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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

##### **FORM 10-Q**

##### ** **

**Mark One**

 

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2009**

 

**or**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from               to                .**

 

**Commission file number 000-24939**

 

**EAST WEST BANCORP, INC**.

(Exact name of registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices) (Zip Code)

 

**(626) 768-6000**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes x  No o

 

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

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filed, a non-accelerated filer or asmaller reporting company.  Seedefinition of “large accelerated filer and accelerated filer” inRule 12b-2 of the Exchange Act.

 

| Large accelerated  filer o |   | Accelerated filer x          |
|---------------------------------|--------|-----------------------------------|
|                            |   |                              |
| Non-accelerated  filer o   |   | Smaller reporting  company o |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct).   Yes o  No x

 

Number of shares outstanding of the issuer’s commonstock on the latest practicable date: 91,732,640 shares of common stock as ofOctober 31, 2009.

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I  - FINANCIAL INFORMATION** | 4        |
|------------------------------------------|----------|
| ** **                               |     |   |
|                                     | Item 1.  | Condensed  Consolidated Financial Statements (Unaudited) | 4-7 |
|                                     |     |   |   |
|                                     |     | Notes  to Condensed Consolidated Financial Statements (Unaudited) | 8-39 |
|                                     |     |   |   |
|                                     | Item  2. | Management’s Discussion and Analysis of Financial  Condition and Results of Operations | 40-79 |
|                                     |     |   |   |
|                                     | Item  3. | Quantitative  and Qualitative Disclosures About Market Risks | 79 |
|                                     |     |   |   |
|                                     | Item 4.  | Controls  and Procedures | 79-80 |
|                                     |     |   |   |
| **PART II - OTHER  INFORMATION**    | 81       |
| ** **                               |     |   |
|                                     | Item 1.  | Legal  Proceedings | 81 |
|                                     |     |   |   |
|                                     | Item 1A. | Risk Factors | 81-82 |
|                                     |     |   |   |
|                                     | Item  2. | Unregistered  Sales of Equity Securities and Use of Proceeds | 83 |
|                                     |     |   |   |
|                                     | Item  3. | Defaults  Upon Senior Securities | 83 |
|                                     |     |   |   |
|                                     | Item  4. | Submission  of Matters to a Vote of Security Holders | 83 |
|                                     |     |   |   |
|                                     | Item 5.  | Other Information | 83 |
|                                     |     |   |   |
|                                     | Item 6.  | Exhibits | 83-84 |
|                                     |     |   |   |
| **SIGNATURE**                            | 85       |

 

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### **Forward-Looking Statements**

### ** **

Certain matters discussed in this QuarterlyReport may constitute forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended (the “1933 Act”) andSection 21E of the Securities Exchange Act of 1934, as amended (the“Exchange Act”), and as such, may involve risks and uncertainties.  These forward-looking statements relate to,among other things, expectations of the environment in which the Companyoperates and projections of future performance including future earnings andfinancial condition.  The Company’sactual results, performance, or achievements may differ significantly from theresults, performance, or achievements expected or implied in suchforward-looking statements.  Such risk and uncertainties and otherfactors include, but are not limited to, adverse developments or conditionsrelated to or arising from:

 

·                  changes in our borrowers’ performance onloans;

 

·                  changes in the commercial and consumerreal estate markets;

 

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

 

·                  changes in the economy, includinginflation;

 

·                  changes in government interest ratepolicies;

 

·                  changes in laws or the regulatoryenvironment;

 

·                  changes in critical accounting policiesand judgments;

 

·                  changes in accounting policies orprocedures as may be required by the Financial Accounting Standards Board orother regulatory agencies;

 

·                  changes in the equity and debt securitiesmarkets;

 

·                  changes in competitive pressures onfinancial institutions;

 

·                  effect of additional provision for loanlosses;

 

·                  effect of any acquisitions we may make;

 

·                  effect of any goodwill impairment;

 

·                  fluctuations of our stock price;

 

·                  success and timing of our businessstrategies;

 

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

 

·                  changes in our ability to receivedividends from our subsidiaries; and

 

·                  political developments, wars or otherhostilities that may disrupt or increase volatility in securities or otherwiseaffect economic conditions.

 

For a more detailed discussion of some of the factorsthat might cause such differences, see the Company’s 2008 Form 10-K underthe heading “ITEM 1A. RISK FACTORS” and the information set forth under “RISKFACTORS” in this Form 10-Q.  TheCompany does not undertake, and specifically disclaims any obligation to updateany forward-looking statements to reflect the occurrence of events orcircumstances after the date of such statements except as required by law.

 

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PART I - FINANCIAL INFORMATION

**ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

*(In thousands, except share data)*

*(Unaudited)*

 
| ** **                                                                                                                                                                                                                                                                                            | ** ** | **September 30,** | ** **     | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|----------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                            | ** ** | **2009**               | ** **     | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                            |       |                   |           |                  |       |
| Cash and due from banks                                                                                                                                                                                                                                                                               |       | $                      | 132,569        |                  | $          | 144,486 |   |
| Short-term investments                                                                                                                                                                                                                                                                                |       | 460,665                |           | 734,367               |       |
| Interest-bearing deposits  in other banks                                                                                                                                                                                                                                                             |       | 320,860                |           | 228,441               |       |
| Securities purchased under  resale agreements                                                                                                                                                                                                                                                         |       | 75,000                 |           | 50,000                |       |
| Investment securities  held-to-maturity, at amortized cost (with fair value of $799,729 at  September 30, 2009 and $123,105 at December 31, 2008)                                                                                                                                           |       | 781,331                |           | 122,317               |       |
| Investment securities  available-for-sale, at fair value (with amortized cost of $1,496,992 at  September 30, 2009 and $2,189,570 at December 31, 2008)                                                                                                                                     |       | 1,457,023              |           | 2,040,194             |       |
| Loans receivable, net of  allowance for loan losses of $230,650 at September 30, 2009 and $178,027  at December 31, 2008                                                                                                                                                                    |       | 8,156,838              |           | 8,069,377             |       |
| Investment in Federal Home  Loan Bank stock, at cost                                                                                                                                                                                                                                                  |       | 86,729                 |           | 86,729                |       |
| Investment in Federal  Reserve Bank stock, at cost                                                                                                                                                                                                                                                    |       | 36,785                 |           | 27,589                |       |
| Other real estate owned,  net                                                                                                                                                                                                                                                                         |       | 24,185                 |           | 38,302                |       |
| Investment in affordable  housing partnerships                                                                                                                                                                                                                                                        |       | 60,546                 |           | 48,141                |       |
| Premises and equipment, net                                                                                                                                                                                                                                                                           |       | 55,011                 |           | 60,184                |       |
| Due from customers on  acceptances                                                                                                                                                                                                                                                                    |       | 5,414                  |           | 5,538                 |       |
| Premiums on deposits  acquired, net                                                                                                                                                                                                                                                                   |       | 17,904                 |           | 21,190                |       |
| Goodwill                                                                                                                                                                                                                                                                                              |       | 337,438                |           | 337,438               |       |
| Cash surrender value of  life insurance policies                                                                                                                                                                                                                                                      |       | 97,511                 |           | 94,745                |       |
| Deferred tax assets                                                                                                                                                                                                                                                                                   |       | 156,047                |           | 184,588               |       |
| Accrued interest receivable  and other assets                                                                                                                                                                                                                                                         |       | 224,074                |           | 129,190               |       |
| **TOTAL**                                                                                                                                                                                                                                                                                             | ** ** | **$**                  | **12,485,930** | ** **            | **$**      | **12,422,816** | ** ** |
|                                                                                                                                                                                                                                                                                                  |       |                   |           |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                        |       |                   |           |                  |       |
| Customer deposit accounts:                                                                                                                                                                                                                                                                            |       |                   |           |                  |       |
| Noninterest-bearing                                                                                                                                                                                                                                                                                   |       | $                      | 1,397,217      |                  | $          | 1,292,997 |   |
| Interest-bearing                                                                                                                                                                                                                                                                                      |       | 7,271,340              |           | 6,848,962             |       |
| Total customer deposits                                                                                                                                                                                                                                                                               |       | 8,668,557              |           | 8,141,959             |       |
| Federal funds purchased                                                                                                                                                                                                                                                                               |       | 3,022                  |           | 28,022                |       |
| Federal Home Loan Bank  advances                                                                                                                                                                                                                                                                      |       | 923,216                |           | 1,353,307             |       |
| Securities sold under  repurchase agreements                                                                                                                                                                                                                                                          |       | 1,019,450              |           | 998,430               |       |
| Notes payable                                                                                                                                                                                                                                                                                         |       | 7,111                  |           | 16,506                |       |
| Bank acceptances  outstanding                                                                                                                                                                                                                                                                         |       | 5,414                  |           | 5,538                 |       |
| Long-term debt                                                                                                                                                                                                                                                                                        |       | 235,570                |           | 235,570               |       |
| Accrued interest payable,  accrued expenses and other liabilities                                                                                                                                                                                                                                     |       | 101,808                |           | 92,718                |       |
| Total liabilities                                                                                                                                                                                                                                                                                     |       | 10,964,148             |           | 10,872,050            |       |
|                                                                                                                                                                                                                                                                                                  |       |                   |           |                  |       |
| COMMITMENTS AND  CONTINGENCIES (Note 8)                                                                                                                                                                                                                                                               |       |                   |           |                  |       |
|                                                                                                                                                                                                                                                                                                  |       |                   |           |                  |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                                                             |       |                   |           |                  |       |
|                                                                                                                                                                                                                                                                                                  |       |                   |           |                  |       |
| Preferred stock, $0.001 par  value, 5,000,000 shares authorized; Series A, non-cumulative  convertible, 200,000 shares issued and 85,741 shares outstanding in 2009 and  196,505 shares outstanding in 2008; Series B, cumulative, 306,546 shares  issued and outstanding in 2009 and 2008. |       | 367,922                |           | 472,311               |       |
| Common stock, $0.001 par  value, 200,000,000 shares authorized; 98,442,732 and 70,377,989 shares issued  in 2009 and 2008, respectively; 91,693,532 and 63,745,624 shares outstanding  in 2009 and 2008, respectively.                                                                                |       | 98                     |           | 70                    |       |
| Additional paid in capital                                                                                                                                                                                                                                                                            |       | 929,558                |           | 695,521               |       |
| Retained earnings                                                                                                                                                                                                                                                                                     |       | 351,721                |           | 572,172               |       |
| Treasury stock, at cost —  6,749,200 shares in 2009 and 6,632,365 shares in 2008                                                                                                                                                                                                                 |       | (104,338               | )              | (102,817              | )          |
| Accumulated other  comprehensive loss, net of tax                                                                                                                                                                                                                                                     |       | (23,179                | )              | (86,491               | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                       |       | 1,521,782              |           | 1,550,766             |       |
| **TOTAL**                                                                                                                                                                                                                                                                                             | ** ** | **$**                  | **12,485,930** | ** **            | **$**      | **12,422,816** | ** ** |

 

See accompanying notes to condensed consolidated financial statements. 

 

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

*(In thousands, except per share data)*

*(Unaudited)*

* *
| ** **                                                                           | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|------------------------------------------|------------|
| ** **                                                                           | ** ** | **2009**                                   | ** **  | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| **INTEREST  AND DIVIDEND INCOME**                                                    |       |                                       |        |                                     |       |   |   |   |   |
| Loans receivable, including  fees                                                    |       | $                                          | 114,512     |                                     | $          | 131,682 |   | $ | 336,997 |   | $ | 425,113 |   |
| Investment securities  held-to-maturity                                              |       | 12,060                                     |        | —                                   |       | 31,077 |   | — |   |
| Investment securities  available-for-sale                                            |       | 16,425                                     |        | 23,141                                   |       | 57,101 |   | 75,923 |   |
| Securities purchased under  resale agreements                                        |       | 2,153                                      |        | 1,276                                    |       | 4,695 |   | 5,533 |   |
| Interest-bearing deposits  in other banks                                            |       | 1,454                                      |        | 5                                        |       | 4,678 |   | 14 |   |
| Short-term investments                                                               |       | 402                                        |        | 1,953                                    |       | 2,663 |   | 3,093 |   |
| Investment in Federal  Reserve Bank stock                                            |       | 552                                        |        | 415                                      |       | 1,604 |   | 1,122 |   |
| Investment in Federal Home  Loan Bank stock                                          |       | 366                                        |        | 1,390                                    |       | 365 |   | 4,153 |   |
| Total interest and dividend  income                                                  |       | 147,924                                    |        | 159,862                                  |       | 439,180 |   | 514,951 |   |
|                                                                                 |       |                                       |        |                                     |       |   |   |   |   |
| **INTEREST  EXPENSE**                                                                |       |                                       |        |                                     |       |   |   |   |   |
| Customer deposit accounts                                                            |       | 26,970                                     |        | 40,757                                   |       | 94,933 |   | 136,546 |   |
| Federal Home Loan Bank  advances                                                     |       | 11,172                                     |        | 17,140                                   |       | 38,191 |   | 54,363 |   |
| Securities sold under  repurchase agreements                                         |       | 12,140                                     |        | 12,063                                   |       | 36,016 |   | 33,881 |   |
| Long-term debt                                                                       |       | 1,760                                      |        | 2,957                                    |       | 6,211 |   | 9,675 |   |
| Federal funds purchased                                                              |       | 2                                          |        | 430                                      |       | 8 |   | 2,176 |   |
| Total interest expense                                                               |       | 52,044                                     |        | 73,347                                   |       | 175,359 |   | 236,641 |   |
|                                                                                 |       |                                       |        |                                     |       |   |   |   |   |
| NET INTEREST INCOME BEFORE  PROVISION FOR LOAN LOSSES                                |       | 95,880                                     |        | 86,515                                   |       | 263,821 |   | 278,310 |   |
| PROVISION FOR LOAN LOSSES                                                            |       | 159,244                                    |        | 43,000                                   |       | 388,666 |   | 183,000 |   |
| NET INTEREST (LOSS) INCOME  AFTER PROVISION FOR LOAN LOSSES                          |       | (63,364                                    | )           | 43,515                                   |       | (124,845 | ) | 95,310 |   |
|                                                                                 |       |                                       |        |                                     |       |   |   |   |   |
| **NONINTEREST  (LOSS) INCOME**                                                       |       |                                       |        |                                     |       |   |   |   |   |
| Impairment loss on  investment securities                                            |       | (45,199                                    | )           | (53,567                                  | )          | (82,846 | ) | (63,512 | ) |
| Less: Noncredit-related  impairment loss recorded in other comprehensive income      |       | 20,950                                     |        | —                                   |       | 20,950 |   | — |   |
| Net impairment loss on  investment securities recognized in earnings                 |       | (24,249                                    | )           | (53,567                                  | )          | (61,896 | ) | (63,512 | ) |
| Branch fees                                                                          |       | 4,679                                      |        | 4,285                                    |       | 14,463 |   | 12,725 |   |
| Net gain on sale of  investment securities                                           |       | 2,177                                      |        | —                                   |       | 7,378 |   | 7,767 |   |
| Letters of credit fees and  commissions                                              |       | 1,984                                      |        | 2,319                                    |       | 5,768 |   | 7,472 |   |
| Ancillary loan fees                                                                  |       | 1,227                                      |        | 1,783                                    |       | 4,812 |   | 3,908 |   |
| Income from life insurance  policies                                                 |       | 1,090                                      |        | 1,029                                    |       | 3,269 |   | 3,081 |   |
| Net gain on sale of loans                                                            |       | 8                                          |        | 144                                      |       | 19 |   | 2,272 |   |
| Other operating income                                                               |       | 1,204                                      |        | 457                                      |       | 1,902 |   | 2,088 |   |
| Total noninterest (loss)  income                                                     |       | (11,880                                    | )           | (43,550                                  | )          | (24,285 | ) | (24,199 | ) |
|                                                                                 |       |                                       |        |                                     |       |   |   |   |   |
| **NONINTEREST  EXPENSE**                                                             |       |                                       |        |                                     |       |   |   |   |   |
| Compensation and employee  benefits                                                  |       | 15,875                                     |        | 17,520                                   |       | 49,492 |   | 66,578 |   |
| Occupancy and equipment  expense                                                     |       | 6,262                                      |        | 6,817                                    |       | 19,950 |   | 20,364 |   |
| Deposit insurance premiums  and regulatory assessments                               |       | 6,057                                      |        | 1,678                                    |       | 18,950 |   | 5,191 |   |
| Other real estate owned  expense                                                     |       | 767                                        |        | 2,123                                    |       | 16,480 |   | 3,520 |   |
| Loan-related expense                                                                 |       | 2,197                                      |        | 2,361                                    |       | 5,274 |   | 5,967 |   |
| Amortization of investments  in affordable housing partnerships                      |       | 1,709                                      |        | 1,886                                    |       | 5,121 |   | 5,521 |   |
| Legal expense                                                                        |       | 1,323                                      |        | 855                                      |       | 4,856 |   | 3,890 |   |
| Data processing                                                                      |       | 1,079                                      |        | 1,055                                    |       | 3,362 |   | 3,386 |   |
| Amortization and impairment  loss on premiums on deposits acquired                   |       | 1,069                                      |        | 1,581                                    |       | 3,286 |   | 6,145 |   |
| Deposit-related expenses                                                             |       | 948                                        |        | 1,231                                    |       | 2,863 |   | 3,416 |   |
| Impairment loss on goodwill                                                          |       | —                                     |        | 272                                      |       | — |   | 858 |   |
| Other operating expenses                                                             |       | 8,778                                      |        | 11,147                                   |       | 25,748 |   | 32,235 |   |
| Total noninterest expense                                                            |       | 46,064                                     |        | 48,526                                   |       | 155,382 |   | 157,071 |   |
|                                                                                 |       |                                       |        |                                     |       |   |   |   |   |
| LOSS BEFORE BENEFIT FROM  INCOME TAXES                                               |       | (121,308                                   | )           | (48,561                                  | )          | (304,512 | ) | (85,960 | ) |
| BENEFIT FROM INCOME TAXES                                                            |       | (52,777                                    | )           | (17,355                                  | )          | (126,790 | ) | (33,911 | ) |
| Net loss before  extraordinary item                                                  |       | (68,531                                    | )           | (31,206                                  | )          | (177,722 | ) | (52,049 | ) |
| Impact of desecuritization  (Note 7)                                                 |       | —                                     |        | —                                   |       | 5,366 |   | — |   |
| **NET LOSS  AFTER EXTRAORDINARY ITEM**                                               | ** ** | **(68,531**                                | **)**       | **(31,206**                              | **)**      | **(183,088** | **)** | **(52,049** | **)** |
| PREFERRED STOCK DIVIDENDS,  INDUCEMENT, AND AMORTIZATION OF PREFERRED STOCK DISCOUNT |       | (10,620                                    | )           | (4,089                                   | )          | (42,986 | ) | (4,089 | ) |
| **NET LOSS  AVAILABLE TO COMMON STOCKHOLDERS**                                       | ** ** | **$**                                      | **(79,151** | **)**                                    | **$**      | **(35,295** | **)** | **$** | **(226,074** | **)** | **$** | **(56,138** | **)** |
|                                                                                 | ** ** | ** **                                 | ** **  | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **LOSS PER  SHARE AVAILABLE TO COMMON STOCKHOLDERS**                                 |       |                                       |        |                                     |       |   |   |   |   |
| BASIC                                                                                |       | $                                          | (0.91       | )                                        | $          | (0.56 | ) | $ | (3.19 | ) | $ | (0.90 | ) |
| DILUTED                                                                              |       | $                                          | (0.91       | )                                        | $          | (0.56 | ) | $ | (3.19 | ) | $ | (0.90 | ) |
| DIVIDENDS DECLARED PER  COMMON SHARE                                                 |       | $                                          | 0.01        |                                     | $          | 0.10 |   | $ | 0.04 |   | $ | 0.30 |   |
|                                                                                 |       |                                       |        |                                     |       |   |   |   |   |
| **WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING**                                   |       |                                       |        |                                     |       |   |   |   |   |
| BASIC                                                                                |       | 86,538                                     |        | 62,675                                   |       | 70,967 |   | 62,586 |   |
| DILUTED                                                                              |       | 86,538                                     |        | 62,675                                   |       | 70,967 |   | 62,586 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTSOF CHANGES IN STOCKHOLDERS’ EQUITY

