—			—			6			12
Total chargeoffs	3,420			171			4,933			2,483
Recoveries:
1-4 family residential real estate	—			—			9			40
Multifamily real estate	—			197			26			197
Commercial and industrial real estate	—			264			—			264
Business, commercial	63			174			465			551
Automobile	45			3			141			35
Other	—			—			—			—
Total recoveries	108			638			641			1,087
Net chargeoffs (recoveries)	3,312			(467		)	4,292			1,396
Allowance balance, end of period	$	46,902		$	37,514		$	46,902		$	37,514
Average loans outstanding	$	4,448,099		$	2,816,697		$	3,914,055		$	2,627,692
Total gross loans outstanding, end of period	$	4,721,201		$	2,936,185		$	4,721,201		$	2,936,185
Annualized net chargeoffs (recoveries) to average loans	0.30		%	(0.07		)%	0.15		%	0.07		%
Allowance for loan losses to total gross loans	0.99		%	1.28		%	0.99		%	1.28		%

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.

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:

	September 30, 2004			December 31, 2003
	Amount		%	Amount		%
	(Dollars in thousands)
1-4 family residential real estate	$	429	5.8	$	259	4.5
Multifamily real estate	2,964		22.4	2,487		24.7
Commercial and industrial real estate	15,457		50.0	12,958		47.6
Construction	6,472		6.7	3,781		5.5
Business, commercial	14,262		11.3	13,761		13.2
Automobile	553		0.2	486		0.4
Consumer and other	699		3.6	321		4.1
Other risks	6,066		—	5,193		—
Total	$	46,902	100.0	$	39,246	100.0

Allocated reserves on single family loans increased $170 thousand, or 66%, to $429 thousand due primarily to an 87% increase in the volume of single family loans at September 30, 2004 in comparison to year-end 2003 levels.

Allocated reserves on multifamily loans increased $477 thousand, or 19%, to $3.0 million due primarily to a 31% increase in the volume of multifamily loans at September 30, 2004 from year-end 2003 levels. The increase in required reserves related to the increase in multifamily loans was partially offset by a decrease in the volume of loans in this category that were classified (i.e. rated “substandard” and “doubtful”) and placed on the watchlist at September 30, 2004 relative to December 31, 2003. Multifamily loans rated “substandard” and placed on the watchlist totaled $477 thousand and $8.5 million, respectively, at September 30, 2004. This compares to $990 thousand and $12.9 million in loans rated “substandard” and placed on the watchlist, respectively, at December 31, 2003.

Allocated reserves on commercial real estate loans increased $2.5 million, or 19%, to $15.5 million at September 30, 2004 primarily due to a 52% increase in the volume of loans in this category relative to year-end 2003. This is further compounded by an increase in criticized (i.e. rated “special mention”) and classified commercial real estate loans at September 30, 2004 relative to December 31, 2003. Commercial real estate loans rated special mention and substandard totaled $6.5 million and $8.4 million, respectively, at September 30, 2004. This compares to $4.7 million and $4.3 million in loans rated special mention and substandard, respectively, at December 31, 2003. The increase in required reserves related to these factors was partially offset by a decrease in the hotel industry concentration risk allocation to 0.75% at September 30, 2004, from 2.5% at December 31, 2003. As previously mentioned, the hotel industry concentration risk allocation was initially established in response to the anticipated fallout from the events of September 11^th. Although the events of September 11^th did not have a discernible negative impact on our hotel/motel portfolio, we deemed it prudent to maintain the risk allocation in ensuing periods to compensate for the weakened state of the travel and tourism industry in the months and years following

the September 11^thtragedy. We continue to evaluate the appropriateness and size of this industry concentration risk allocation every quarter.

Allocated reserves on construction loans increased $2.7 million, or 71%, to $6.5 million at September 30, 2004 primarily due to a 77% increase in the volume of loans in this category when compared to December 31, 2003.

Allocated loss reserves on commercial business loans increased $501 thousand, or 4%, to $14.3 million at September 30, 2004 primarily due to a 23% increase in the volume of loans in this category compared to year-end 2003 levels as well as an increase in required reserves on commercial business loans that are placed on the watchlist and rated “special mention.” We have observed rising chargeoff trends in this loan category in the past couple of years, both in frequency and size. Based on these observed patterns, we felt that the previous minimum loss rates established for the watchlist and special mention risk classifications did not adequately address the potential credit risk concerns of commercial business loans placed in these categories. As such, we have deemed it prudent to increase the minimum loss rates in these risk categories for commercial business loans during the first quarter of 2004. Furthermore, commercial business loans rated “special mention” also increased to $3.8 million at September 30, 2004, compared with $372 thousand at December 31, 2003. Partially offsetting the impact of these factors is a decrease in the volume of commercial business loans rated “substandard” to $9.9 million at September 30, 2004, compared to $19.3 million at December 31, 2003.