*(In thousands, except share data)*

*(Unaudited)*

* *
| ** **                                                                                                                                  | ** ** | ** **    | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | **Accumulated**   | ** **  | ** **         | ** **  | ** **             | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|-------------|------------|----------------|------------|--------------|-------------|--------------|------------|-------------------|-------------|--------------------|-------------|------------------------|------------|
| ** **                                                                                                                                  | ** ** | ** **    | ** ** | **Paid  In**   | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | **Other**         | ** **  | ** **         | ** **  | ** **             | ** ** |
| ** **                                                                                                                                  | ** ** | ** **    | ** ** | **Capital**    | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** **  | ** **   | ** ** | **Comprehensive** | ** **  | ** **         | ** **  | **Total**              | ** ** |
| ** **                                                                                                                                  | ** ** | **Preferred** | ** ** | **Preferred**  | ** ** | **Common**  | ** ** | **Paid  In**   | ** ** | **Retained** | ** **  | **Treasury** | ** ** | **Loss,**         | ** **  | **Comprehensive**  | ** **  | **Stockholders’** | ** ** |
| ** **                                                                                                                                  | ** ** | **Stock**     | ** ** | **Stock**      | ** ** | **Stock**   | ** ** | **Capital**    | ** ** | **Earnings** | ** **  | **Stock**    | ** ** | **Net  of Tax**   | ** **  | **Income  (Loss)** | ** **  | **Equity**             | ** ** |
|                                                                                                                                        |       |          |       |           |       |        |       |           |       |         |        |         |       |              |        |               |        |                   |       |
| **BALANCE,  JANUARY 1, 2008**                                                                                                               | ** ** | **$**         | **—** | ** **     | ** ** | ** **  | **$**      | **70**         | ** ** | **$**        | **652,297** | ** **   | **$**      | **657,183**       | ** **  | **$**              | **(98,925** | **)**                  | **$**      | **(38,802** | **)** | ** ** | ** ** | **$** | **1,171,823** | ** ** |
| Comprehensive  loss                                                                                                                         | ** ** | ** **    | ** ** | ** **     | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | ** **        | ** **  | ** **         | ** **  |                   |       |
| Net loss for the  period                                                                                                                    |       |          |       |           |       |        |       |           |       | (52,049      | )           |         |       |              |        | $                  | (52,049     | )                      | (52,049    | ) |
| Net unrealized loss on investment securities  available-for-sale                                                                            |       |          |       |           |       |        |       |           |       |         |        |         |       | (33,797           | )           | (33,797            | )           | (33,797                | )          |
| Total  comprehensive loss                                                                                                                   |       |          |       |           |       |        |       |           |       |         |        |         |       |              |        | $                  | (85,846     | )                      |       |   |
| Cumulative effect  of change in accounting principle pursuant to adoption of ASC 715-60  (previously EITF 06-4)                             |       |          |       |           |       |        |       |           |       | (479         | )           |         |       |              |        |               |        | (479                   | )          |
| Stock  compensation costs                                                                                                                   |       |          |       |           |       |        |       | 4,515          |       |         |        |         |       |              |        |               |        | 4,515                  |       |
| Tax provision  from stock plans                                                                                                             |       |          |       |           |       |        |       | (238           | )          |         |        |         |       |              |        |               |        | (238                   | )          |
| Issuance of  200,000 shares Series A convertible preferred stock, net of stock  issuance costs                                         |       |          |       | 194,068        |       |        |       |           |       |         |        |         |       |              |        |               |        | 194,068                |       |
| Conversion of  2,600 shares of Preferred Stock                                                                                              |       |          |       | (2,523         | )          |        |       |           |       |         |        |         |       |              |        |               |        | (2,523                 | )          |
| Issuance of 168,983 shares of Common Stock from  converted 2,600 shares of Preferred Stock                                                  |       |          |       |           |       |        |       | 2,523          |       |         |        |         |       |              |        |               |        | 2,523                  |       |
| Issuance of 400,834 shares pursuant to various stock  plans and agreements                                                                  |       |          |       |           |       |        |       | 1,623          |       |         |        |         |       |              |        |               |        | 1,623                  |       |
| Issuance of 18,361 shares pursuant to Director  retainer fee                                                                                |       |          |       |           |       |        |       | 219            |       |         |        |         |       |              |        |               |        | 219                    |       |
| Cancellation of 102,058 shares due to forfeitures of  issued restricted stock                                                               |       |          |       |           |       |        |       | 3,238          |       |         |        | (3,238       | )          |              |        |               |        | —                 |       |
| Purchase accounting adjustment pursuant to DCB  Acquisition                                                                                 |       |          |       |           |       |        |       | 2,298          |       |         |        |         |       |              |        |               |        | 2,298                  |       |
| Purchase of 410 shares of treasury stock due to the  vesting of restricted stock                                                            |       |          |       |           |       |        |       |           |       |         |        | (8           | )          |              |        |               |        | (8                     | )          |
| Dividends paid on  preferred stock                                                                                                          |       |          |       |           |       |        |       |           |       | (4,089       | )           |         |       |              |        |               |        | (4,089                 | )          |
| Dividends paid on  common stock                                                                                                             |       |          |       |           |       |        |       |           |       | (19,005      | )           |         |       |              |        |               |        | (19,005                | )          |
| **BALANCE,  SEPTEMBER 30, 2008**                                                                                                            | ** ** | **$**         | **—** | ** **     | **$**      | **191,545** | ** ** | **$**          | **70**     | ** **   | **$**       | **666,475**  | ** ** | **$**             | **581,561** | ** **         | **$**       | **(102,171**           | **)**      | **$** | **(72,599** | **)** | ** ** | ** ** | **$** | **1,264,881** | ** ** |
| ** **                                                                                                                                  | ** ** | ** **    | ** ** | ** **     | ** ** | ** **  | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | ** **        | ** **  | ** **         | ** **  | ** **             | ** ** |
| **BALANCE,  DECEMBER 31, 2008**                                                                                                             | ** ** | **$**         | **—** | ** **     | **$**      | **472,311** | ** ** | **$**          | **70**     | ** **   | **$**       | **695,521**  | ** ** | **$**             | **572,172** | ** **         | **$**       | **(102,817**           | **)**      | **$** | **(86,491** | **)** | ** ** | ** ** | **$** | **1,550,766** | ** ** |
| Cumulative effect adjustment for reclassification of the  previously recognized noncredit-related impairment loss on investment  securities | ** ** | ** **    | ** ** | ** **     | ** ** | ** **  | ** ** | ** **     | ** ** | 8,110        | ** **  | ** **   | ** ** | (8,110            | )           | ** **         | ** **  | —                 | ** ** |
| **BALANCE,  JANUARY 1, 2009**                                                                                                               | ** ** | **$**         | **—** | ** **     | **$**      | **472,311** | ** ** | **$**          | **70**     | ** **   | **$**       | **695,521**  | ** ** | **$**             | **580,282** | ** **         | **$**       | **(102,817**           | **)**      | **$** | **(94,601** | **)** | ** ** | ** ** | **$** | **1,550,766** | ** ** |
| Comprehensive  loss                                                                                                                         |       |          |       |           |       |        |       |           |       |         |        |         |       |              |        |               |        |                   |       |
| Net loss after  extraordinary item for the year                                                                                             |       |          |       |           |       |        |       |           |       | (183,088     | )           |         |       |              |        | $                  | (183,088    | )                      | (183,088   | ) |
| Net unrealized gain on investment securities  available-for-sale                                                                            |       |          |       |           |       |        |       |           |       |         |        |         |       | 53,021            |        | 53,021             |        | 53,021                 |       |
| Net unrealized  loss as a result of desecuritization                                                                                        |       |          |       |           |       |        |       |           |       |         |        |         |       | 30,551            |        | 30,551             |        | 30,551                 |       |
| Noncredit-related impairment loss on investment  securities recorded in the current year                                                    |       |          |       |           |       |        |       |           |       |         |        |         |       | (12,150           | )           | (12,150            | )           | (12,150                | )          |
| Total  comprehensive loss                                                                                                                   |       |          |       |           |       |        |       |           |       |         |        |         |       |              |        | $                  | (111,666    | )                      |       |   |
| Stock  compensation costs                                                                                                                   |       |          |       |           |       |        |       | 4,370          |       |         |        |         |       |              |        |               |        | 4,370                  |       |
| Tax provision  from stock plans                                                                                                             |       |          |       |           |       |        |       | (498           | )          |         |        |         |       |              |        |               |        | (498                   | )          |
| Preferred stock  issuance and conversion cost                                                                                               |       |          |       | (180           | )          |        |       |           |       |         |        |         |       |              |        |               |        | (180                   | )          |
| Common stock  issuance cost                                                                                                                 |       |          |       |           |       |        |       | (5,535         | )          |         |        |         |       |              |        |               |        | (5,535                 | )          |
| Induced  conversion of 110,764 shares of Preferred Stock                                                                                    |       |          |       | (107,474       | )          |        |       |           |       |         |        |         |       |              |        |               |        | (107,474               | )          |
| Issuance of 9,968,760 shares of Common Stock from  converted 110,764 shares of Preferred Stock                                              |       |          |       |           |       | 10          |       | 107,464        |       |         |        |         |       |              |        |               |        | 107,474                |       |
| Issuance of 5,000,000 shares Common Stock from  Private Placement                                                                           |       |          |       |           |       | 5           |       | 27,495         |       |         |        |         |       |              |        |               |        | 27,500                 |       |
| Issuance of 12,650,000 shares Common Stock from  Public Offering                                                                            |       |          |       |           |       | 12          |       | 80,316         |       |         |        |         |       |              |        |               |        | 80,328                 |       |
| Issuance of 423,597 shares pursuant to various stock  plans and agreements                                                                  |       |          |       |           |       | 1           |       | 399            |       |         |        |         |       |              |        |               |        | 400                    |       |
| Issuance of 22,386 shares pursuant to Director  retainer fee                                                                                |       |          |       |           |       |        |       | 219            |       |         |        |         |       |              |        |               |        | 219                    |       |
| Cancellation of 60,578 shares due to forfeitures of  issued restricted stock                                                                |       |          |       |           |       |        |       | 1,467          |       |         |        | (1,467       | )          |              |        |               |        | —                 |       |
| Purchase of 11,166 shares of treasury stock due to  the vesting of restricted stock                                                         |       |          |       |           |       |        |       |           |       |         |        | (54          | )          |              |        |               |        | (54                    | )          |
| Amortization of  Series B preferred stock discount                                                                                     |       |          |       | 3,265          |       |        |       |           |       | (3,265       | )           |         |       |              |        |               |        | —                 |       |
| Preferred stock  dividends                                                                                                                  |       |          |       |           |       |        |       |           |       | (21,381      | )           |         |       |              |        |               |        | (21,381                | )          |
| Common stock  dividends                                                                                                                     |       |          |       |           |       |        |       |           |       | (2,487       | )           |         |       |              |        |               |        | (2,487                 | )          |
| Inducement of  preferred stock conversion                                                                                                   |       |          |       |           |       |        |       | 18,340         |       | (18,340      | )           |         |       |              |        |               |        | —                 |       |
| **BALANCE,  SEPTEMBER 30, 2009**                                                                                                            | ** ** | **$**         | **—** | ** **     | **$**      | **367,922** | ** ** | **$**          | **98**     | ** **   | **$**       | **929,558**  | ** ** | **$**             | **351,721** | ** **         | **$**       | **(104,338**           | **)**      | **$** | **(23,179** | **)** | ** ** | ** ** | **$** | **1,521,782** | ** ** |

 
| ** **                                                                                                                                                  | ** **   | **Nine Months Ended September 30,** | ** **   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------------------|--------------|
| ** **                                                                                                                                                  | ** **   | **2009**                                 | ** **   | **2008** | ** ** |
| *** ***                                                                                                                                                | *** *** | **(In thousands)**                       | *** *** |
| **Disclosure of reclassification amounts:**                                                                                                                 |         |                                     |         |   |   |
| Unrealized holding gain (loss) on securities arising during the  period, net of tax (expense) benefit of $ (37,620) in 2009 and $ 47,887 in  2008 |         | $                                        | 51,952       |   | $ | (66,129 | ) |
| Less: Reclassification adjustment for gain included in net loss, net  of tax expense of $(22,898) in 2009 and $(23,413) in 2008                             |         | 31,620                                   |         | 32,332 |   |
| Net unrealized gain (loss) on securities, net of tax (expense) benefit  of $ (60,518) in 2009 and $ 24,474 in 2008                                |         | $                                        | 83,572       |   | $ | (33,797 | ) |

 

See accompanying notes to condensed consolidated financial statements.

 

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

*(In thousands)*

*(Unaudited)*

 
| ** **                                                                                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                            |       |                                     |       |   |   |
| Net loss after extraordinary item                                                                   |       | $                                        | (183,088   | ) | $ | (52,049 | ) |
| Adjustments to reconcile net loss income to net cash provided by  operating activities:             |       |                                     |       |   |   |
| Depreciation and amortization                                                                       |       | 16,847                                   |       | 12,754 |   |
| Impairment loss on goodwill                                                                         |       | —                                   |       | 858 |   |
| Credit related impairment loss on investment securities  available-for-sale                         |       | 61,896                                   |       | 63,512 |   |
| Impairment loss on other equity investment                                                          |       | 581                                      |       | — |   |
| Stock compensation costs                                                                            |       | 4,370                                    |       | 4,515 |   |
| Deferred tax benefit                                                                                |       | (16,886                                  | )          | (78,929 | ) |
| Provision for loan losses and impact of desecuritization                                            |       | 397,929                                  |       | 183,000 |   |
| Provision for loan loss on other real estate owned                                                  |       | 17,670                                   |       | 2,121 |   |
| Net gain on sales of investment securities, loans and other assets                                  |       | (2,827                                   | )          | (8,570 | ) |
| Federal Home Loan Bank stock dividends                                                              |       | —                                   |       | (3,777 | ) |
| Originations of loans held for sale                                                                 |       | (33,248                                  | )          | (42,100 | ) |
| Proceeds from sale of loans held for sale                                                           |       | 33,318                                   |       | 42,458 |   |
| Tax provision from stock plans                                                                      |       | 498                                      |       | 238 |   |
| Net change in accrued interest receivable and other assets                                          |       | (11,050                                  | )          | 25,755 |   |
| Net change in accrued interest payable, accrued expenses and other  liabilities                     |       | (97,694                                  | )          | (5,485 | ) |
| Total adjustments                                                                                   |       | 371,404                                  |       | 196,350 |   |
| Net cash provided by operating activities                                                           |       | 188,316                                  |       | 144,301 |   |
|                                                                                                |       |                                     |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                            |       |                                     |       |   |   |
| Net decrease in loans receivable                                                                    |       | 318,232                                  |       | 265,375 |   |
| Purchases of:                                                                                       |       |                                     |       |   |   |
| Interest-bearing deposits in other banks                                                            |       | (417,909                                 | )          | (495 | ) |
| Securities purchased under resale agreements                                                        |       | (50,000                                  | )          | — |   |
| Investment securities held-to-maturity                                                              |       | (697,768                                 | )          | — |   |
| Investment securities available-for-sale                                                            |       | (1,314,263                               | )          | (1,657,219 | ) |
| Loans receivable                                                                                    |       | (350,000                                 | )          | — |   |
| Federal Home Loan Bank stock                                                                        |       | —                                   |       | (9,400 | ) |
| Federal Reserve Bank stock                                                                          |       | (9,196                                   | )          | (5,904 | ) |
| Investments in affordable housing partnerships                                                      |       | (22                                      | )          | — |   |
| Premises and equipment                                                                              |       | (433                                     | )          | (3,173 | ) |
| Proceeds from:                                                                                      |       |                                     |       |   |   |
| Sale of investment securities                                                                       |       | 336,710                                  |       | 376,148 |   |
| Sale/call of securities purchased under resale agreements                                           |       | 25,000                                   |       | 100,000 |   |
| Sale of loans receivable                                                                            |       | 105,227                                  |       | 148,254 |   |
| Sale of other real estate owned                                                                     |       | 51,807                                   |       | 28,084 |   |
| Sale of premises and equipment                                                                      |       | 8                                        |       | 85 |   |
| Maturity of interest-bearing deposits in other banks                                                |       | 325,494                                  |       | — |   |
| Repayments, maturity and redemption of investment securities                                        |       | 1,040,828                                |       | 1,011,854 |   |
| Dividends/redemption of Federal Home Loan Bank stock                                                |       | 182                                      |       | 12,000 |   |
| Acquisitions, net of cash paid                                                                      |       | —                                   |       | (1,158 | ) |
| Net cash (used in) provided by investing activities                                                 |       | (636,103                                 | )          | 264,451 |   |
|                                                                                                |       |                                     |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                                            |       |                                     |       |   |   |
| Net proceeds from (payment for):                                                                    |       |                                     |       |   |   |
| Deposits                                                                                            |       | 526,598                                  |       | 257,435 |   |
| Issuance of short-term borrowings                                                                   |       | (3,980                                   | )          | (544,320 | ) |
| Proceeds from:                                                                                      |       |                                     |       |   |   |
| Issuance of long-term borrowings                                                                    |       | —                                   |       | 250,000 |   |
| Issuance of preferred stock                                                                         |       | —                                   |       | 200,000 |   |
| Issuance of common stock from public offering                                                       |       | 80,328                                   |       | — |   |
| Issuance of common stock from private placement                                                     |       | 27,500                                   |       | — |   |
| Issuance of common stock pursuant to various stock plans and  agreements                            |       | 400                                      |       | 1,623 |   |
| Payment for:                                                                                        |       |                                     |       |   |   |
| Repayment of long-term borrowings                                                                   |       | (430,000                                 | )          | (170,000 | ) |
| Repayment of notes payable on affordable housing investments                                        |       | (9,395                                   | )          | (7,091 | ) |
| Repurchase of treasury shares pursuant to stock repurchase program and  vesting of restricted stock |       | (54                                      | )          | (8 | ) |
| Issuance and conversion costs of preferred stock & common  stock                           |       | (5,715                                   | )          | (5,932 | ) |
| Cash dividends on preferred stock                                                                   |       | (20,530                                  | )          | (4,089 | ) |
| Cash dividends on common stock                                                                      |       | (2,486                                   | )          | (19,005 | ) |
| Tax provision from stock plans                                                                      |       | (498                                     | )          | (238 | ) |
| Net cash provided by (used in) financing activities                                                 |       | 162,168                                  |       | (41,625 | ) |
|                                                                                                |       |                                     |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                           |       | (285,619                                 | )          | 367,127 |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                      |       | 878,853                                  |       | 160,347 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                            |       | $                                        | 593,234    |   | $ | 527,474 |   |
| ** **                                                                                          |       |                                     |       |   |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                                 |       |                                     |       |   |   |
| Cash paid during the period for:                                                                    |       |                                     |       |   |   |
| Interest                                                                                            |       | 184,054                                  |       | 231,717 |   |
| Income tax payments, net of refunds                                                                 |       | (13,126                                  | )          | 39,743 |   |
| Noncash investing and financing activities:                                                         |       |                                     |       |   |   |
| Desecuritization of loans receivable                                                                |       | 635,614                                  |       | — |   |
| Loans to facilitate sales of loans receivable                                                       |       | 130,509                                  |       | 52,500 |   |
| Transfers to real estate owned/affordable housing partnership                                       |       | 116,124                                  |       | 46,614 |   |
| Loans to facilitate sales of real estate owned                                                      |       | 38,605                                   |       | — |   |
| Issuance of common stock in lieu of Board of Director retainer fees                                 |       | 219                                      |       | 219 |   |
| Afforadable housing investment financed through notes payable                                       |       | —                                   |       | 3,000 |   |
| Purchase accounting adjustment in connection with acquisition                                       |       | —                                   |       | 2,298 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

# **For Nine Months Ended September 30, 2009 and 2008**

*(Unaudited)*

 

**1.****             ****BASISOF PRESENTATION**

 

The condensed consolidated financialstatements include the accounts of East West Bancorp, Inc. (referred toherein on an unconsolidated basis as “East West” and on a consolidated basis asthe “Company”) and its wholly-owned subsidiaries, East West Bank andsubsidiaries (the “Bank”) and East West Insurance Services, Inc.  Intercompany transactions and accounts havebeen eliminated in consolidation.  East Westalso has nine wholly-owned subsidiaries that are statutory business trusts (the“Trusts”).  In accordance with FinancialAccounting Standards Board Accounting Standards Codification (“ASC”) 810, *(*previously FASB Interpretation No. 46(R), *Consolidation of Variable Interest Entities)*, the Trusts arenot consolidated into the accounts of East West Bancorp, Inc.

 

The interim condensed consolidated financialstatements, presented in accordance with accounting principles generallyaccepted in the United States of America (“GAAP”), are unaudited and reflectall adjustments which, in the opinion of management, are necessary for a fairstatement of financial condition and results of operations for the interimperiods.  All adjustments are of a normaland recurring nature.  Results for thenine months ended September 30, 2009 are not necessarily indicative ofresults that may be expected for any other interim period or for the year as awhole.  Certain information and notedisclosures normally included in annual financial statements prepared inaccordance with GAAP have been condensed or omitted.  Events subsequent to the condensedconsolidated balance sheet date have been evaluated through November 3,2009, the date the financial statements are available to be issued, forinclusion in the accompanying financial statements.  The unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and notes included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008.

 

Certain prior year balanceshave been reclassified to conform to current year presentation.

 

**2.****             ****SIGNIFICANTACCOUNTING POLICIES**

 

*Recent Accounting Standards*

 

In December 2007*,*the FASB issued ASC 805**(previously**SFAS No. 141(R), *BusinessCombinations*).  ASC 805establishes principles and requirements for how an acquiring company(1) recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, and any non-controlling interest inthe acquiree, (2) recognizes and measures the goodwill acquired in thebusiness combination or a gain from a bargain purchase, and (3) determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination.  ASC 805 is effective for businesscombinations occurring on or after the beginning of the fiscal year beginningon or after December 15, 2008.** **ASC 805, effective for the Companyon January 1, 2009, applies to all transactions or other events inwhich the Company obtains control of one or more businesses.  Management will assess each transaction on acase-by-case basis as they occur.

 

In December 2007, the FASB issued ASC 810-10(previously SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements - an Amendment of ARB No. 51*).  This Statement requires 

 

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thatnoncontrolling or minority interests in subsidiaries be presented in theconsolidated statement of financial position within equity, but separate fromthe parents’ equity, and that the amount of the consolidated net incomeattributable to the parent and to the noncontrolling interest be clearlyidentified and presented on the face of the consolidated statement ofincome.  ASC 810-10 is effective forfiscal years beginning on or after December 15, 2008.  The adoption of this guidance did not have amaterial effect on the Company’s financial condition, results of operations, orcash flows.

 

In February 2008, the FASB issued ASC860-10-35-2 and ASC 860-10-40-42 (previously FASB Staff Position FAS No. 140-3,*Accounting for Transfers of Financial Assetsand Repurchase Financing Transactions*)*,*which providesa consistent framework for the evaluation**ofa transfer of a financial asset and subsequent repurchase agreement entered into with the same**counterparty.  ASC 860-10-35-2 and ASC 860-10-40-42 provideguidelines that must be met in order for an initial transfer and**subsequent repurchase agreement to not beconsidered linked for evaluation.  If thetransactions do not meet the**specifiedcriteria, they are required to be accounted for as one transaction.  This guidance is effective for fiscal years**beginning after November 15, 2008,and shall be applied prospectively to initial transfers and repurchasefinancings**for which the initialtransfer is executed on or after adoption. The adoption of this guidance did not have a material effect on theCompany’s financial condition, results of operations, or cash flows.

 

InFebruary 2008, the FASB issued ASC 820-10 (previously SFAS No. 157-2,*Effective Date of FASB Statement No. 157*),which provided for a one-year deferral of the implementation of this standardfor other nonfinanical assets and liabilities, effective for fiscal yearsbeginning after November 15, 2008. The adoption of this additional guidance did not have a material effecton the Company’s financial condition, results of operations, or cash flows.

 

In March 2008, the FASB issued ASC 815-10-50(previously SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities*).  ASC 815-10-50 requires specific disclosuresregarding the location and amounts of derivative instruments in the financialstatements; how derivative instruments and related hedged items are accountedfor; and how derivative instruments and related hedged items affect thefinancial position, financial performance, and cash flows of the Company.  It is effective for financial statementsissued for fiscal years beginning after November 15, 2008, with earlyadoption encouraged.  The adoption ofthis guidance did not have a material effect on the Company’s financialcondition, results of operations, or cash flows.

 

In April 2008, the FASB directed the FASBStaff to issue ASC 350-30-35-1 (previously FSP No. FAS 142-3, *Determination of the Useful Life of Intangible Assets*).  ASC 350-30-35-1 amends the factors thatshould be considered in developing renewal or extension assumptions used forpurposes of determining the useful life of a recognized intangible asset underASC 350 (previously SFAS 142, “*Goodwill and OtherIntangible Assets”*).  ASC 350-30-35-1 is intended to improvethe consistency between the useful life of a recognized intangible asset under ASC350 and the period of expected cash flows used to measure the fair value of theasset under ASC 805 and other GAAP.  ASC 350-30-35-1  is effective for fiscal years beginning afterDecember 15, 2008.  Earlierapplication is not permitted.  The adoption ofthis guidance did not have a material effect on the Company’s financialcondition, results of operations, or cash flows.

 

In June 2008, the FASB issued ASC 260-10-45(previously FSP EITF 03-06-1, *Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities*)*.*  ASC 260-10-45 requires all outstandingunvested share-based payment awards that contain rights to nonforfeitabledividends to be considered participating securities and requires entities toapply the two-class method of computing basic and diluted earnings pershare.  This guidance is effective forfiscal years beginning after December 15, 2008, and interim periods withinthose fiscal years.  Early adoption 

 

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isprohibited.  The adoption of thisguidance did not have a material effect on the Company’s basic and dilutedearnings per share calculation.

 

In December 2008, the FASB issued ASC-10-50(previously FSP FAS 140-4 and FIN 46(R)-8, “*Disclosures by PublicEntities (Enterprises) About Transfers of Financial Assets and Interests inVariable Interest Entities”*). This disclosure-only ASC improves the transparency of transfers offinancial assets and an enterprise’s involvement with variable interestentities (VIEs), including qualifying special-purpose entities (QSPEs).  The disclosures required by this ASC areintended to provide greater transparency to financial statement users about atransferor’s continuing involvement with transferred financial assets and anenterprise’s involvement with variable interest entities and qualifyingSPEs.  This ASC shall be effective forthe first reporting period ending after December 15, 2008, with earlierapplication encouraged, and shall be applied for each annual and interimreporting period thereafter.  The disclosure requirementsrelated to the adoption of this guidance are presented in Note 3 and Note 8 of the Company’s condensed consolidated financialstatements.

 

In January 2009, the FASB issued ASC 325-40(previously FSP EITF 99-20-1), *Amendments to theImpairment Guidance of EITF Issue No. 99-20*, which revises theother-than-temporary-impairment (“OTTI”) guidance on beneficial interests insecuritized financial assets that are within the scope of EITF 99-20, *Recognition of Interest Income and Impairment on Purchased and RetainedBeneficial Interests in Securitized Financial Assets*).  ASC 325-40 amends Issue 99-20, to more closelyalign its OTTI guidance with ASC 320-10 (previously FASB StatementNo. 115, *Accounting for Certain Investments in Debtand Equity Securities*), by (1) removing the notion of a “marketparticipant” and (2) inserting a “probable” concept related to the estimationof a beneficial interest’s cash flows. ASC 325-40 is effective prospectively for interim and annual periodsending after December 15, 2008. Retrospective application of this ASC is prohibited.  The adoption of this guidance did not have amaterial effect on the Company’s financial condition, results of operations, orcash flows.

 

In April 2009, the FASB issued ASC 320-10-65(previously FSP FAS 115-2 and FAS 124, *Recognition andPresentation of Other-Than-Temporary Impairments*), which makeschanges to the timing of loss recognition and earnings for debt and similarinvestment securities classified as either “available-for-sale” or“held-to-maturity”.  The ASC providesthat if an entity intends to sell an impaired debt security prior to recoveryof its amortized cost basis, or if it is more likely than not that it will haveto sell the security prior to recovery, then the full amount of the impairmentis to be classified as other-than-temporary and recognized in earnings.  Otherwise, the portion of the impairment lossdeemed to constitute a credit loss is considered an OTTI loss to be reported inearnings. The non-credit loss portion is recognized in other comprehensiveincome.  This ASC also requires entities toinitially apply the provisions of the standard to the noncredit portion ofpreviously recorded OTTI impaired securities, existing as of the date ofinitial adoption, by making a cumulative-effect adjustment from the openingbalance of retained earnings to other comprehensive income in the period ofadjustment.  Upon adoption of ASC320-10-65, the Company reclassified the noncredit portion of previouslyrecognized OTTI totaling $8.1 million, net of tax, from the opening balance ofretained earnings to other comprehensive income.  Additionally, upon implementation of this ASCas of March 31, 2009, the Company recorded $200 thousand, on a pre-taxbasis, of the credit portion of OTTI through earnings and $7.6 million, net oftax, of the non-credit portion of OTTI in other comprehensive income.

 

In April 2009, the FASB issued ASC 820-10-65(previously FSP FAS 157-4,*Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly*),which provides additional guidance for estimating fair value in accordance withASC 820 when the volume and level of activity for the asset or liability havesignificantly decreased.  ASC 820-10-65also requires additional disclosures relating to fair value measurement inputsand valuation techniques, as well as providing disclosures for all debt andequity investment securities by major security types rather than by majorsecurity categories that should be 

 

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basedon the nature and risks of the security during both interim and annualperiods.  The adoption of this ASC resulted in additional disclosures which arepresented in Note 3 of the Company’s condensed consolidated financialstatements.

 

In April 2009, the FASB issued ASC 820-10-50,(previously FSP FAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments*), which increases the frequencyof fair value disclosures from an annual basis only to a quarterly basis.  The guidance will require public entities todisclose in their interim financial statements the fair value of all financialinstruments within the scope of ASC 825 (previously SFAS No. 107, *Disclosures about Fair Value of Financial Instruments*), aswell as the methods and significant assumptions used to estimate the fair valueof those instruments.  The ASC shall beeffective for interim reporting periods ending after June 15, 2009, withearly adoption permitted for periods ending after March 15, 2009.  An entity may early adopt this ASC only if italso elects to early adopt ASC 820-10-65 and ASC 320-10-65.  This ASC does not require disclosures forearlier periods presented for comparative periods at initial adoption.  In periods after initial adoption, this ASCrequires comparative disclosures only for periods ending after the initialadoption.  The adoption of this ASC on June 30, 2009 resulted in additionaldisclosures which are presented in Note 3 of the Company’s condensedconsolidated financial statements.

 

In May 2009, the FASB issued ASC 855,(previously SFAS No. 165, *Subsequent Events*).  ASC 855 requires entities to recognize in thefinancial statements the effect of all events or transactions that provideadditional evidence of conditions that existed at the balance sheet date,including the estimates inherent in the financial statement preparationprocess.  Entities shall not recognize the impact of events ortransactions that provide evidence about conditions that did not exist at thebalance sheet date but arose after that date.  ASC 855 also requiresentities to disclose the date through which subsequent events have beenevaluated.  ASC 855 was effective for interim and annual reportingperiods ending after June 15, 2009.  The adoption of thisguidance did not have a material effect on the Company’s financial condition,results of operations, or cash flows.

 

In June 2009, the FASB issued ASC 860(previously SFAS No. 166, *Accounting for Transfersof Financial Assets*, which amends Statement 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities*), and will require more informationabout transfers of financial assets, including securitization transactions, andwhere companies have continuing exposure to the risks related to transferredfinancial assets.  It eliminates theconcept of a “qualifying special-purpose entity,” changes the requirements forderecognizing financial assets, and requires additional disclosures.  It is effective for financial statementsissued for fiscal years beginning after November 15, 2009, and earlyadoption is prohibited.  The Company iscurrently evaluating the impact that this statement will have on its financialcondition, results of operations, or cash flows.

 

In June 2009, the FASB issued ASC 810(previously SFAS No. 167, *Amendments to FASBInterpretation No. 46(R)*), which is a revision to FASBInterpretation No. 46(R), *Consolidation of VariableInterest Entities*, and changes how a company determines when anentity that is insufficiently capitalized or is not controlled through voting(or similar rights) should be consolidated. The determination of whether a company is required to consolidate anentity is based on, among other things, an entity’s purpose and design and acompany’s ability to direct the activities of the entity that mostsignificantly impact the entity’s economic performance.  It is effective for financial statementsissued for fiscal years beginning after November 15, 2009, and earlyadoption is prohibited.  The Company doesnot expect the adoption of this guidance to have a material effect on itsfinancial condition, results of operations, or cash flows.

 

In June 2009, the FASB issued ASC 105(previously SFAS No. 168, *The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples (“GAAP”) — a replacement of FASB Statement No. 162(“Codification”)*).  ThisCodification is the source of 

 

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authoritativeU.S. GAAP recognized by the FASB to be applied by nongovernmentalentities.  All of the contents of theCodification carries the same level of authority, effectively superseding SFASNo. 162, *The***Hierarchy ofGenerally Accepted Accounting Principles**.  In other words, the GAAP hierarchy has beenmodified to include only two levels of GAAP: authoritative andnonauthoritative.  The Codification isnot intended to change GAAP, but it will change the way GAAP is organized andpresented.  The Codification is effectivefor financial statements issued for interim and annual periods ending after September 15,2009.  In order to ease the transition tothe Codification, the Company has provided the Codification cross-referencealongside the references to the standards issued and adopted prior to theadoption of the Codification.

 

In August 2009, the FASB issued ASU 2009-05, *Measuring Liabilities at Fair Value*, which provides guidanceon measuring the fair value of liabilities under FASB ASC 820.  ASU 2009-05 reaffirms that fair valuemeasurement of a liability assumes the transfer of a liability to a marketparticipant as of the measurement date. ASU 2009-05 is effective for the first interim reporting period afterissuance.  The Company does not expectthe adoption of this guidance to have a material effect on its financialcondition, results of operations, or cash flows.

 

**3.****             ****FAIR VALUE**

 

The Company adopted ASC 820 effectiveJanuary 1, 2008, which  provides aframework for measuring fair value under GAAP. This standard applies to all financial assets and liabilities that arebeing measured and reported at fair value on a recurring and non-recurringbasis.  For the Company, this includesthe investment securities available-for-sale portfolio, equity swap agreements,derivatives payable, mortgage servicing assets,****andimpaired loans**.**

 

The Company adopted ASC 820-10 effectiveJanuary 1, 2009, which provided for a one-year deferral of theimplementation of ASC 820 for other nonfinanical assets and liabilities,effective for fiscal years beginning after November 15, 2008.  For the Company, this includes other realestate owned (“OREO”).

 

Upon adoption of ASC 820-10-65 effectiveMarch 31, 2009, the Company has provided additional disclosures relatingto fair value measurement inputs and valuation techniques as well as providingdisclosures for all debt and equity investment securities by major securitytypes rather than by major security categories that should be based on thenature and risks of the security during both interim and annual periods.

 

Fair value is defined as the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date.  In determining fair value, the Company usesvarious methods including market and income approaches.  Based on these approaches, the Company oftenutilizes certain assumptions that market participants would use in pricing theasset or liability.  These inputs can bereadily observable, market corroborated, or generally unobservable firminputs.  The Company utilizes valuationtechniques that maximize the use of observable inputs and minimize the use ofunobservable inputs.  Based on theobservability of the inputs used in the valuation techniques, the Company isrequired to provide the following information according to the fair value hierarchy.  The hierarchy ranks the quality andreliability of the information used to determine fair values.  The hierarchy gives the highest priority toquoted prices available in active markets and the lowest priority to datalacking transparency.  Financial assetsand liabilities carried at fair value will be classified and disclosed in oneof the following three categories:

 

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

 

·                  Level 2 –Quoted prices for similar instruments in active markets; quoted prices foridentical or similar instruments in markets that are not active; andmodel-derived valuations whose inputs are observable and can be corroborated bymarket data.  Level 2 financialinstruments typically include U.S. Government debt and agency mortgage-backedsecurities, municipal securities, U.S. Government sponsored enterprisepreferred stock securities, trust preferred securities, equity swap agreements,and OREO.