Despite a 20% decrease in the volume of loans in this category, allocated reserves on automobile loans increased $67 thousand, or 14%, to $553 thousand as of September 30, 2004 primarily as a result of a 200 basis point increase to 5% in the minimum loss rate for automobile loans rated “pass.” This change was implemented during the first quarter of 2004. A minimum loss rate of 3% was initially established for automobile loans during the third quarter of 2003 due to a rising pattern of chargeoff losses experienced in this loan category. We continue to routinely experience chargeoffs in this loan category, and on several occasions, we have had to charge off loans with no previously manifested or observable credit weaknesses. As such, we feel that an increase in the minimum loss rate on loans rated “pass” was warranted due to the frequency and rate at which loans in this category migrate from “pass” to “loss.”

Allocated reserves on consumer loans increased by $378 thousand, or 118%, to $699 thousand as of September 30, 2004. 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, in part, to a 25% increase in home equity lines of credit at September 30, 2004 relative to December 31, 2003. More significantly, however, the increase in allocated reserves on consumer loans is due to an increase in minimum loss rates on outstanding home equity lines to 0.40% at September 30, 2004, compared to 0.20% at December 31, 2003. The increase in minimum loss rates was initiated as of June 30, 2004 when we started to discern credit issues related to this segment of our portfolio as evidenced by increasing delinquency trends. Moreover, we feel that our loss exposure relative to this portfolio is greater in light of rising interest rates and our subordinate position with respect to collateral. Consequently, it is our opinion that the previous minimum loss rate of 0.20% on outstanding home equity lines is no longer adequate to address the potential risks associated with this portfolio.

The allowance for loan losses of $46.9 million at September 30, 2004 exceeded the allocated allowance by $6.1 million, or 13% of the total allowance. This compares to an unallocated allowance of $5.2 million, or 13%, as of December 31, 2003. The $6.1 million unallocated allowance at September 30, 2004 is comprised of two elements. The first element, which accounts for approximately $2.0 million of the unallocated allowance, represents a 5% economic risk factor that takes into consideration the sustained recessionary state of the national economy. This condition has been exacerbated by corporate scandals linked to various large companies, and more recently, by the geopolitical instability in the Middle East. While recent economic reports show some positive indications, the economic forecast in the foreseeable future is, to a large extent, still tenuous at best. 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 second element, which accounts for approximately $4.1 million, or approximately 10% of the allocated allowance amount of $40.8 million at September 30, 2004, was established to compensate for the modeling risk associated with the classification migration and individual loan review analysis methodologies. These risk factors are consistent with allocations set aside in prior periods.

Deposits

Deposits increased $1.00 billion, or 30%, to $4.31 billion at September 30, 2004, from $3.31 billion at December 31, 2003. The increase in deposits reflects the $193.4 million in deposits acquired from Trust Bank in August 2004. Excluding this transaction, internal deposit growth amounted to $807.4 million, or 24%, over December 31, 2003. This organic deposit growth was comprised of increases in non-interest bearing demand accounts of $200.7 million, or 22%, money market accounts of $204.3 million, or 71%, savings accounts of $23.5 million, or 8%, time deposit accounts of $372.8 million, or 25%, and checking accounts of $6.1 million, or 3%.

At September 30, 2004, core deposits represented 53% of total deposits, with time deposits representing the remaining 47%. During the first and second quarters of 2004, we implemented a previously announced promotional retail program for certificates of deposit which primarily accounted for the increase in time deposit accounts during the period. This promotion was targeted towards customers with existing checking accounts, and new individual and business customers who opened certain qualifying checking or business checking account products. We also experienced strong core deposit growth in the first nine months of 2004 primarily due to expanded commercial banking relationships and new accounts tied to the opening of time deposits under our recent promotional program.