 

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

 

In determining the appropriate hierarchy levels, theCompany performs a detailed analysis of assets and liabilities that are subjectto fair value disclosure.  The followingtable presents both financial and non-financial assets and liabilities that aremeasured at fair value on a recurring and non-recurring basis.  These assets and liabilities are reported onthe consolidated balance sheets at their fair values as of September 30,2009.  Financial assets and liabilitiesare classified in their entirety based on the lowest level of input that issignificant to their fair value measurement.

 
| ** **                                                                                                         | ** **   | **Assets (Liabilities) Measured at Fair Value on a  Recurring Basis as of September 30, 2009** | ** **   |
|--------------------------------------------------------------------------------------------------------------------|--------------|-----------------------------------------------------------------------------------------------------|--------------|
| ** **                                                                                                         | ** **   | **Fair Value  Measurements********September 30, 2009**                                         | ** **   | **Quoted Prices in  Active Markets for  Identical Assets  (Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable Inputs  (Level 3)** | ** ** |
| ** **                                                                                                         | ** **   | **(In Thousands)**                                                                                  | ** **   |
| Investment  securities available-for-sale                                                                          | *** *** | *** ***                                                                                        | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| U.S. Treasury  securities                                                                                          |         | $                                                                                                   | 2,215        |   | $ | 2,215 |   | $ | — |   | $ | — |   |
| U.S. Government agency securities and U.S.  Government sponsored enterprise debt securities                        |         | 476,735                                                                                             |         | — |   | 476,735 |   | — |   |
| U.S. Government agency securities and U.S.  Government sponsored enterprise residential mortgage-backed securities |         |                                                                                                |         |   |   |   |   |   |   |
| Commercial mortgage-backed securities                                                                              |         | 26,980                                                                                              |         | — |   | 26,980 |   | — |   |
| Residential  mortgage-backed securities                                                                            |         | 772,374                                                                                             |         | — |   | 772,374 |   | — |   |
| Municipal  securities                                                                                              |         | 17,926                                                                                              |         | — |   | 17,926 |   | — |   |
| Other  residential mortgage-backed securities                                                                      |         |                                                                                                |         |   |   |   |   |   |   |
| Investment grade                                                                                                   |         | 26,992                                                                                              |         | — |   | 26,992 |   | — |   |
| Non-investment  grade                                                                                              |         | 15,534                                                                                              |         | — |   | — |   | 15,534 |   |
| Corporate debt  securities                                                                                         |         |                                                                                                |         |   |   |   |   |   |   |
| Investment grade                                                                                                   |         | 103,278                                                                                             |         | — |   | 102,418 |   | 860 |   |
| Non-investment  grade                                                                                              |         | 11,701                                                                                              |         | — |   | 6,210 |   | 5,491 |   |
| U.S. Government  sponsored enterprise equity securities                                                            |         | 3,288                                                                                               |         | — |   | 3,288 |   | — |   |
| Total investment  securities available-for-sale                                                                    |         | $                                                                                                   | 1,457,023    |   | $ | 2,215 |   | $ | 1,432,923 |   | $ | 21,885 |   |
| Equity swap  agreements                                                                                            |         | $                                                                                                   | 13,728       |   |   |   | $ | 13,728 |   |   |   |
| Derivatives payable                                                                                                |         | (13,733                                                                                             | )            |   |   |   |   | (13,733 | ) |

 

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| ** **                | ** ** | **Assets  Measured at Fair Value on a Non-Recurring Basis for the Three Months Ended  September 30, 2009** | ** ** | ** **                                                              | ** ** |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                | ** ** | **Fair Value  Measurements  September 30, 2009**                                                           | ** ** | **Quoted  Prices in Active  Markets for Identical  Assets   (Level 1)** | ** ** | **Significant  Other  Observable Inputs   (Level 2)** | ** ** | **Significant  Unobservable  Inputs   (Level 3)** | ** ** | **Total Gains  (Losses)** | ** ** |
| ** **                | ** ** | **(In Thousands)**                                                                                              | ** ** | ** **                                                              | ** ** |
|                      |       |                                                                                                            |       |                                                                    |       |   |   |   |   |   |   |
| Mortgage Servicing Assets |       | $                                                                                                               | 9,060      |                                                                    | $          | — |   | $ | — |   | $ | 9,060 |   | $ | (20 | ) |
| Impaired Loans            |       | 119,413                                                                                                         |       | —                                                                  |       | — |   | 119,413 |   | (54,541 | ) |
| OREO                      |       | 16,092                                                                                                          |       | —                                                                  |       | 16,092 |   | — |   | (4,644 | ) |
|                           |            |                                                                                                                 |            |                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                | ** ** | **Assets  Measured at Fair Value on a Non-Recurring Basis for the Nine Months Ended  September 30, 2009** | ** ** | ** **                                                             | ** ** |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                | ** ** | **Fair Value  Measurements  September 30, 2009**                                                          | ** ** | **Quoted  Prices in Active  Markets for Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs   (Level 3)** | ** ** | **Total Gains  (Losses)** | ** ** |
| ** **                | ** ** | **(In Thousands)**                                                                                             | ** ** | ** **                                                             | ** ** |
|                      |       |                                                                                                           |       |                                                                   |       |   |   |   |   |   |   |
| Mortgage Servicing Assets |       | $                                                                                                              | 9,060      |                                                                   | $          | — |   | $ | — |   | $ | 9,060 |   | $ | 660 |   |
| Impaired Loans            |       | 140,756                                                                                                        |       | —                                                                 |       | — |   | 140,756 |   | (81,547 | ) |
| OREO                      |       | 16,920                                                                                                         |       | —                                                                 |       | 16,920 |   | — |   | (6,792 | ) |
|                           |            |                                                                                                                |            |                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |

 

At each reporting period, all assets and liabilitiesfor which the fair value measurement is based on significant unobservableinputs are classified as Level 3.  Thefollowing table provides a reconciliation of the beginning and ending balancesfor available-for-sale investment securities by major security type and formajor asset and liability categories measured at fair value using significantunobservable inputs (Level 3) for the three and nine months endedSeptember 30, 2009:

 
| ** **                                                                                                                   | ** ** | **Investment Securities Available-for-Sale** | ** ** | ** **                       | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                   | ** ** | ** **                                   | ** ** | **Residential  Mortgage-Backed** | ** ** | **Corporate Debt Securities** | ** ** | ** ** | ** ** |
| ** **                                                                                                                   | ** ** | ** **                                   | ** ** | **Securities**                   | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                                                                                                                   | ** ** | **Total**                                    | ** ** | **Non-Investment  Grade**        | ** ** | **Investment  Grade** | ** ** | **Investment  Grade** | ** ** | **Derivatives  Payable** | ** ** |
|                                                                                                                         |       |                                         |       |                             |       | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Beginning  balance, July 1, 2009                                                                                        |       | $                                            | 32,460     |                             | $          | 16,628 |   | $ | 1,245 |   | $ | 14,587 |   | $ | (13,323 | ) |
| Total gains or  (losses) (1)                                                                                                 |       |                                         |       |                             |       |   |   |   |   |   |   |
| Included in  earnings                                                                                                        |       | (24,164                                      | )          | 1                                |       | 5 |   | (24,170 | ) | (410 | ) |
| Included in  other comprehensive loss (unrealized) (2)                                                                       |       | 12,604                                       |       | (1,095                           | )          | (374 | ) | 14,073 |   |   |   |
| Purchases,  issuances, sales, settlements (3)                                                                                |       | 985                                          |       | —                           |       | (16 | ) | 1,001 |   |   |   |
| Transfers in  and/or out of Level 3 (4)                                                                                      |       | —                                       |       | —                           |       | — |   | — |   |   |   |
| Ending balance,  September 30, 2009                                                                                     |       | $                                            | 21,885     |                             | $          | 15,534 |   | $ | 860 |   | $ | 5,491 |   | $ | (13,733 | ) |
| Changes in  unrealized losses included in earnings relating to assets and liabilities  still held at September 30, 2009 |       | $                                            | (23,839    | )                                | $          | — |   | $ | — |   | $ | (24,249 | ) | $ | 410 |   |

 

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| ** **                                                                                                                  | ** ** | **Investment Securities  Available-for-Sale** | ** ** | ** **                                       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | ** **                                    | ** ** | **Residential  Mortgage-Backed Securities** | ** ** | **Corporate Debt Securities** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                  | ** ** | ** **                                    | ** ** | ** **                                       | ** ** | **Non-** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                  | ** ** | ** **                                    | ** ** | **Investment**                                   | ** ** | **Investment** | ** ** | **Investment** | ** ** | **Investment** | ** ** | **Residual** | ** ** | **Derivatives** | ** ** |
| ** **                                                                                                                  | ** ** | **Total**                                     | ** ** | **Grade**                                        | ** ** | **Grade** | ** ** | **Grade** | ** ** | **Grade** | ** ** | **Securities** | ** ** | **Payable** | ** ** |
|                                                                                                                        |       |                                          |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Beginning balance, January 1, 2009                                                                                     |       | $624,351                                      |       | $527,109                                         |       | $10,216 |   | $1,294 |   | $35,670 |   | $50,062 |   | $(14,142 | ) |
| Total gains or (losses) (1)                                                                                                 |       |                                          |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Included in earnings                                                                                                        |       | (55,119                                       | )          | 2,629                                            |       | 193 |   | 12 |   | (61,810 | ) | 3,857 |   | 409 |   |
| Included in other comprehensive loss (unrealized) (2)                                                                       |       | 105,387                                       |       | 101,456                                          |       | 1,363 |   | (408 | ) | 27,996 |   | (25,020 | ) |   |   |
| Purchases, issuances, sales, settlements (3)                                                                                |       | (652,734                                      | )          | (613,582                                         | )          | (13,850 | ) | (38 | ) | 3,635 |   | (28,899 | ) |   |   |
| Transfers in and/or out of Level 3 (4)                                                                                      |       | —                                        |       | (17,612                                          | )          | 17,612 |   | — |   | — |   | — |   |   |   |
| Ending balance, September 30, 2009                                                                                     |       | $21,885                                       |       | $—                                          |       | $15,534 |   | $860 |   | $5,491 |   | $— |   | $(13,733 | ) |
| Changes in unrealized losses included in earnings  relating to assets and liabilities still held at September 30, 2009 |       | $(62,305                                      | )          | $—                                          |       | $— |   | $— |   | $(61,896 | ) | $— |   | $(409 | ) |

 

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1)              Total gains or losses represent the totalrealized and unrealized gains and losses recorded for Level 3 assets andliabilities.  Realized gains or lossesare reported in the consolidated statements of operations.

 

2)              Unrealized gains or losses as well as thenoncredit portion of OTTI on investment securities are reported in accumulatedother comprehensive loss, net of tax, in the consolidated statements of changesin stockholders’ equity.

 

3)              Purchases, issuances, sales andsettlements represent Level 3 assets and liabilities that were either purchased,issued, sold, or settled during the period. The amounts are recorded at their end of period fair values.  In May 2009, the Company desecuritized itsportfolio of private-label mortgage backed securities resulting in a $635.6million decrease in Level 3 investment grade mortgage-backed securities for thenine months ended September 30, 2009.

 

4)              Transfers in and/or out representexisting assets and liabilities that were either previously categorized as ahigher level and the inputs to the model became unobservable or assets andliabilities that were previously classified as Level 3 and the lowestsignificant input became observable during the period.  These assets and liabilities are recorded attheir end of period fair values.

 

**Valuation Methodologies**

 

**Investment SecuritiesAvailable-for-Sale** — The fair values of available-for-sale investmentsecurities are generally determined by reference to the average of at least twoquoted market prices obtained from independent external brokers or pricesobtained from independent external pricing service providers who haveexperience in valuing these securities. In obtaining such valuation information from third parties, the Companyhas reviewed the methodologies used to develop the resulting fair values.

 

The Company’s Level 3 available-for-sale securitiesinclude one private-label mortgage-backed security and certain pooled trustpreferred securities.  The fair values ofthe private-label mortgage-backed security and pooled trust preferredsecurities have traditionally been based on the average of at least two quotedmarket prices obtained from independent external brokers since broker quotes inan active market are given the highest priority.  However, as a result of the global financialcrisis and illiquidity in the U.S. markets, the market for these securities hasbecome increasingly inactive since mid-2007. It is the Company’s view that current broker prices on the private-labelmortgage-backed security and certain pooled trust preferred securities arebased on forced liquidation or distressed sale values in very inactive marketsthat are not representative of the economic value of these securities.  As such, the fair value of the private-labelmortgage-backed security and pooled trust preferred securities have been belowcost since the advent of the financial crisis. Additionally, most, if not all, of these broker quotes arenonbinding.  The Company consideredwhether to place little, if any, weight on transactions that are not orderlywhen estimating fair value.  Althoughlength of time and severity of impairment are among 

 

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thefactors to consider when determining whether a security that isother-than-temporarily impaired, the private-label mortgage backed security andpooled trust preferred securities have only exhibited deep declines in valuesince the credit crisis began.  The Companytherefore believes that this is an indicator that the decline in price issolely a result of the lack of liquidity in the market for these securities andthe broker quotes received stem from distressed sale transactions.

 

For the private-label mortgage-backed security, theCompany determined fair value by using the appropriate combination of themarket approach reflecting current broker prices and a discounted cash flowapproach.  The values resulting from eachapproach (i.e. market and income approaches) were weighted to derive the final fairvalue on the private-label mortgage-backed security.  For the pooled trust preferred securities,the fair value was derived based on discounted cash flow analyses.  In order to determine the appropriatediscount rate used in calculating fair values derived from the income methodfor the private-label mortgage-backed security and pooled trust preferredsecurities, the Company has made assumptions using an exit pricing approachrelated to the implied rate of return which have been adjusted for general changesin market rates, estimated changes in credit quality and liquidity riskpremium, specific non-performance and default experience in the collateralunderlying the securities.  The gains andlosses recorded in the period are recognized in noninterest income.   During the second quarter of 2009, theprivate-label mortgage-backed security was downgraded from investment grade tonon-investment grade.

 

In May 2009, the desecuritization of theCompany’s Level 3 private-label mortgage backed securities resulted in a $635.6million increase in single and multifamily loans receivable and is reflected inthe decrease of Level 3 investment grade mortgage-backed investment securitiesfor the nine months ended September 30, 2009 Level 3 reconciliation tabledescribed above.

 

**Equity Swap Agreements**– The Company has enteredinto several equity swap agreements with a major investment brokerage firm tohedge against market fluctuations in a promotional equity index certificate ofdeposit product offered to bank customers. This deposit product, which has a term of 5 years or 51⁄2 years, paysinterest based on the performance of the Hang Seng China Enterprises Index(“HSCEI”).  The fair value of theseequity swap agreements is based on the income approach.  The fair value is based on the change in thevalue of the HSCEI and the volatility of the call option over the life of theindividual swap agreement.  The optionvalue is derived based on the volatility, the interest rate and the timeremaining to maturity of the call option. The Company’s consideration of its counterparty’s credit risk resultedin a $26 thousand adjustment to the valuation of the equity swap agreements forthe quarter ended September 30, 2009. The valuation of equity swap agreements falls within Level 2 of the fairvalue hierarchy due to the observable nature of the inputs used in deriving thefair value of these derivative contracts.

 

**Derivatives Payable** — The Company’s derivativespayable are recorded in conjunction with the certificate of deposits (“hostinstrument”) that pays interest based on changes in the HSCEI and are includedin interest-bearing deposits on the consolidated balance sheets.  The fair value of these embedded derivativesis based on the income approach.  ****The Company’sconsideration of its own credit risk resulted in a $21 thousand adjustment tothe valuation of the derivative liabilities, and a net gain of $10thousand was recognized in noninterest income as the net difference between thevaluation of the equity swap agreements and derivatives payable for the quarterended****September 30****, 2009.******** The valuation of thederivatives payable falls within Level 3 of the fair value hierarchy since thesignificant inputs used in deriving the fair value of these derivativecontracts are not directly observable.

 

**Mortgage Servicing Assets (“MSAs”)** — The Company records MSAsin conjunction with its loan sale and securitization activities since theservicing of the underlying loans is retained by the Bank.  MSAs are initially measured at fair value usingan income approach.  The initial fairvalue of MSAs is determined based on the present value of estimated net futurecash flows related to contractually 

 

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specifiedservicing fees.  The valuation for MSAsfalls within Level 3 of the fair value hierarchy since there are no quotedprices for MSAs and the significant inputs used to determine fair value are notdirectly observable.  The valuation ofMSAs is determined using a discounted cash flow approach utilizing theappropriate yield curve and several market-derived assumptions includingprepayment speeds, servicing cost, delinquency and foreclosure costs and behavior,and float earnings rate.  Net cash flowsare present valued using a market-derived discount rate.  The resulting fair value is then compared torecently observed bulk market transactions with similar characteristics.  The fair value is adjusted accordingly to bebetter aligned with current observed market trends and activity.

 

**Impaired Loans —**The Company’s impaired loans are generallymeasured using the fair value of the underlying collateral, which is determinedbased on the most recent valuation information received, which may be adjustedbased on factors such as the Company’s historical knowledge and changes inmarket conditions from the time of valuation. Impaired loans fall within Level 3 of the fair value hierarchy sincethey are measured at fair value based on the most recent valuation informationreceived on the underlying collateral.

 

**Other Real Estate Owned (“OREO”) —**The Company’s OREOrepresents properties acquired through foreclosure or through full or partialsatisfaction of loans, are considered held-for-sale, and are recorded at thelower of cost or estimated fair value at the time of foreclosure.  The fair values of OREO properties are basedon third-party appraisals, broker price opinions or accepted writtenoffers.  These valuations are reviewed andapproved by the Company’s appraisal department, credit review, or OREO department.  OREO properties are classified as Level 2assets in the fair value hierarchy.  TheOREO balance of $24.2 million included in the condensed consolidated balancesheets as of September 30, 2009 is recorded net of estimated disposalcosts.

 

**Fair Valueof Financial Instruments**

 

The Company adopted ASC 820-10-50 effectiveJune 30, 2009, which increases the frequency of fair value disclosuresfrom an annual basis only to a quarterly basis. The carrying amounts and fair values of the Company’s financial instrumentsas of September 30, 2009 and December 31, 2008 were as follows:

 

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| ** **                                    |   | **As  of September 30, 2009** |    | **As  of December 31, 2008** |   |
|-----------------------------------------------|--------|------------------------------------|---------|-----------------------------------|--------|
| ** **                                    |   | **Carrying**                       |    |                              |   | **Carrying** |   |   |   |
| ** **                                    |   | **Notional  or**                   |    | **Estimated**                     |   | **Notional  or** |   | **Estimated** |   |
| ** **                                    |   | **Contract  Amount**               |    | **Fair  Value**                   |   | **Contract  Amount** |   | **Fair  Value** |   |
| ** **                                    |   | **(In thousands)**                 |    |
| **Financial  Assets:**                        |   |                               |    |                              |   |   |   |   |   |
| Cash and due  from banks                      |   | $                                  | 132,569 |                              | $      | 132,569 |   | $ | 144,486 |   | $ | 144,486 |   |
| Short-term  investments                       |   | 460,665                            |    | 460,665                           |   | 734,367 |   | 734,367 |   |
| Interest-bearing  deposits in other banks     |   | 320,860                            |    | 320,865                           |   | 228,441 |   | 228,353 |   |
| Securities  purchased under resale agreements |   | 75,000                             |    | 86,292                            |   | 50,000 |   | 51,581 |   |
| Investment  securities held-to-maturity       |   | 781,331                            |    | 799,729                           |   | 122,317 |   | 123,105 |   |
| Investment  securities available-for-sale     |   | 1,457,023                          |    | 1,457,023                         |   | 2,040,194 |   | 2,040,194 |   |
| Loans  receivable, net                        |   | 8,156,838                          |    | 8,064,302                         |   | 8,069,377 |   | 8,036,406 |   |
| Investment in  Federal Home Loan Bank stock   |   | 86,729                             |    | 86,729                            |   | 86,729 |   | 86,729 |   |
| Investment in  Federal Reserve Bank stock     |   | 36,785                             |    | 36,785                            |   | 27,589 |   | 27,589 |   |
| Accrued interest  receivable                  |   | 51,025                             |    | 51,025                            |   | 46,230 |   | 46,230 |   |
| Equity swap  agreements                       |   | 38,828                             |    | 13,728                            |   | 43,453 |   | 13,853 |   |
|                                          |   |                               |    |                              |   |   |   |   |   |
| **Financial  Liabilities:**                   |   |                               |    |                              |   |   |   |   |   |
| Customer deposit  accounts:                   |   |                               |    |                              |   |   |   |   |   |
| Demand, savings  and money market deposits    |   | 4,428,646                          |    | 4,008,980                         |   | 3,399,817 |   | 3,141,126 |   |
| Time deposits                                 |   | 4,239,911                          |    | 4,248,498                         |   | 4,742,142 |   | 4,750,957 |   |
| Federal funds  purchased                      |   | 3,022                              |    | 3,022                             |   | 28,022 |   | 28,022 |   |
| Federal Home  Loan Bank advances              |   | 923,216                            |    | 943,118                           |   | 1,353,307 |   | 1,397,081 |   |
| Securities sold  under repurchase agreements  |   | 1,019,450                          |    | 1,264,807                         |   | 998,430 |   | 1,204,329 |   |
| Notes payable                                 |   | 7,111                              |    | 7,111                             |   | 16,506 |   | 16,506 |   |
| Accrued interest  payable                     |   | 10,283                             |    | 10,283                            |   | 18,977 |   | 18,977 |   |
| Long-term debt                                |   | 235,570                            |    | 89,972                            |   | 235,570 |   | 120,325 |   |
| Derivatives  payable                          |   | 38,828                             |    | 13,733                            |   | 43,453 |   | 14,142 |   |
|                                          |   |                               |    |                              |   |   |   |   |   |
| **Off-balance  sheet financial instruments:** |   |                               |    |                              |   |   |   |   |   |
| Commitments to  extend credit                 |   | 1,100,083                          |    | 10,615                            |   | 1,469,513 |   | 16,001 |   |
| Standby letters  of credit                    |   | 642,452                            |    | 3,699                             |   | 656,979 |   | 3,614 |   |
| Commercial  letters of credit                 |   | 32,290                             |    | (76                               | )      | 39,426 |   | (204 | ) |
|                                               |        |                                    |         |                                   |        |  |  |  |  |  |  |  |  |

 

Themethods and assumptions used to estimate the fair value of each class offinancial instruments for which it is practicable to estimate that value areexplained below:

 

***C******ash and Due From Banks*****— The carryingamounts approximate fair values due to the short-term nature of theseinstruments.