For a limited time during the third quarter of 2004, we offered a promotional equity index certificate of deposit which has an interest rate tied to the Hang Seng China Enterprises Index. We took in approximately $14.5 million in time deposits with 5½ year maturities as a result of this promotion. We offered two versions of this product: (1) guaranteed 1% interest per annum and interest paid on 75% of the performance of the Index; and (2) no interest guarantee and interest paid on 90% of the performance of the Index. In both cases, the customers’ principal investment is guaranteed and insured by the Federal Deposit Insurance Corporation (“FDIC”). We are currently in the middle of a second offering of this product, also for a limited time period, commencing in late September 2004 through the middle of November 2004. Under SFAS 133, a certificate of deposit that pays interest based on changes in an equity index is a hybrid instrument with an embedded derivative (i.e. equity call option) that must be accounted for separately from the host contract (i.e. the certificate of deposit). The fair value of the embedded derivative at September 30, 2004 was $2.8 million and is included in interest-bearing deposits on the Consolidated Statements of Financial Condition. To manage our interest rate risk exposure on this product, we have entered into freestanding interest rate swap agreements with a major investment brokerage firm with notional amounts of $9.4 million and $5.1 million. The fair values of the interest rate swap agreements aggregated $584 thousand at September 30, 2004 and are included in other assets on the Consolidated Statements of Financial Condition. The notional amounts and terms of the interest rate swap agreements match the principal amounts and terms of the issued certificates of deposit. In accordance with SFAS 133, both the embedded equity call option on the certificates of deposit and the freestanding interest rate swap agreements will be marked-to-market every quarter with resulting changes in fair value recorded in the income statement. There was not a material impact on the Consolidated Statements of Income for the quarter ended September 30, 2004.

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 133% to $655.3 million as of September 30, 2004, representing an increase of $374.0 million from December 31, 2003. The increase was due primarily to $300.0 million in additional FHLB advances that we entered into during the first quarter of 2004 to capitalize on the attractive market pricing for these instruments. These new advances, which have maturity durations ranging from one to three years, will provide us with cost-effective, longer-term financing to help support our loan growth for the remainder of the year. There were no outstanding short-term borrowings at September 30, 2004. This compares to $12.0 million in such instruments at December 31, 2003.

Contractual Obligations and Commitments

Except for the $14.5 million in interest rate swap agreements that we entered into on August 25 2004, there were no material changes outside the ordinary course of our business in our contractual obligations during the quarter ended September 30, 2004.

Capital Resources

Our primary source of capital is the retention of net after tax earnings. At September 30, 2004, stockholders’ equity totaled $492.6 million, a 36% increase from $362.0 million as of December 31, 2003. The increase is due primarily to: (1) net income of $55.4 million recorded during the first nine months of 2004; (2) stock compensation costs amounting to $1.0 million related to our Restricted Stock Award Program; (3) tax benefits of $4.4 million resulting from the exercise of nonqualified stock options; (4) net issuance of common stock totaling $4.8 million, representing 547,886 shares, from the exercise of stock options and stock warrants; (5) net issuance of common stock totaling $996 thousand, representing 52,598 shares, related to our Employee Stock Purchase Plan and shares issued in lieu of Board of Director retainer fees; (6) issuance of common stock, net of expenses, totaling $38.5 million, representing 1,622,844 shares, related to a private placement offering that was completed in March 2004; (7) net issuance of common stock totaling $32.9 million, representing 1,199,578 shares, in connection with the Trust Bank acquisition; and (8) an increase of $101 thousand in unrealized gains on available-for-sale securities. These transactions were offset by payments of quarterly cash dividends totaling $7.5 million for the first nine months of 2004.

On May 18, 2004, our Board of Directors approved a two-for-one stock split effected in the form of a 100% stock dividend. Shareholders of record at the close of business on June 3, 2004 received one additional share of common stock for each share of common stock held by them on that date. The additional shares were distributed by the Company’s transfer agent on or about June 21, 2004. Prior to the stock split, the Company had 25,141,002 shares of common stock issued and outstanding. The stock dividend increased the number of shares issued and outstanding to 50,282,004.

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 September 30, 2004, East West Bank’s Tier 1 and total capital ratios were 9.3% and 10.4%, respectively, compared to 9.1% and 10.4%, respectively, at December 31, 2003.