 

***Short-Term Investments***-The fairvalues of short-term investments generally approximate their book values due totheir short maturities.

 

***Interest-Bearing Deposits inOther Banks*****—**The fair values ofinterest-bearing deposits in other banks is based on the discounted cash flowapproach.  The discount rate is derivedfrom the Bank’s time deposit rate curve.

 

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***Securities Purchased Under Resale Agreements*****— For securities purchased under resale agreementswith original maturities of 90 days or less, the carrying amounts generallyapproximate fair values due to the short-term nature of these instruments.  At September 30, 2009 and December 31,2008, the securitiespurchased under resale agreements are long-term in nature and the fair value isestimated by discounting the cash flows based on expected maturities orrepricing dates utilizing estimated market discount rates and taking intoconsideration the call features of each instrument.

 

***Investment Securities Held-To-Maturity***—**The fair values of the investment securitiesheld-to-maturity are generally determined by reference to the average of atleast two quoted market prices obtained from independent external brokers orindependent external pricing service providers who have experience in valuingthese securities.  In obtaining suchvaluation information from third parties, the Company has reviewed themethodologies used to develop the resulting fair values.

 

***Investment Securities Available-For-Sale***—**The fair values of the investment securitiesavailable-for-sale are generally determined by reference to the average of atleast two quoted market prices obtained from independent external brokers orindependent external pricing service providers who have experience in valuingthese securities.  In obtaining suchvaluation information from third parties, the Company has reviewed themethodologies used to develop the resulting fair values.  For the private-label mortgage-backedsecurity, the fair value was derived based on a combination of broker pricesand discounted cash flow analyses that is weighted as deemed appropriate.  For the pooled trust preferred securities,the fair values were derived based on discounted cash flow analyses.

 

***Loans Receivable, net****-*The fair valueof loans is determined based on the discounted cash flow approach.  The discount rate is derived from theassociated yield curve plus spreads, and reflects the offering rates in themarket for loans with similar financial characteristics.  No adjustments have been made for changes incredit within the loan portfolio.  It ismanagement’s opinion that the allowance for loan losses pertaining toperforming and nonperforming loans results in a fair valuation of such loans.

 

***Federal Home Loan Bank and Federal Reserve******BankStock*****- The carrying amount of the Federal Home Loan Bankstock approximates fair value and its redemption price of $100 per share. The carrying value of the Federal Reserve Bank stock approximates fairvalue as the stock may be sold back at its carrying value.

 

***Accrued Interest Receivable****-*The carrying amount of accrued interest receivableapproximates fair value due to its short-term nature.

 

***Equity Swap Agreements***— The fair value of the derivative contracts isprovided by an independent third party and is determined based on the change invalue of the HSCEI and the volatility of the call option over the life of theindividual swap agreement.  The optionvalue is derived based on the volatility of the option, interest rate and timeremaining to the maturity.  The Companyhas also considered the counterparty’s credit risk in determining thevaluation.

 

***Deposits*****—**The fair value of deposits is determined based onthe discounted cash flow approach.  Thediscount rate is derived from the associated yield curve, plus spread, ifany.  For core deposits, the cashoutflows are projected by the decay rate based on the Bank’s core depositpremium study.  Cash flows for allnon-time deposits are discounted using the LIBOR yield curve.  For time deposits, the cash flows are basedon the contractual runoff and are discounted by the Bank’s current offeringrates, plus spread.

 

***Federal Funds Purchased*****— The carrying amounts approximate fair values due tothe short-term nature of these instruments.

 

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***Federal Home Loan Bank Advances*****— The fair value of FHLB advances is estimated basedon the discounted value of contractual cash flows, using rates currentlyoffered by the FHLB of San Francisco for fixed-rate credit advances withsimilar remaining maturities at each reporting date.

 

***Securities Sold Under Repurchase Agreements*****— For securities sold under repurchase agreements withoriginal maturities of 90 days or less, the carrying amounts approximate fairvalues due to the short-term nature of these instruments.  At September 30, 2009 and December 31,2008, most of thesecurities sold under repurchase agreements are long-term in nature and the fair valuesof securities sold under repurchase agreements are calculated by discountingfuture cash flows based on expected maturities or repricing dates, utilizingestimated market discount rates and taking into consideration the call featuresof each instrument.

 

***Notes Payable*****— Thecarrying amount of notes payable approximates fair value as these notes are payableon demand.

 

***Accrued Interest Payable****-*The carrying amount of accrued interest payableapproximates fair value due to its short-term nature.

 

***Long-Term Debt*** — The fair values of long-term debt are estimated bydiscounting the cash flows through maturity based on current market rates theBank would pay for new issuances.

 

***Derivatives Payable***— The Company’s derivatives payable arerecorded in conjunction with the certificate of deposits (“host instrument”)that pays interest based on changes in the HSCEI.  The Company’s derivatives payable are estimated usingthe income approach.  The Company hasalso considered its own credit risk in determining the valuation.

 

***Commitments to Extend Credit, Standby and Commercial Letters of Credit*****- The fair values of commitments are estimated usingthe fees currently charged to enter into similar agreements, taking intoaccount the remaining terms of the agreements and the counterparty’s creditstanding.

 

Thefair value estimates presented herein are based on pertinent informationavailable to management as of each reporting date.  Although the Company is not aware of anyfactors that would significantly affect the estimated fair value amounts, suchamounts have not been comprehensively revalued for purposes of these financialstatements since that date, and therefore, current estimates of fair value maydiffer significantly from the amounts presented herein.

 

**4.****             ****STOCK-BASEDCOMPENSATION**

 

The Company issues stock-based compensation tocertain employees, officers and directors under share-based compensationplans.  The adoption of ASC 505 and ASC718 (previously SFAS No. 123(R), *Share-Based Payment*)*,* on January 1, 2006 has resulted in incrementalstock-based compensation expense.  Sincethe Company has previously recognized compensation expense on restricted stockawards, the incremental stock-based compensation expense recognized pursuant toASC 505 and ASC 718 relates only to issued and unvested stock option grants.

 

During the three and nine months ended September 30,2009, total compensation cost recognized in the consolidated statements ofoperations related to stock options and restricted stock awards amounted to$1.5 million and $4.4 million, respectively, with related tax benefits of $614thousand and $1.8 million, respectively. During the three and nine months ended September 30, 2008, totalcompensation cost recognized in the consolidated statements of operationsrelated to stock options and 

 

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restrictedstock awards amounted to $1.5 million and $4.5 million, respectively, withrelated tax benefits of $630 thousand and $1.9 million, respectively.

 

*Stock Options*

 

The Company issues fixed stock options to certainemployees, officers, and directors. Stock options are issued at the current market price on the date ofgrant with a three-year or four-year vesting period and contractual terms of 7years.  Stock options issued prior to July 2002had contractual terms of 10 years.  TheCompany issues new shares upon the exercise of stock options.

 

A summary of activity for the Company’s stockoptions as of and for the nine months ended September 30, 2009 ispresented below:

 
| ** **                          | ** ** | ** ** | ** ** | ** **   | ** **  | **Weighted**    | ** ** | ** **             | ** ** |
|-------------------------------------|------------|------------|------------|--------------|-------------|-----------------|------------|------------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Weighted** | ** **  | **Average**     | ** ** | **Aggregate**          | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Average**  | ** **  | **Remaining**   | ** ** | **Intrinsic**          | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Exercise** | ** **  | **Contractual** | ** ** | **Value**              | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Price**    | ** **  | **Term**        | ** ** | **(In thousands) (1)** | ** ** |
| Outstanding at  beginning of period |       | 2,588,968  |       | $            |  20.67 |            |       |                   |       |   |
| Granted                             |       | 43,942     |       | 6.83         |        |            |       |                   |       |
| Exercised                           |       | (6,198     | )          | 5.95         |        |            |       |                   |       |
| Forfeited                           |       | (620,001   | )          | 17.23        |        |            |       |                   |       |
| Outstanding at  end of period       |       | 2,006,711  |       | $            |  21.48 |            | 3.57 years |                   | $          |  196 |   |
| Vested or  expected to vest         |       | 1,941,416  |       | $            |  21.46 |            | 3.51 years |                   | $          |  183 |   |
| Exercisable at  end of period       |       | 1,079,689  |       | $            |  21.01 |            | 2.15 years |                   | $          |  69 |   |

 

----

(1) Includesin-the-money options only.

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholesoption-pricing model with the following assumptions:

 
| ** **                  | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|-----------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
| ** **                  | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Expected term (1)           |       | —                  | (5)        | —                 | (5)        | 4 years |   | 4 years |   |
| Expected volatility (2)     |       | —                  | (5)        | —                 | (5)        | 60.5 | % | 27.9 | % |
| Expected dividend yield (3) |       | —                  | (5)        | —                 | (5)        | 0.6 | % | 1.2 | % |
| Risk-free interest rate (4) |       | —                  | (5)        | —                 | (5)        | 1.8 | % | 2.6 | % |

 

----

(1) The expected term (estimated period of timeoutstanding) of stock options granted was estimated using the historicalexercise behavior of employees.

(2) Theexpected volatility was based on historical volatility for a period equal tothe stock option’s expected term.

(3) Theexpected dividend yield is based on the Company’s prevailing dividend rate atthe time of grant.

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

(5) TheCompany did not issue any stock options during the third quarter of 2009 and2008.

 

During the three and ninemonths ended September 30, 2009 and 2008, information related to stock options ispresented as follows:

 

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| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                              | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                              | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                    |       |                   |       |                   |       |   |   |   |   |
| Weighted average  fair value of stock options granted during the period |       | $                      | —     | (1)                    | $          | — | (1) | $ | 3.00 |   | $ | 4.27 |   |
| Total intrinsic  value of options exercised (in thousands)              |       | 8                      |       | 43                     |       | 13 |   | 380 |   |
| Total fair value  of options vested (in thousands)                      |       | 74                     |       | 103                    |       | 1,512 |   | 1,325 |   |
|                                                                         |            |                        |            |                        |            |  |  |  |  |  |  |  |  |

 

----

(1) The Company didnot issue any stock options during the third quarter of 2009 and 2008.

 

As of September 30, 2009, total unrecognizedcompensation cost related to stock options amounted to $2.5 million.  The cost is expected to be recognized over aweighted average period of 2.8 years.

 

*Restricted Stock*

 

In addition to stockoptions, the Company also grants restricted stock awards to directors, certainofficers and employees.  The restrictedshares awarded become fully vested after three to five years of continued employmentfrom the date of grant.  The Companybecomes entitled to an income tax deduction in an amount equal to the taxableincome reported by the holders of the restricted shares when the restrictionsare released and the shares are issued. Restricted shares are forfeited if officers and employees terminateprior to the lapsing of restrictions. The Company records forfeitures of restricted stock as treasury sharerepurchases.

 

A summary of the activity for restricted stock as ofSeptember 30, 2009, including changes during the nine months then ended,is presented below:

 
| ** **                         | ** ** | ** ** | ** ** | **Weighted** | ** **  |
|------------------------------------|------------|------------|------------|--------------|-------------|
| ** **                         | ** ** | ** ** | ** ** | **Average**  | ** **  |
| ** **                         | ** ** | **Shares** | ** ** | **Price**    | ** **  |
| Outstanding at beginning of period |       | 753,165    |       | $            |  29.35 |   |
| Granted                            |       | 328,407    |       | 7.42         |        |
| Vested                             |       | (32,609    | )          | 37.87        |        |
| Forfeited                          |       | (105,669   | )          | 30.45        |        |
| Outstanding at end of period       |       | 943,294    |       | $            |  21.30 |   |

 

The weighted average fairvalues of restricted stock awards granted during the nine months ended September 30,2009 and 2008 were $7.42 and $19.66, respectively.

 

As of September 30,2009, total unrecognized compensation cost related to restricted stock awardsamounted to $9.3 million.  This cost isexpected to be recognized over a weighted average period of 2.6 years.

 

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**5.****             ****INVESTMENT****SECURITIES**

 

An analysis of theheld-to-maturity and available-for-sale investment securities portfolio ispresented as follows:

 
| ** **                                                                                  | ** ** | **As of September 30, 2009** | ** **      |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------|-----------------|
| ** **                                                                                  | ** ** | ** **                        | ** **      | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                                                                  | ** ** | **Amortized**                     | ** **      | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                                                                                  | ** ** | **Cost**                          | ** **      | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
|                                                                                        |       | **(In thousands)**                |            |
| **Held-to-maturity**                                                                        |       |                              |            |   |   |   |   |   |   |
| U.S. Government agency and U.S. Government sponsored  enterprise debt securities            |       | $                                 |  252,638   |   | $ |  530 |   | $ |  (1,145 | ) | $ |  252,023 |   |
| Municipal securities                                                                        |       | 36,118                            |            | 1,720 |   | — |   | 37,838 |   |
| Other  residential mortgage-backed securities                                               |       |                              |            |   |   |   |   |   |   |
| Investment grade                                                                            |       | 75,033                            |            | 1,909 |   | (115 | ) | 76,827 |   |
| Non-investment  grade                                                                       |       | 30,461                            |            | — |   | (1,770 | ) | 28,691 |   |
| Corporate debt  securities                                                                  |       |                              |            |   |   |   |   |   |   |
| Investment grade                                                                            |       | 377,947                           |            | 17,417 |   | (89 | ) | 395,275 |   |
| Non-investment  grade                                                                       |       | 4,625                             |            | — |   | (59 | ) | 4,566 |   |
| Other securities                                                                            |       | 4,509                             |            | — |   | — |   | 4,509 |   |
| **Total  investment securities held-to-maturity**                                           |       | $                                 |  781,331   |   | $ |  21,576 |   | $ |  (3,178 | ) | $ |  799,729 |   |
|                                                                                        |       |                              |            |   |   |   |   |   |   |
| **Available-for-sale**                                                                      |       |                              |            |   |   |   |   |   |   |
| U.S. Treasury  securities                                                                   |       | $                                 |  2,214     |   | $ |  1 |   | $ |  — |   | $ |  2,215 |   |
| U.S. Government agency and U.S. Government sponsored  enterprise debt securities            |       | 474,896                           |            | 2,311 |   | (472 | ) | 476,735 |   |
| U.S. Government agency and U.S. Government sponsored  enterprise mortgage-backed securities |       |                              |            |   |   |   |   |   |   |
| Commercial  mortgage-backed securities                                                      |       | 26,107                            |            | 873 |   | — |   | 26,980 |   |
| Residential  mortgage-backed securities                                                     |       | 752,671                           |            | 19,705 |   | (2 | ) | 772,374 |   |
| Municipal  securities                                                                       |       | 17,759                            |            | 193 |   | (26 | ) | 17,926 |   |
| Other  residential mortgage-backed securities                                               |       |                              |            |   |   |   |   |   |   |
| Investment grade                                                                            |       | 27,099                            |            | — |   | (107 | ) | 26,992 |   |
| Non-investment  grade                                                                       |       | 21,329                            |            | — |   | (5,795 | ) | 15,534 |   |
| Corporate debt  securities                                                                  |       |                              |            |   |   |   |   |   |   |
| Investment grade                                                                            |       | 102,052                           |            | 2,534 |   | (1,308 | ) | 103,278 |   |
| Non-investment  grade (1)                                                                   |       | 69,824                            |            | — |   | (58,123 | ) | 11,701 |   |
| U.S. Government  sponsored enterprise equity securities                                     |       | 3,041                             |            | 468 |   | (221 | ) | 3,288 |   |
| **Total  investment securities available-for-sale**                                         |       | $                                 |  1,496,992 |   | $ |  26,085 |   | $ |  (66,054 | ) | $ |  1,457,023 |   |
|                                                                                        |       |                              |            |   |   |   |   |   |   |
| **Total  investment securities**                                                            |       | $                                 |  2,278,323 |   | $ |  47,661 |   | $ |  (69,232 | ) | $ |  2,256,752 |   |

 
| ** **                                                                                             | ** ** | **As of December 31, 2008** | ** **      |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|-----------------|
| ** **                                                                                             | ** ** | ** **                       | ** **      | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                                                                             | ** ** | **Amortized**                    | ** **      | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                                                                                             | ** ** | **Cost**                         | ** **      | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| ** **                                                                                             | ** ** | **(In thousands)**               | ** **      |
| **Held-to-maturity**                                                                                   |       |                             |            |   |   |   |   |   |   |
| Municipal  securities                                                                                  |       | $                                |  5,772     |   | $ |  118 |   | $ |  — |   | $ |  5,890 |   |
| Corporate debt  securities                                                                             |       | 116,545                          |            | 904 |   | (234 | ) | 117,215 |   |
| **Total  investment securities held-to-maturity**                                                      |       | $                                |  122,317   |   | $ |  1,022 |   | $ |  (234 | ) | $ |  123,105 |   |
|                                                                                                   |       |                             |            |   |   |   |   |   |   |
| **Available-for-sale**                                                                                 |       |                             |            |   |   |   |   |   |   |
| U.S. Treasury  securities                                                                              |       | $                                |  2,505     |   | $ |  8 |   | $ |  — |   | $ |  2,513 |   |
| U.S. Government agency securities and U.S.  Government sponsored enterprise debt securities            |       | 1,020,355                        |            | 4,762 |   | (1,183 | ) | 1,023,934 |   |
| U.S. Government agency securities and U.S.  Government sponsored enterprise mortgage-backed securities |       | 373,690                          |            | 6,758 |   | (397 | ) | 380,051 |   |
| Other  mortgage-backed securities                                                                      |       | 645,940                          |            | — |   | (108,614 | ) | 537,326 |   |
| Corporate debt  securities (1)                                                                         |       | 116,127                          |            | 266 |   | (73,849 | ) | 42,544 |   |
| U.S. Government  sponsored enterprise equity securities (1)                                            |       | 3,340                            |            | — |   | (2,156 | ) | 1,184 |   |
| Residual  securities                                                                                   |       | 25,043                           |            | 25,019 |   | — |   | 50,062 |   |
| Other securities  (1)                                                                                  |       | 2,570                            |            | 10 |   | — |   | 2,580 |   |
| **Total  investment securities available-for-sale**                                                    |       | $                                |  2,189,570 |   | $ |  36,823 |   | $ |  (186,199 | ) | $ |  2,040,194 |   |
|                                                                                                   |       |                             |            |   |   |   |   |   |   |
| **Total  investment securities**                                                                       |       | $                                |  2,311,887 |   | $ |  37,845 |   | $ |  (186,433 | ) | $ |  2,163,299 |   |

 

----

(1) As of December 31,2008, the Company recorded an OTTI charge of $13.6 million for corporate debtsecurities, $55.3 million for U.S. Government sponsored enterprise equitysecurities, and $4.3 million for other securities.  Upon adoption of ASC 320, the Companyreclassified the noncredit portion of previously recognized OTTI for pooledtrust preferred securities totaling $8.1 million, on a net of tax basis, fromthe opening balance of retained earnings to other comprehensive income as of March 31,2009.  Additionally, the Company recorded$61.9 million, on a pre-tax basis, of the credit portion of OTTI throughearnings and $12.2 million, net of tax, of the non-credit portion of OTTI forpooled trust preferred securities in other comprehensive income for the ninemonths ended September 30, 2009.

 

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The fair values of investment securities aregenerally determined by reference to the average of at least two quoted marketprices obtained from independent external brokers or prices obtained fromindependent external pricing service providers who have experience in valuingthese securities.  The Company performs amonthly analysis on the broker quotes received from third parties to ensurethat the prices represent a reasonable estimate of fair value.  The procedures include, but are not limitedto, initial and ongoing review of third party pricing methodologies, review ofpricing trends, and monitoring of trading volumes.  The Company assesses that prices receivedfrom independent brokers represent a reasonable estimate of fair value throughthe use of internal and external cash flow models developed that are based onspreads, and when available, market indices. As a result of this analysis, if the Company determines there is a moreappropriate fair value based upon available market data, the price receivedfrom third parties is adjusted accordingly.

 

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

 

As a result of the global financial crisis andilliquidity in the U.S. markets, the Company believes current broker pricesobtained on the private-label mortgage-backed security and certain pooled trustpreferred securities are based on forced liquidation or distressed sale valuesin very inactive markets that are not representative of the economic value ofthese securities.  The fair values of theprivate-label mortgage-backed security and pooled trust preferred securitieshave traditionally been based on the average of at least two quoted marketprices obtained from independent external brokers since broker quotes in anactive market are given the highest priority. However, in light of these circumstances, the Company has modified itsapproach in determining the fair values of these securities.  For the pooled trust preferred securities,the Company believes that the cash flow analyses which demonstrate that therealizable value of these securities are equal to their carrying values shouldbe the primary factor considered when making a judgment aboutother-than-temporary impairment.  For theprivate-label mortgage-backed security, the Company determined fair value byusing the appropriate combination of the market approach reflecting currentbroker prices and a discounted cash flow approach.  The values resulting from each approach (i.e.market and income approaches) were weighted to derive the final fair value onthe private-label mortgage-backed security. In calculating the fair value derived from the income approach, theCompany made assumptions related to the implied rate of return, general changein market rates, estimated changes in credit quality and liquidity riskpremium, specific non-performance and default experience in the collateralunderlying the security, as well as broker discount rates.

 

The following tables show theCompany’s rollforward of the amount related to credit losses for the three andnine months ended September 30, 2009:

 
| ** **                                                                                                 | ** ** | **Three Months Ended  September 30, 2009** | ** **    |
|------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|---------------|
| ** **                                                                                                 | ** ** | **(In  thousands)**                             | ** **    |
| Beginning  balance, July 1, 2009                                                                      |       | $                                               |  (37,647 | ) |
| Additions of  OTTI that was not previously recognized                                                      |       | (3,855                                          | )             |
| Additional increases to the amount related to the  credit loss for which an OTTI was previously recognized |       | (20,394                                         | )             |
| Ending balance,  September 30, 2009                                                                   |       | $                                               |  (61,896 | ) |

 

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| ** **                                                                                                 | ** ** | **Nine  Months Ended  September 30, 2009** | ** **    |
|------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|---------------|
| ** **                                                                                                 | ** ** | **(In thousands)**                              | ** **    |
| Beginning balance, January 1, 2009                                                                    |       | $                                               |  —  |   |
| Additions of OTTI that was not previously recognized                                                       |       | (29,084                                         | )             |
| Additional increases to the amount related to the  credit loss for which an OTTI was previously recognized |       | (32,812                                         | )             |
| Ending balance, September 30, 2009                                                                    |       | $                                               |  (61,896 | ) |

 

The following table showsthe Company’s investment portfolio’s gross unrealized losses and related fairvalues, aggregated by investment category and length of time that individualsecurities have been in a continuous unrealized loss position, as ofSeptember 30, 2009 and December 31, 2008:

 

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| ** **                                                                                             | ** ** | **As of September 30, 2009** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **Less Than 12 Months**           | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                                                                             | ** ** | **Fair**                                         | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                                                                                             | ** ** | **Value**                                        | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| ** **                                                                                             | ** ** | **(in thousands)**                               | ** ** |
|                                                                                                   |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| **Held-to-maturity**                                                                                   |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government agency and  U.S. Governmentsponsored enterprise debt securities                        |       | $                                                | 126,494    |   | $ | (1,145 | ) | $ | — |   | $ | — |   | $ | 126,494 |   | $ | (1,145 | ) |
| Other residential mortgage-backed securities                                                           |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Investment grade                                                                                       |       | 17,106                                           |       | (115 | ) | — |   | — |   | 17,106 |   | (115 | ) |
| Non-investment grade                                                                                   |       | 28,691                                           |       | (1,770 | ) | — |   | — |   | 28,691 |   | (1,770 | ) |
| Corporate debt securities                                                                              |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Investment grade                                                                                       |       | 4,039                                            |       | (89 | ) | — |   | — |   | 4,039 |   | (89 | ) |
| Non-investment grade                                                                                   |       | 4,566                                            |       | (59 | ) | — |   | — |   | 4,566 |   | (59 | ) |
| Total temporarily impaired securities held-to-maturity                                                 |       | $                                                | 180,896    |   | $ | (3,178 | ) | $ | — |   | $ | — |   | $ | 180,896 |   | $ | (3,178 | ) |
|                                                                                                   |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| **Available-for-sale**                                                                                 |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasury securities                                                                               |       | $                                                | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| U.S. Government agency and  U.S. Government sponsored enterprise debt securities                       |       | 34,528                                           |       | (472 | ) | — |   | — |   | 34,528 |   | (472 | ) |
| U.S. Government agency and  U.S. Governmentsponsored enterprise residenial  mortgage-backed securities |       | 5,091                                            |       | (2 | ) | — |   | — |   | 5,091 |   | (2 | ) |
| Municipal securities                                                                                   |       | 2,430                                            |       | (26 | ) | — |   | — |   | 2,430 |   | (26 | ) |
| Other residential mortgage-backed securities                                                           |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Investment grade                                                                                       |       | 26,992                                           |       | (107 | ) | — |   | — |   | 26,992 |   | (107 | ) |
| Non-investment grade                                                                                   |       | —                                           |       | — |   | 15,534 |   | (5,795 | ) | 15,534 |   | (5,795 | ) |
| Corporate debt securities                                                                              |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Investment grade                                                                                       |       | 11,927                                           |       | (76 | ) | 860 |   | (1,232 | ) | 12,787 |   | (1,308 | ) |
| Non-investment grade (1)                                                                               |       | 419                                              |       | (10,230 | ) | 11,282 |   | (47,893 | ) | 11,701 |   | (58,123 | ) |
| U.S. Government sponsored enterprise equity securities                                                 |       | —                                           |       | — |   | 1,786 |   | (221 | ) | 1,786 |   | (221 | ) |
| Total temporarily impaired securities available-for-sale                                               |       | $                                                | 81,387     |   | $ | (10,913 | ) | $ | 29,462 |   | $ | (55,141 | ) | $ | 110,849 |   | $ | (66,054 | ) |
| Total temporarily impaired securities                                                                  |       | $                                                | 262,283    |   | $ | (14,091 | ) | $ | 29,462 |   | $ | (55,141 | ) | $ | 291,745 |   | $ | (69,232 | ) |
|                                                                                                   |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                                                             | ** ** | **As  of December 31, 2008**                | ** ** |
| ** **                                                                                             | ** ** | **Less  Than 12 Months**                         | ** ** | **12  Months or More** | ** ** | **Total** | ** ** |
| ** **                                                                                             | ** ** | **Fair**                                         | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                                                                                             | ** ** | **Value**                                        | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| ** **                                                                                             | ** ** | **(in thousands)**                               | ** ** |
| **Held-to-maturity**                                                                                   |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Corporate debt securities                                                                              |       | $                                                | 40,057     |   | $ | (234 | ) | $ | — |   | $ | — |   | $ | 40,057 |   | $ | (234 | ) |
| Total temporarily impaired securities held-to-maturity                                                 |       | $                                                | 40,057     |   | $ | (234 | ) | $ | — |   | $ | — |   | $ | 40,057 |   | $ | (234 | ) |
|                                                                                                   |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| **Available-for-sale**                                                                                 |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government agency  securities and U.S. Governmentsponsored enterprise  debt securities            |       | $                                                | 143,727    |   | $ | (1,183 | ) | $ | — |   | $ | — |   | $ | 143,727 |   | $ | (1,183 | ) |
| U.S. Government agency  securities and U.S. Governmentsponsored  enterprise mortgage-backed securities |       | 72,245                                           |       | (397 | ) | — |   | — |   | 72,245 |   | (397 | ) |
| Other mortgage-backed securities                                                                       |       | 17,984                                           |       | (3,339 | ) | 519,090 |   | (105,275 | ) | 537,074 |   | (108,614 | ) |
| Corporate debt securities                                                                              |       | 4,016                                            |       | (2,946 | ) | 34,611 |   | (70,903 | ) | 38,627 |   | (73,849 | ) |
| U.S. Government sponsored enterprise equity securities                                                 |       | 1,184                                            |       | (2,156 | ) | — |   | — |   | 1,184 |   | (2,156 | ) |
| Total temporarily impaired securities available-for-sale                                               |       | $                                                | 239,156    |   | $ | (10,021 | ) | $ | 553,701 |   | $ | (176,178 | ) | $ | 792,857 |   | $ | (186,199 | ) |
| Total temporarily impaired securities                                                                  |       | $                                                | 279,213    |   | $ | (10,255 | ) | $ | 553,701 |   | $ | (176,178 | ) | $ | 832,914 |   | $ | (186,433 | ) |

 

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(1) For the nine monthsended September 30, 2009, the Company recorded $21.0 million, on a pre-taxbasis, of the non-credit portion of OTTI for pooled trust preferred securitiesin other comprehensive income, which is included as gross unrealized losses.

 

*Corporate Debt Securities(Available-for-Sale)*

 

The majority of unrealized losses in theavailable-for-sale portfolio at September 30, 2009 are related to pooledtrust preferred debt securities.  As of September 30,2009, the Company had $6.4 million in pooled trust preferred debt securities available-for-sale,representing less than 1% of the total investment securities available-for-saleportfolio.  In April 2009, exceptfor one security which was downgraded but remained at investment grade status,the ratings for the other twelve pooled trust

 

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preferredsecurities were downgraded to non-investment grade status due to increaseddeferral and default activity from the issuers of the underlying debtcollateralizing these instruments.  As ofSeptember 30, 2009, these debt instruments had gross unrealized lossesamounting to $55.4 million, or 90% of the total amortized cost basis of thesesecurities, comprised of $34.4 million in gross unrealized losses and $21.0million, or $12.2 million on a net of tax basis, in noncredit-relatedimpairment losses recorded during the first nine months of 2009 pursuant to theprovisions of ASC 320-10-65.

 

Almost all of the pooled trust preferred securities held by the Companyhave underlying collateral issued by banks and insurance companies.  Continued deterioration in market conditionshave resulted in many more small banks either deferring or defaulting on theirtrust preferred debt during the third quarter of 2009.  As a result of diminishing collateral values,deteriorating cash flows, and increasing estimates of future deferrals anddefaults, the Company recorded an impairment loss of $45.2 million on itsportfolio of trust preferred securities during the third quarter of 2009, ofwhich $24.2 million was a pre-tax credit loss recorded through earnings.  **Theremaining $21.0 million, or $12.2 million on a net of tax basis, innoncredit-related impairment** loss was recorded in othercomprehensive income as of September 30, 2009.  The Company determined the amount ofcredit-related impairment by discounting the expected future cash flows withthe effective yield of the security in accordance with generally acceptedaccounting principles**. **During the first quarter of2009, the Company recorded an impairment loss of $13.4 million on anon-investment grade pooled trust preferred security.  During the second quarter of 2009, theCompany recorded an impairment loss of $100.8 million on its portfolio of trustpreferred securities, of which $37.4 million was a pre-tax credit loss recordedin other comprehensive income.  As of March 31,2009, of the total impairment loss amount, $200 thousand was a pretax creditloss recorded through earnings.  Theremaining $13.2 million, or $7.6 million on a net of tax basis, innoncredit-related impairment loss was recorded in other comprehensive income.

 

During 2008 and 2007, the Company recorded $13.6 million and $405thousand, respectively, in non-credit related impairment losses on three pooledtrust preferred securities due to rating downgrades caused by increases in market spreads, concernsregarding the housing market, and lack of liquidity in the market.  None of these securities have experienced anycredit-related losses for which OTTI was previously recorded.  Upon the implementation of ASC 320-10-65, the Companyreclassified the combined $14.0 million, or $8.1 million on a net of tax basis,in noncredit-related OTTI impairment losses recognized during 2008 and 2007from the opening balance of retained earnings to other comprehensive income asof March 31, 2009.

 

*Mortgage-backed Securities(Held-to-Maturity)*

 

As of September 30,2009, the aggregatefair value of the non-agency held-to-maturity mortgage-backed securitiesamounted to $105.5 million.  Thesesecurities are collateralized by single family loans and secured by first lienson these residential properties.  During thesecond and third quarter of 2009,  threemortgage-backed securities were downgraded from investment grade tonon-investment grade.  Except for thesethree non-investment grade securities, the remaining held-to-maturitymortgage-backed securities are investment grade.  As of September 30, 2009, these debtinstruments had gross unrealized losses for less than twelve months amountingto $1.9 million, or 2% of the aggregate amortized cost basis ofheld-to-maturity mortgage-backed securities, comprised of $1.8 million and $115thousand that are non-investment grade and investment grade, respectively.

 

The decline infair values of these securities is due to widening market spreads, concernsregarding the downturn in the housing market, and lack of liquidity in themarket.  However, these securities havestrong credit support, low loan-to-values, low delinquency, and low OREOratios.  The Company does not intendto sell these securities and it is not more likely than not that the Companywill be required to sell these securities before recovery of their amortizedcost bases.  As such, the Company doesnot deem these securities to be other-than-temporarily impaired as of September 30,2009.

 

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*Mortgage-backed Securities(Available-for-Sale)*

 

As of September 30,2009, the Company hadone private-label available-for-sale mortgage-backed security with a fair valueof $15.5 million, with a gross unrealized loss of $5.8 million, or 27% of theamortized cost basis of this security, for more than 12 months.  During the second quarter of 2009, thissecurity was downgraded from investment grade to non-investment grade.  This security is collateralized by singlefamily loans and secured by the first lien on these residentialproperties.  Additionally, any principaland interest shortfall that may arise from the deterioration of the collateralwill be covered by a monoline insurance provider.  The Company does not intend to sellthis security and it is not more likely than not that the Company will berequired to sell this security before recovery of its amortized costbasis.  As such, the Company does notdeem this security to be other-than-temporarily impaired as of September 30,2009.

 

In May 2009,the Company desecuritized its private-label mortgage backed securities whichresulted in a $635.6 million increase in single and multifamily loansreceivable with a corresponding decrease in available-for-sale investmentsecurities.  These single family and multifamilyloans were previously originated by the Company and were securitized in 2006and 2007 for additional liquidity purposes. All of the resulting securities were retained by the Company in itsavailable-for-sale investment portfolio. The Company’s decision to desecuritize these securities was prompted bythe mark-to-market adjustments recorded on these securities that were based onprice points observed in the general market for mortgage-backed securities thatwere not reflective of the better credit quality of the underlying loans.  These loans had very low overall delinquencyrates as of September 30, 2009.  Theaccumulated mark-to-market adjustments on these securities, recorded in othercomprehensive income, were negatively impacting the Company’s tangible commonequity.  The desecuritization added $30.6million to the Company’s tangible common equity.

 

*Government-SponsoredEquity Preferred Stock (Available-for Sale)*

 

In September 2008, liquidity and credit concerns led the U.S.Federal Government to assume a conservatorship role in Fannie Mae and FreddieMac.  The rating on Fannie Mae andFreddie Mac preferred stock securities was downgraded from investment grade tonon-investment grade status reflecting the cessation of dividend payments onthese securities.  These securities arenon-cumulative perpetual preferred stock in which unpaid dividends do notaccumulate.  The purchase agreementbetween the U.S. Treasury and these government-sponsored entities contains acovenant prohibiting the payment of dividends on existing preferred stock.  As the assessment on the status of anyresumption in dividend payments on these securities was uncertain, the Company recorded $55.3 million inOTTI charges on Fannie Mae and Freddie Mac preferred stock securities in2008.  As of September 30, 2009, thefair value of these preferred stock securities was $3.3 million.  Gross unrealized losses on these securitiesamounted to $221 thousand as of September 30, 2009, or 7% of the aggregateamortized cost basis of these securities. The outlook for these preferred securities remains stable.  The Company does not intend to sell thesesecurities and it is not more likely than not that the Company will be requiredto sell these securities before recovery of their amortized cost bases.  As such, the Company does not deem theseremaining securities to be other-than-temporarily impaired as of September 30,2009.