The following table compares East West Bancorp, Inc.’s and East West Bank’s actual capital ratios at September 30, 2004, to those required by regulatory agencies for capital adequacy and well-capitalized classification purposes:

	East West Bancorp			East West Bank			Minimum Regulatory Requirements			Well Capitalized Requirements
Total Capital (to Risk-Weighted Assets)		10.7	%		10.4	%		8.0	%		10.0	%
Tier 1 Capital (to Risk-Weighted Assets)		9.7	%		9.3	%		4.0	%		6.0	%
Tier 1 Capital (to Average Assets)		9.2	%		8.9	%		4.0	%		5.0	%

ASSET LIABILITY AND MARKET RISK MANAGEMENT

Liquidity

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by the Asset/Liability Committee and the Board of Directors. This process is intended to ensure the maintenance of sufficient funds to meet 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 nine months ended September 30, 2004, we experienced net cash inflows from operating activities of $62.8 million, compared to net cash inflows of $54.4 million for the nine months ended September 30, 2003. Net cash inflows from operating activities for the first nine months of 2004 and 2003 were primarily due to net income earned during the period.

Net cash outflows from investing activities totaled $1.29 billion and $374.2 million for the nine months ended September 30, 2004 and 2003, 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 $1.20 billion for the first nine months of 2004 primarily due to deposit growth, net proceeds from FHLB advances, and net proceeds from the issuance of common stock related to a private placement offering in March 2004. During the same period in 2003, growth in deposits and net proceeds from FHLB advances largely accounted for the net cash inflows from financing activities totaling $246.9 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 September 30, 2004, our available borrowing capacity includes approximately $68.6 million in repurchase arrangements, $130.0 million in federal funds line facilities, and $983.6 million in unused FHLB advances. We believe our liquidity sources to be stable and adequate. At September 30, 2004, 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 nine months ended September 30, 2004, total dividends paid by East West Bank to East West Bancorp, Inc. totaled $7.5 million, compared with $7.4 million for the same period in 2003. As of September 30, 2004, approximately $182.1 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 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, 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 September 30, 2004 and December 31, 2003, assuming a parallel shift of 100 to 200 basis points in both directions:

	Net Interest Income Volatility(1)						Net Portfolio Value Volatility(2)
Change in Interest Rates (Basis Points)	September 30, 2004			December 31, 2003			September 30, 2004			December 31, 2003
+200		10.0	%		12.0	%		(7.1	)%		(6.6	)%
+100		6.0	%		6.9	%		(2.5	)%		(2.4	)%
-100		(5.3	)%		(6.0	)%		2.0	%		1.1	%
-200		(12.2	)%		(13.9	)%		0.0	%		0.6	%

(1) The percentage change represents net interest income for twelve months in a stable interest rate environment versus net interest income in the various rate scenarios.

(2) The percentage change represents net portfolio value of the Bank in a stable rate environment versus net portfolio value in the various rate scenarios.

All interest-earning assets, interest-bearing liabilities and related derivative contracts are included in the interest rate sensitivity analysis at September 30, 2004 and December 31, 2003. At September 30, 2004 and December 31, 2003, the 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 table provides the outstanding principal balances and the weighted average interest rates of our non-derivative financial instruments as of September 30, 2004. 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

information presented below is based on the repricing date for variable rate instruments and the expected maturity date for fixed rate instruments.

	Expected Maturity or Repricing Date by Year																					Fair Value at
	Year 1			Year 2			Year 3			Year 4			Year 5			After Year 5			Total			September 30, 2004
	(Dollars in thousands)
At September 30, 2004:
Assets:
Short-term investments	$	31,096		$	—		$	—		$	—		$	—		$	—		$	31,096			$	31,096
Weighted average rate	1.65		%	—		%	—		%	—		%	—		%	—		%	1.65		%
Investment securities available-for-sale (fixed rate)	$	44,142		$	139,475		$	139,801		$	1		$	2		$	31,549		$	354,970			$	355,327
Weighted average rate	3.03		%	2.37		%	3.20		%	8.62		%	8.80		%	4.45		%	2.96		%
Investment securities available-for-sale (variable rate)	$	114,751		$	—		$	—		$	—		$	—		$	—		$	114,751			$	116,870
Weighted average rate	3.37		%	—		%	—		%	—		%	—		%	—		%	3.37		%
Total gross loans	$	3,375,270		$	644,106		$	186,327		$	106,692		$	121,881		$	286,925		$	4,721,201			$	4,759,470
Weighted average rate	5.32		%	6.05		%	6.16		%	6.01		%	5.91		%	6.44		%	5.55		%
Liabilities:
Checking accounts	$	305,406		$	—		$	—		$	—		$	—		$	—		$	305,406			$	305,406
Weighted average rate	0.38		%	—		%	—		%	—		%	—		%	—		%	0.38		%
Money market accounts	$	501,720		$	—		$	—		$	—		$	—		$	—		$	501,720			$	501,720
Weighted average rate	1.16		%	—		%	—		%	—		%	—		%	—		%	1.16		%
Savings deposits	$	337,943		$	—		$	—		$	—		$	—		$	—		$	337,943			$	337,943
Weighted average rate	0.11		%	—		%	—		%	—		%	—		%	—		%	0.11		%
Time deposits	$	1,890,152		$	120,425		$	20,344		$	661		$	815		$	512		$	2,032,909			$	2,027,381
Weighted average rate	1.70		%	2.12		%	1.80		%	2.59		%	2.74		%	0.28		%	1.73		%
Federal Home Loan Bank advances	$	422,750		$	147,000		$	84,500		$	—		$	1,000		$	—		$	655,250			$	654,514
Weighted average rate	1.84		%	2.24		%	2.47		%	—		%	4.98		%	—		%	2.02		%
Junior subordinated debt	$	—		$	—		$	—		$	—		$	—		$	42,012		$	42,012			$	36,494
Weighted average rate	—		%	—		%	—		%	—		%	—		%	7.71		%	7.71		%