 

The Company has thirteen individual securities that have been in acontinuous unrealized loss position for twelve months or longer as of September 30,2009.  These securities are comprised often corporate debt securities with a total fair value of $12.1 million, twogovernment-sponsored equity preferred securities with a total fair value of$1.8 million and one mortgage-backed security with a fair value of $15.5million.  As of September 30, 2009,there were also 28 securities that have been in a continuous unrealized lossposition for less than twelve months. The unrealized losses on these securities are primarily attributed tochanges in interest rates as well as the liquidity crisis that has impacted all

 

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financialindustries.  The issuers of thesesecurities have not, to the Company’s knowledge, established any cause fordefault on these securities.  Thesesecurities have fluctuated in value since their purchase dates as marketinterest rates have fluctuated.  TheCompany does not intend to sell these securities and it is not more likely thannot that the Company will be required to sell the investments before recoveryof their amortized cost bases.  As such,the Company does not deem these securities to be other-than-temporarilyimpaired as of September 30, 2009.

 

The scheduled maturities of investment securities atSeptember 30, 2009 are presented as follows:

 
| ** **                              | ** ** | **Held-to-maturity** | ** **    | **Available-for-sale** | ** ** |
|-----------------------------------------|------------|----------------------|---------------|------------------------|------------|
| ** **                              | ** ** | **Amortized**        | ** **    | **Estimated**          | ** ** | **Amortized** | ** ** | **Estimated** | ** ** |
| **(In thousands)**                      | ** ** | **Cost**             | ** **    | **Fair Value**         | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Due within one  year                    |       | $                    |  220,132 |                   | $          |  222,276 |   | $ |  325,308 |   | $ |  316,192 |   |
| Due after one  year through five years  |       | 305,649              |          | 320,941                |       | 151,933 |   | 154,067 |   |
| Due after five  years through ten years |       | 52,040               |          | 53,800                 |       | 116,058 |   | 119,026 |   |
| Due after ten  years                    |       | 203,510              |          | 202,712                |       | 900,651 |   | 864,450 |   |
| Indeterminate  maturity                 |       | —               |          | —                 |       | 3,042 |   | 3,288 |   |
| Total                                   |       | $                    | 781,331       |                   | $          | 799,729 |   | $ | 1,496,992 |   | $ | 1,457,023 |   |

 

**6.****             ****GOODWILLAND OTHER INTANGIBLE ASSETS**

 

The carrying amount ofgoodwill remained at $337.4 million at September 30, 2009 and December 31, 2008.  Goodwill is tested for impairment on anannual basis, or more frequently as events occur, or as currentcircumstances and conditions warrant. The Company records impairment losses as charges to noninterest expenseand adjustments to the carrying value of goodwill.  Subsequent reversals of goodwill impairmentare prohibited.

 

During the third quarter of2009, both the U.S. and global financial markets continued to experiencevolatility and the effect of such volatility continued to unfavorably impactthe market prices of banking stocks, including the Company’s.  As of September 30, 2009, the Company’smarket capitalization based on total outstanding common and preferredshares was $1.08 billion and its total stockholders’ equity was $1.52billion.  As a result, the Companyperformed an impairment analysis as of September 30, 2009to determine whether and towhat extent, if any, recorded goodwill was impaired.  The analysis compared the fair value of eachof the reporting units, including goodwill, to the respective carryingamounts.  If the carrying amount of thereporting unit, including goodwill exceeds the fair value of that reportingunit, then further testing for goodwill impairment is performed.

 

During the first quarter of 2009, the Companyre-aligned its management reporting structure and identified three businessdivisions that meet the criteria of an operating segment in accordance withgenerally accepted accounting principles. The Company’s three operating segments are Retail Banking, CommercialBanking, and Other.  The Companydetermined that there were no additional reporting units below each operatingsegment and therefore the reporting units are equivalent to the operatingsegments.  See Note 10 to the Company’scondensed consolidated financial statements presented elsewhere in this reportfor a further discussion of the revised business segments.

 

In order to determine thefair value of the reporting units, a combined income and market approach wasused.  Under the income approach, theCompany provided a net income projection for the next 5 years plus a terminalgrowth rate was used to calculate the discounted cash flows and the presentvalue of the reporting units.  Under themarket approach, the fair value was calculated using the current fair values ofcomparable peer banks of similar size, geographic footprint and focus.  The market

 

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capitalizations andmultiples of these peer banks were used to calculate the market price of theCompany and each reporting unit.  Thefair value was also subject to a control premium adjustment, which is the costsavings that a purchaser of the reporting units could achieve by eliminatingduplicative costs.  Under the combinedincome and market approaches, the value from each approach was appropriatelyweighted to determine the fair value.  Asa result of this analysis, the Company determined that there was no goodwillimpairment at September 30, 2009 as the fair values of all reporting unitsexceeded the current carrying amounts of the goodwill.  No assurance can be given that goodwill willnot be written down in future periods. The Company recorded goodwill impairment of $858 thousand as a charge toearnings during thefirst nine months of 2008.

 

The Company also has premiums on acquireddeposits which represent the intangible value of depositor relationshipsresulting from deposit liabilities assumed from various acquisitions.  Other intangibles are tested for impairmenton an annual basis, or more frequently as events occur, or as currentcircumstances and conditions warrant. The gross carrying amount of deposit premiums totaled $43.0 million asof September 30, 2009 and December 31, 2008, with related accumulatedamortization expense amounting to $24.3 million and $21.0 million,respectively, as of September 30, 2009 and December 31, 2008.  During the first quarter of 2008, the Companyrecorded an $855 thousand impairment loss on deposit premiums initiallyrecorded for the Desert Community Bank acquisition due to higher thananticipated runoffs in certain deposit categories.  The Company amortizes premiums on acquireddeposits based on the projected useful lives of the related deposits.

 

The following table providesthe estimated amortization expense of premiums on acquired deposits for 2009and the succeeding four years as follows:

 
| **Estimate  For The Year Ending  December 31,** | ** ** | **Amount**         | ** **  |
|------------------------------------------------------|------------|--------------------|-------------|
| ** **                                           | ** ** | **(In thousands)** | ** **  |
| 2009                                                 |       | $                  |  1,058 |   |
| 2010                                                 |       | 3,858              |        |
| 2011                                                 |       | 3,378              |        |
| 2012                                                 |       | 2,602              |        |
| 2013                                                 |       | 1,707              |        |
|                                                      |            |                    |             |  |

 

**7.****             ****ALLOWANCEFOR LOAN LOSSES**

 

The following tablesummarizes activity in the allowance for loan losses for the periods indicated:

 

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| ** **                                                     | ** ** | **Three Months Ended** | ** **      | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------|------------|------------------------|-----------------|------------------------|------------|
| ** **                                                     | ** ** | **September 30,** | ** **      | **September 30,** | ** ** |
| ** **                                                     | ** ** | **2009**               | ** **      | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                     | ** ** | **(in thousands)**     | ** **      | **(in thousands)**     | ** ** |
|                                                           | ** ** | ** **             | ** **      | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allowance balance, beginning of period                         |       | $                      |  223,700   |                   | $          |  168,413 |   | $ |  178,027 |   | $ |  88,407 |   |
| Allowance for unfunded loan  commitments and letters of credit |       | (1,051                 | )               | 5,437                  |       | (617 | ) | 5,669 |   |
| Provision for loan losses                                      |       | 159,244                |            | 43,000                 |       | 388,666 |   | 183,000 |   |
| Impact of desecuritization                                     |       | —                 |            | —                 |       | 9,262 |   | — |   |
| Chargeoffs:                                                    |       |                   |            |                   |       |   |   |   |   |
| Single family real estate                                      |       | 8,371                  |            | 1,023                  |       | 26,487 |   | 1,732 |   |
| Multifamily real estate                                        |       | 7,235                  |            | 1,006                  |       | 11,333 |   | 1,442 |   |
| Commercial real estate                                         |       | 23,715                 |            | 666                    |       | 39,574 |   | 666 |   |
| Land                                                           |       | 40,397                 |            | 21,024                 |       | 86,519 |   | 42,442 |   |
| Construction                                                   |       | 56,354                 |            | 16,138                 |       | 134,880 |   | 40,429 |   |
| Commercial business                                            |       | 17,696                 |            | 4,401                  |       | 50,873 |   | 18,136 |   |
| Automobile                                                     |       | 6                      |            | 63                     |       | 41 |   | 226 |   |
| Other consumer                                                 |       | 109                    |            | 34                     |       | 1,727 |   | 74 |   |
| Total chargeoffs                                               |       | 153,883                |            | 44,355                 |       | 351,434 |   | 105,147 |   |
|                                                           |       |                   |            |                   |       |   |   |   |   |
| Recoveries:                                                    |       |                   |            |                   |       |   |   |   |   |
| Single family real estate                                      |       | 337                    |            | 1                      |       | 563 |   | 3 |   |
| Multifamily real estate                                        |       | 4                      |            | —                 |       | 222 |   | — |   |
| Commercial and industrial real estate                          |       | 610                    |            | 3                      |       | 1,207 |   | 1,905 |   |
| Land                                                           |       | 409                    |            | 1,896                  |       | 825 |   | — |   |
| Construction                                                   |       | 768                    |            | 2,581                  |       | 1,734 |   | 2,581 |   |
| Commercial business                                            |       | 484                    |            | 177                    |       | 2,132 |   | 714 |   |
| Automobile                                                     |       | 14                     |            | 2                      |       | 45 |   | 23 |   |
| Other consumer                                                 |       | 14                     |            | —                 |       | 18 |   | — |   |
| Total recoveries                                               |       | 2,640                  |            | 4,660                  |       | 6,746 |   | 5,226 |   |
| Net chargeoffs                                                 |       | 151,243                |            | 39,695                 |       | 344,688 |   | 99,921 |   |
| Allowance balance, end of period                               |       | $                      |  230,650   |                   | $          |  177,155 |   | $ |  230,650 |   | $ |  177,155 |   |
| Average loans outstanding                                      |       | $                      |  8,471,766 |                   | $          |  8,451,517 |   | $ |  8,305,602 |   | $ |  8,725,596 |   |
| Total gross loans outstanding, end of period                   |       | $                      |  8,419,475 |                   | $          |  8,289,433 |   | $ |  8,419,475 |   | $ |  8,289,433 |   |
| Annualized net chargeoffs to average loans                     |       | 7.14                   | %               | 1.88                   | %          | 5.53 | % | 1.53 | % |
| Allowance for loan losses to total gross loans, end of period  |       | 2.74                   | %               | 2.14                   | %          | 2.74 | % | 2.14 | % |

 

At September 30, 2009,the allowance for loan losses amounted to $230.7 million, or 2.74% of totalloans, compared with $178.0 million or 2.16% of total loans at December 31,2008, and $177.2 million, or 2.14% of total gross loans as of September 30,2008.  The increase in the allowance forloan losses is primarily due to the $388.7 million in provisions for loanlosses recorded during the nine months ended September 30, 2009 and $9.3million in allowance for losses recorded during the second quarter of 2009 inconjunction with the desecuritization of single family and multifamily loanscompleted in May 2009.  Thiscompares to $183.0 million in provisions for loan losses recorded during thenine months ended September 30, 2008. During the third quarter of 2009, the Company sold $180.6 million inproblem loans and $25.7 million in OREO properties.  Year to date through September 30, 2009,the Company has sold $313.3 million in problem loans and $105.5 million in OREOproperties.  These sales of problemassets have resulted in net chargeoffs of $60.1 million and $91.9 million forthe third quarter of 2009 and first nine months of 2009, respectively, andincreased loan loss provisions.  Duringthe first nine months of 2009, the Company recorded $344.7 million in netchargeoffs, compared to $99.9 million in net chargeoffs recorded during thefirst nine months of 2008.  Throughoutthe course of 2008 and the first nine months of 2009, the Company has activelyreduced its total exposure to land and construction loans by $2.03 billion, or63%.  As of September 30, 2009, landand construction loan balances were

 

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reduced to $415.2 millionand $654.1 million, respectively, from $576.6 million and $1.26 billion,respectively, as of December 31, 2008.

 

**8.****             ****COMMITMENTSAND CONTINGENCIES**

 

*Credit Extensions* - In thenormal course of business, the Company has various outstanding commitments toextend credit that are not reflected in the accompanying condensed consolidatedfinancial statements.  As of September 30,2009 and December 31, 2008, respectively, undisbursed loan commitmentsamounted to $1.10 billion and $1.47 billion, respectively.  Commercial and standby letters of creditamounted to $674.7 million and $696.4 million as of September 30,2009 and December 31, 2008, respectively.

 

*Guarantees*— From time totime, the Company securitizes loans with recourse in the ordinary course ofbusiness.  For loans that have beensecuritized with recourse, the recourse component is considered a guarantee.  When the Company securitizes a loan withrecourse, it commits to stand ready to perform if the loan defaults, and tomake payments to remedy the default.  Asof September 30, 2009, total loans securitized with recourse amounted to$485.6 million and were comprised of $54.0 million in single family loans withfull recourse and $431.5 million in multifamily loans with limitedrecourse.  In comparison, total loanssecuritized with recourse amounted to $544.5 million at December 31, 2008,comprised of $62.4 million in single family loans with full recourse and $482.1million in multifamily loans with limited recourse.  The recourse provision on multifamily loansis limited to 2.5% of the top loss on the underlying loans.  All of these transactions representsecuritizations with Fannie Mae.  The Company’s recourse reserve relatedto loan securitizations totaled $1.7 million****asof September 30, 2009 and $1.1 million as of December 31, 2008, andis included in accrued expenses and other liabilities in the accompanyingcondensed consolidated balance sheets. Despite the challenging conditions in the real estate market, theCompany continues to experience relatively minimal losses from the singlefamily and multifamily loan portfolios.

 

The Company also sells or securitizes loanswithout recourse that may have to be subsequently repurchased if a defect thatoccurred during the loan origination process results in a violation of arepresentation or warranty made in connection with the securitization or saleof the loan.  When a loan sold orsecuritized to an investor without recourse fails to perform according to itscontractual terms, the investor will typically review the loan file todetermine whether defects in the origination process occurred and if suchdefects give rise to a violation of a representation or warranty made to theinvestor in connection with the sale or securitization.  If such a defect is identified, the Companymay be required to either repurchase the loan or indemnify the investor forlosses sustained.  If there are no suchdefects, the Company has no commitment to repurchase the loan.  As of September 30, 2009 and December 31,2008, the amount of loans sold without recourse totaled $708.2 million and$693.5 million, respectively.  Totalloans securitized without recourse amounted to $362.1 million and $1.04billion, respectively, at September 30, 2009 and December 31,2008.  The decrease in loans securitizedwithout recourse at September 30, 2009, is due to the desecuritization ofthe Company’s private label mortgage backed securities during May 2009 whichresulted in an increase of $635.6 million of single and multifamily loans witha corresponding decrease in investment securities available-for-sale.  The loans sold or securitized withoutrecourse represent the unpaid principal balance of the Company’s loans servicedfor others portfolio.

 

*Litigation*— Neither the Company nor the Bank is involved inany material legal proceedings at September 30, 2009.  The Bank, from time to time, is a party tolitigation which arises in the ordinary course of business, such as claims toenforce liens, claims involving the origination and servicing of loans, andother issues related to the business of the Bank.  After taking into consideration informationfurnished by counsel to the Company and the Bank, management believes that theresolution of such

 

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issueswill not have a material adverse impact on the financial position, results ofoperations, or liquidity of the Company or the Bank.

 

**9.****             ****STOCKHOLDERS’EQUITY**

 

*Series A Preferred StockOffering* - In April 2008, the Company issued 200,000shares of 8% Non-Cumulative Perpetual Convertible Preferred Stock, Series A(“Series A”), with a liquidation preference of $1,000 per share.  The Company received $194.1 million ofadditional Tier 1 qualifying capital, after deducting stock issuancecosts.  The holders of the Series Apreferred stock have the right at any time to convert each share of Series Apreferred stock into 64.9942 shares of the Company’s common stock, plus cash inlieu of fractional shares.  Thisrepresents an initial conversion price of approximately $15.39 per share ofcommon stock or a 22.5% conversion premium based on the closing price of theCompany’s common stock on April 23, 2008 of $12.56 per share.  On or after May 1, 2013, the Companywill have the right, under certain circumstances, to cause the Series Apreferred stock to be converted into shares of the Company’s common stock.  Dividends on the Series A preferredstock, if declared, will accrue and be payable quarterly in arrears at a rateper annum equal to 8% on the liquidation preference of $1,000 per share, on February 15,May 15, August 15 and November 15 of each year.  The proceeds from this offering were used toaugment the Company’s liquidity and capital positions and reduce itsborrowings.

 

In July 2009, the Company completed theexchange of approximately 111 thousand shares of Series A preferred stock intoabout 10 million shares of common stock with certain shareholders.  This transaction was accounted for as aninduced conversion with the settlement of shares occurring in July 2009.  The Company recorded a preferred dividend of$18.3 million during the nine months ended 2009 which represents the additionalconsideration or inducement given to these shareholders in excess of thecarrying value of the Series A preferred stock.  As a result of these exchange transactions,the Company’s tangible common equity increased by an aggregate of $107.5million net of original stock issuance costs.

 

*Series B Preferred Stock Offering -*On December 5, 2008, the Companyissued 306,546 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B(“Series B”), with a liquidation preference of $1,000 per share.  The Company received $306.5 million ofadditional Tier 1 qualifying capital from the U.S. Treasury by participating inthe U.S.Treasury’s Capital Purchase Program (“TCPP”).  The Series B preferred shares will paycumulative dividends at a rate of 5% per annum until the fifth anniversary ofthe investment date and thereafter at a rate of 9% per annum.  The Series B preferred shares aretransferable by the U.S. Treasury at any time. Subject to the approval of the Federal Reserve Board, the Series Bpreferred shares may be reacquired by the Company at 100% of liquidationpreference (plus any accrued and unpaid dividends).

 

*Warrants*—**During 2008, in conjunction with the Series Bpreferred stock offering, the Company issued warrants with an initial price of$15.15 per share of common stock for which the warrant may be exercised, withan allocated fair value of $25.2 million. The warrant may be exercised at any time on or before December 5,2018.  The U.S. Treasury may not transfera portion of the warrants with respect to more than one-half of the originalnumber of shares of common stock until the earlier of the successful completionof an offering of replacement Tier 1 capital of at least $306.5 million and December 31,2009.  The warrants, and all rights underthe warrants, are otherwise transferable. As of September 30, 2009, there were 3,035,109 warrantsoutstanding.

 

***Private Salesof Common Stock***— On July 14, 2009, in privateplacement transactions, two customers of the Bank purchased 5,000,000 newlyissued shares of the Company’s common stock at a price of $5.50 per share. TheCompany received net proceeds of approximately $26.0 million, net of

 

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stock issuance costs, in conjunction with this common stockoffering.  The Company has registeredthese shares for resale to the public.

 

*Public Offering of Common Stock -* On July 24, 2009,the Company completed a public offering of 11 million shares of its commonstock priced at $6.35.  The underwriteralso exercised its option to purchase an additional 1.65 million shares of theCompany’s common stock.  The Companyreceived net proceeds of approximately $76.7 million, net of stock issuancecosts, in conjunction with this common stock offering.

 

*Stock Repurchase Program*— During 2007,the Company’s Board of Directors authorized a new stock repurchase program tobuy back up to $80.0 million of the Company’s common stock.  The Company did not repurchase any sharesduring the nine months ended September 30, 2009 in connection with thisstock repurchase program.