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 take into consideration discounted cash flows based on expected maturities or repricing dates utilizing estimated market discount rates as projected by third party data providers.

Transaction deposit accounts, which include checking, money market and savings accounts, are presumed to have equal book and fair values because the interest rates paid on these accounts are based on prevailing market rates. The fair value of time deposits is based upon the discounted value of contractual cash flows, which is estimated using current rates offered for deposits of similar remaining

terms. The fair value of short-term borrowings approximates book value due to their short maturities. The fair value of FHLB advances is estimated by discounting the cash flows through maturity or the next repricing date based on current rates offered by the FHLB for borrowings with similar maturities. The fair value of junior subordinated debt securities is estimated by discounting the cash flows through maturity based on current rates offered on the 30-year Treasury bond.

The Asset/Liability Committee is authorized to utilize a wide variety of off-balance sheet financial techniques to assist in the management of interest rate risk. 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.

On August 25, 2004, we entered into two interest rate swap agreements with a major investment brokerage firm to hedge against market fluctuations in a promotional equity index certificate of deposit product that we offered to Bank customers for a limited time during the third quarter of 2004. This product, which has a term of 5½ years, pays interest based on the performance of the Hang Seng China Enterprises Index. The combined notional amounts of the interest rate swap agreements total $14.5 million with termination dates similar to the stated maturity date on the underlying certificate of deposit host contracts. The interest rate swap agreements are linked to the one-month Libor minus a spread. Payments to the counterparty are made on a monthly basis. In accordance with SFAS 133, both the embedded equity call option on the certificates of deposit and the freestanding interest rate swap agreements will be marked-to-market every quarter with resulting changes in fair value recorded in the income statement. At September 30, 2004, the fair values of the embedded equity call option on the certificates of deposit and the interest rate swap agreements amounted to $2.8 million and $584 thousand, respectively. The fair values of these instruments are based on quoted market prices from broker dealers making a market for these derivatives.

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

As of the end of the period covered by 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 Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective. There have been no significant changes in our internal controls during the fiscal quarter covered by the report that has materially affected or is reasonably likely to materially affect our internal controls over financial reporting.

Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the 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.

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

PART I—FINANCIAL INFORMATION			4
	Item 1.	Financial Statements	4-7
		Notes to Condensed Consolidated Financial Statements	8-16
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17-43
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	43
	Item 4.	Controls and Procedures	43
PART II—OTHER INFORMATION			44
	Item 1.	Legal Proceedings	44
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
	Item 3.	Defaults upon Senior Securities	44
	Item 4.	Submission of Matters to a Vote of Security Holders	44
	Item 5.	Other Information	44
	Item 6.	Exhibits	44
SIGNATURES			45

Dated: November 9, 2004
	EAST WEST BANCORP, INC.
	By:	/s/ JULIA GOUW
		JULIA GOUW
		Executive Vice President and Chief Financial Officer

Month Ended	Total Number of Shares Purchased(1)		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
July 31, 2004		—		$	—		—		(2)
August 31, 2004		—		$	—		—		(2)
September 30, 2004		—		$	—		—		(2)
Total		—		$	—		—		$	7,000,000