 

*Quarterly Dividends* — On July 15,2009, the Company’s Board of Directors declared third quarter preferred stockcash dividends of $20.00 per share on its Series A preferred stock payableon or about August 1, 2009 to shareholders of record on July 15,2009.  On August 17, 2009, theCompany’s Board of Directors declared and paid quarterly preferred cashdividends of $12.50 on its Series B preferred shares.  Total cash dividends accrued and paid inconjunction with the Company’s Series A and B preferred stock amounted to$5.9 million and $21.4 million during the three and nine months ended September 30,2009, respectively.

 

On July 15, 2009, theCompany’s Board of Directors also declared quarterly common stock cashdividends of $0.01 per share payable on or about August 26, 2009 toshareholders of record on August 12, 2009. Cash dividends totaling $916 thousand and $2.5 million were paid to theCompany’s common shareholders during the third quarter and first nine months of2009, respectively.

 

*Earnings (Loss) Per Share (“EPS”)* — The actualnumber of shares outstanding at September 30, 2009 was 91,693,532.  Basic EPS excludes dilution and is computedby dividing income or loss available to common stockholders by theweighted-average number of shares outstanding during the period.  Diluted EPS is calculated on the basis of theweighted average number of shares outstanding during the period plus restrictedstock and shares issuable upon the assumed exercise of outstanding convertiblepreferred stock, common stock options and warrants, unless they have anantidilutive effect.  Due to the net lossrecorded during the third quarter and first nine months of 2009, incrementalshares resulting from the assumed conversion, exercise, or contingent issuanceof securities are not included as their effect on earnings or loss per sharewould be antidilutive.

 

The following table sets forth (loss)earnings per share calculations for the three and nine months ended September 30,2009 and 2008:

 

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| ** **                                                                                 | ** ** | **Three  Months Ended September 30,**                         | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2009**                                                           | ** ** | **2008** | ** ** |
| ** **                                                                                 | ** ** | **Net loss available to**                           | ** ** | **Number** | ** ** | **Per Share** | ** ** | **Net loss available to** | ** ** | **Number** | ** ** | **Per Share** | ** ** |
| ** **                                                                                 | ** ** | **common stockholders**                                       | ** ** | **of Shares** | ** ** | **Amounts** | ** ** | **common stockholders** | ** ** | **of Shares** | ** ** | **Amounts** | ** ** |
| ** **                                                                                 | ** ** | **(In thousands, except per share data)** | ** ** |
| **Basic  EPS**                                                                             | * *   | * *                                                           | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Net loss before  extraordinary item, as reported                                           |       | $                                                                  | (68,531    | ) | 86,538 |   | $ | (0.79 | ) | $ | (31,206 | ) | 62,675 |   | $ | (0.50 | ) |
| Less: Preferred  stock dividends, inducement, and amortization of preferred stock discount |       | (10,620                                                            | )          | — |   | — |   | (4,089 | ) | — |   | — |   |
| Loss available to  common stockholders before extraordinary item                           |       | (79,151                                                            | )          | 86,538 |   | (0.91 | ) | (35,295 | ) | 62,675 |   | (0.56 | ) |
| Extraordinary  item                                                                        |       | —                                                             |       | — |   | — |   | — |   | — |   | — |   |
| Net loss  available to common stockholders after extraordinary item                        |       | $                                                                  | (79,151    | ) | $ | 86,538 |   | $ | (0.91 | ) | $ | (35,295 | ) | 62,675 |   | $ | (0.56 | ) |
|                                                                                       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted  EPS**                                                                           |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities:                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Stock options                                                                              |       | —                                                             |       | — |   | — |   | — |   | — |   | — |   |
| Restricted stock                                                                           |       | —                                                             |       | — |   | — |   | — |   | — |   | — |   |
| Stock warrants                                                                             |       | —                                                             |       | — |   | — |   | — |   | — |   | — |   |
|                                                                                       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Loss available to  common stockholders before extraordinary item                           |       | $                                                                  | (79,151    | ) | 86,538 |   | $ | (0.91 | ) | $ | (35,295 | ) | 62,675 |   | $ | (0.56 | ) |
| Extraordinary  item                                                                        |       | —                                                             |       | — |   | — |   | — |   | — |   | — |   |
| Net loss  available to common stockholders after extraordinary item                        |       | $                                                                  | (79,151    | ) | $ | 86,538 |   | $ | (0.91 | ) | $ | (35,295 | ) | 62,675 |   | $ | (0.56 | ) |

 
| ** **                                                                                 | ** ** | **Nine  Months Ended September 30,**                          | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2009**                                                           | ** ** | **2008** | ** ** |
| ** **                                                                                 | ** ** | **Net  loss available to**                                         | ** ** | **Number** | ** ** | **Per  Share** | ** ** | **Net  loss available to** | ** ** | **Number** | ** ** | **Per  Share** | ** ** |
| ** **                                                                                 | ** ** | **common  stockholders**                                           | ** ** | **of  Shares** | ** ** | **Amounts** | ** ** | **common  stockholders** | ** ** | **of  Shares** | ** ** | **Amounts** | ** ** |
| ** **                                                                                 | ** ** | **(In thousands, except per share data)** | ** ** |
| **Basic  EPS**                                                                             | * *   | * *                                                           | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Net loss before  extraordinary item, as reported                                           |       | $                                                                  | (177,722   | ) | 70,967 |   | $ | (2.50 | ) | $ | (52,049 | ) | 62,586 |   | $ | (0.83 | ) |
| Less: Preferred  stock dividends, inducement, and amortization of preferred stock discount |       | (42,986                                                            | )          | — |   | — |   | (4,089 | ) | — |   | — |   |
| Loss available to  common stockholders before extraordinary item                           |       | (220,708                                                           | )          | 70,967 |   | (3.11 | ) | (56,138 | ) | 62,586 |   | (0.90 | ) |
| Extraordinary  item                                                                        |       | (5,366                                                             | )          | 70,967 |   | (0.08 | ) | — |   | — |   | — |   |
| Net loss  available to common stockholders after extraordinary item                        |       | $                                                                  | (226,074   | ) | $ | 70,967 |   | $ | (3.19 | ) | $ | (56,138 | ) | 62,586 |   | $ | (0.90 | ) |
|                                                                                       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted  EPS**                                                                           |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities:                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Stock options                                                                              |       | —                                                             |       | — |   | — |   | — |   | — |   | — |   |
| Restricted stock                                                                           |       | —                                                             |       | — |   | — |   | — |   | — |   | — |   |
| Stock warrants                                                                             |       | —                                                             |       | — |   | — |   | — |   | — |   | — |   |
|                                                                                       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Loss available to  common stockholders before extraordinary item                           |       | $                                                                  | (220,708   | ) | 70,967 |   | $ | (3.11 | ) | $ | (56,138 | ) | 62,586 |   | $ | (0.90 | ) |
| Extraordinary  item                                                                        |       | (5,366                                                             | )          | 70,967 |   | (0.08 | ) | — |   | — |   | — |   |
| Net loss  available to common stockholders after extraordinary item                        |       | $                                                                  | (226,074   | ) | 70,967 |   | $ | (3.19 | ) | $ | (56,138 | ) | 62,586 |   | $ | (0.90 | ) |
|                                                                                            |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following outstanding convertiblepreferred stock, stock options, and restricted stock for the three and ninemonths ended September 30, 2009 and 2008, respectively, were excluded fromthe computation of diluted EPS because including them would have had anantidilutive effect:

 
| ** **                   | ** **   | **Three Months Ended   September 30,** | ** **   | **Nine Months Ended   September 30,** | ** **   |
|------------------------------|--------------|---------------------------------------------|--------------|--------------------------------------------|--------------|
| ** **                   | ** **   | **2009**                                    | ** **   | **2008**                                   | ** **   | **2009** | ** ** | **2008** | ** ** |
| *** ***                 | *** *** | **(In thousands)**                          | *** *** | **(In thousands)**                         | *** *** |
| Convertible  preferred stock |         | 6,169                                       |         | 12,955                                     |         | 10,547 |   | 7,617 |   |
| Stock options                |         | 1,922                                       |         | 2,435                                      |         | 1,964 |   | 1,995 |   |
| Restricted stock             |         | 583                                         |         | 710                                        |         | 802 |   | 651 |   |

 

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**10.****      ****BUSINESS SEGMENTS**

 

The Company utilizes an internal reporting system tomeasure the performance of various operating segments within the Bank and theCompany overall.  The Company hadpreviously identified five operating segments for purposes of managementreporting: retail banking, commercial lending, treasury, residential lending,and other.  The Bank’s strategic focushas been shifting and evolving over the last several years which has influencedhow the chief operating decision maker views the Company’s business operationsand assesses its economic performance. Specifically, the Company’s business focus has culminated in atwo-segment core business structure: Retail Banking and CommercialBanking.  A third segment, which iscomprised of a combination of previous operating segments—Treasury and Other,provides broad administrative support to these two core segments.  As a result of this evolution in theCompany’s strategic focus, the Company realigned its segment methodology duringthe first quarter of 2009, and identified these three business divisions asmeeting the criteria of an operating segment. The objective of combining certain segments under a new reportingstructure was to better align the Company’s service structure with its customerbase, and to provide a platform to more efficiently manage the complexities andchallenges impacting the Company’s current business environment.

 

The Retail Banking segment focuses primarily onretail operations through the Bank’s branch network.  The Commercial Banking segment, whichincludes commercial real estate, primarily generates commercial loans throughthe efforts of the commercial lending offices located in the Bank’s northernand southern California production offices. Furthermore, the Company’s Commercial Banking segment also offers a widevariety of international finance and trade services and products.  The former residential lending segment hasbeen combined with the Retail Banking segment due to the consumer-centricnature of the products and services offered by these two segments as well asthe synergistic relationship between these two units in generating consumermortgage loans.  The remainingcentralized functions, including the former Treasury segment, and eliminationsof intersegment amounts have been aggregated and included in “Other.”

 

Given the significant decline in short-term andlong-term interest rates since 2007, the Company reassessed its transferpricing assumptions during the first quarter of 2009 to be consistent with itsgoal of growing core deposits and originating profitable, good credit qualityloans.  Changes to the Company’s fundstransfer pricing assumptions were made with the intent to promote core depositgrowth and, given the Bank’s recent credit experience, to better reflect thecurrent risk profiles of various loan categories within the credit portfolio.  Transfer pricing assumptions andmethodologies are reviewed at least annually to ensure that the Company’sprocess is reflective of current market conditions.  The transfer pricing process is formulatedwith the goal of incenting loan and deposit growth that is consistent with theCompany’s overall growth objectives as well as provide a reasonable andconsistent basis for the measurement of the Company’s business segments andproduct net interest margins.  Changes tothe Company’s transfer pricing assumptions and methodologies are approved bythe Asset Liability Committee.

 

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The changes in transfer pricing assumptions that theCompany implemented during the first quarter of 2009 have not been reflected inthe segment results for 2008 since these changes were adopted on a prospectivebasis.  The Company has, however,performed a high level assessment of the impact of these transfer pricingassumption changes to the various operating segments.  Based on this assessment, the Companydetermined that the full year impact of these changes was not significantoverall, and would have been favorable to the segment pretax profit (loss)results for the Retail Banking and Commercial banking segments but unfavorableto the Other segment during 2008. Additionally, the changes in transfer pricing assumptions implementedduring the first quarter of 2009 would not have altered the conclusion of thegoodwill impairment test performed as of September 30, 2008, had theseassumptions been retroactively implemented during 2008.

 

The accounting policies of the segments are the sameas those described in the summary of significant accounting policies describedin Note 1 of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2008.  Operatingsegment results are based on the Company’s internal management reportingprocess, which reflects assignments and allocations of capital, certainoperating and administrative costs and the provision for loan losses.  Net interest income is based on the Company’sinternal funds transfer pricing system which assigns a cost of funds or acredit for funds to assets or liabilities based on their type, maturity orrepricing characteristics.  Noninterestincome and noninterest expense, including depreciation and amortization,directly attributable to a segment are assigned to that business.  Indirect costs, including overhead expense,are allocated to the segments based on several factors, including, but notlimited to, full-time equivalent employees, loan volume and depositvolume.  The provision for credit lossesis allocated based on actual chargeoffs for the period as well as average loanbalance for each segment during the period. The Company evaluates overall performance based on profit or loss fromoperations before income taxes excluding nonrecurring gains and losses.

 

The following tables presentthe operating results and other key financial measures for the individualoperating segments for the three and nine months ended September 30, 2009and 2008:

 

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| ** **                                | ** ** | **Three Months Ended September 30, 2009** | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                | ** ** | **Retail**                                     | ** ** | **Commercial** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Banking**                                    | ** ** | **Banking** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **(In thousands)**                        | ** ** |
|                                      |       |                                           |       |   |   |   |   |   |   |
| Interest income                           |       | $                                              | 55,364     |   | $ | 61,039 |   | $ | 31,521 |   | $ | 147,924 |   |
| Charge for funds  used                    |       | (17,024                                        | )          | (16,822 | ) | (36,441 | ) | (70,287 | ) |
| Interest spread  on funds used            |       | 38,340                                         |       | 44,217 |   | (4,920 | ) | 77,637 |   |
| Interest expense                          |       | (21,648                                        | )          | (3,680 | ) | (26,716 | ) | (52,044 | ) |
| Credit on funds  provided                 |       | 32,132                                         |       | 3,157 |   | 34,998 |   | 70,287 |   |
| Interest spread  on funds provided        |       | 10,484                                         |       | (523 | ) | 8,282 |   | 18,243 |   |
| Net interest  income (expense)            |       | $                                              | 48,824     |   | $ | 43,694 |   | $ | 3,362 |   | $ | 95,880 |   |
|                                      |       |                                           |       |   |   |   |   |   |   |
| Provision for  loan losses                |       | $                                              | 65,184     |   | $ | 94,060 |   | $ | — |   | $ | 159,244 |   |
| Depreciation,  amortization and accretion |       | 2,512                                          |       | 1,354 |   | 1,409 |   | 5,275 |   |
| Goodwill                                  |       | 320,566                                        |       | 16,872 |   | — |   | 337,438 |   |
| Segment pretax  (loss) profit             |       | (44,984                                        | )          | (56,767 | ) | (19,557 | ) | (121,308 | ) |
| Segment assets                            |       | 4,292,102                                      |       | 4,660,368 |   | 3,533,460 |   | 12,485,930 |   |

 
| ** **                                | ** ** | **Three Months Ended September 30, 2008** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Retail**                                                         | ** ** | **Commercial** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Banking**                                                        | ** ** | **Banking** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **(In thousands)**                                            | ** ** |
|                                      |       |                                                               |       |   |   |   |   |   |   |
| Interest income                           |       | $                                                                  | 60,292     |   | $ | 79,833 |   | $ | 19,737 |   | $ | 159,862 |   |
| Charge for funds  used                    |       | (28,222                                                            | )          | (35,898 | ) | (37,888 | ) | (102,008 | ) |
| Interest spread  on funds used            |       | 32,070                                                             |       | 43,935 |   | (18,151 | ) | 57,854 |   |
| Interest expense                          |       | (32,494                                                            | )          | (3,454 | ) | (37,399 | ) | (73,347 | ) |
| Credit on funds  provided                 |       | 49,598                                                             |       | 3,867 |   | 48,543 |   | 102,008 |   |
| Interest spread  on funds provided        |       | 17,104                                                             |       | 413 |   | 11,144 |   | 28,661 |   |
| Net interest  income (expense)            |       | $                                                                  | 49,174     |   | $ | 44,348 |   | $ | (7,007 | ) | $ | 86,515 |   |
|                                      |       |                                                               |       |   |   |   |   |   |   |
| Provision for  loan losses                |       | $                                                                  | 22,604     |   | $ | 20,396 |   | $ | — |   | $ | 43,000 |   |
| Depreciation,  amortization and accretion |       | 2,577                                                              |       | 196 |   | (120 | ) | 2,653 |   |
| Goodwill                                  |       | 320,464                                                            |       | 16,867 |   | — |   | 337,331 |   |
| Segment pretax  (loss) profit             |       | (9,698                                                             | )          | 9,078 |   | (47,941 | ) | (48,561 | ) |
| Segment assets                            |       | 4,027,073                                                          |       | 5,229,446 |   | 2,465,797 |   | 11,722,316 |   |

 
| ** **                                | ** ** | **Nine Months Ended September 30, 2009** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Retail**                                                        | ** ** | **Commercial** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Banking**                                                       | ** ** | **Banking** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **(In thousands)**                                           | ** ** |
|                                      |       |                                                              |       |   |   |   |   |   |   |
| Interest income                           |       | $                                                                 | 164,304    |   | $ | 185,437 |   | $ | 89,439 |   | $ | 439,180 |   |
| Charge for funds  used                    |       | (48,702                                                           | )          | (48,926 | ) | (145,265 | ) | (242,893 | ) |
| Interest spread  on funds used            |       | 115,602                                                           |       | 136,511 |   | (55,826 | ) | 196,287 |   |
| Interest expense                          |       | (73,196                                                           | )          | (12,942 | ) | (89,221 | ) | (175,359 | ) |
| Credit on funds  provided                 |       | 116,897                                                           |       | 12,479 |   | 113,517 |   | 242,893 |   |
| Interest spread  on funds provided        |       | 43,701                                                            |       | (463 | ) | 24,296 |   | 67,534 |   |
| Net interest  income (expense)            |       | $                                                                 | 159,303    |   | $ | 136,048 |   | $ | (31,530 | ) | $ | 263,821 |   |
|                                      |       |                                                              |       |   |   |   |   |   |   |
| Provision for  loan losses                |       | $                                                                 | 144,561    |   | $ | 244,105 |   | $ | — |   | $ | 388,666 |   |
| Depreciation,  amortization and accretion |       | 8,584                                                             |       | 3,226 |   | 5,037 |   | 16,847 |   |
| Goodwill                                  |       | 320,566                                                           |       | 16,872 |   | — |   | 337,438 |   |
| Segment pretax  (loss) profit             |       | (84,964                                                           | )          | (136,334 | ) | (83,214 | ) | (304,512 | ) |
| Segment assets                            |       | 4,292,102                                                         |       | 4,660,368 |   | 3,533,460 |   | 12,485,930 |   |

 
| ** **                                | ** ** | **Nine Months Ended September 30, 2008** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Retail**                                                        | ** ** | **Commercial** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Banking**                                                       | ** ** | **Banking** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **(In thousands)**                                           | ** ** |
|                                      |       |                                                              |       |   |   |   |   |   |   |
| Interest income                           |       | $                                                                 | 205,251    |   | $ | 253,950 |   | $ | 55,750 |   | $ | 514,951 |   |
| Charge for funds  used                    |       | (104,691                                                          | )          | (123,884 | ) | (79,163 | ) | (307,738 | ) |
| Interest spread  on funds used            |       | 100,560                                                           |       | 130,066 |   | (23,413 | ) | 207,213 |   |
| Interest expense                          |       | (109,582                                                          | )          | (10,813 | ) | (116,246 | ) | (236,641 | ) |
| Credit on funds  provided                 |       | 167,118                                                           |       | 13,748 |   | 126,872 |   | 307,738 |   |
| Interest spread  on funds provided        |       | 57,536                                                            |       | 2,935 |   | 10,626 |   | 71,097 |   |
| Net interest  income (expense)            |       | $                                                                 | 158,096    |   | $ | 133,001 |   | $ | (12,787 | ) | $ | 278,310 |   |
|                                      |       |                                                              |       |   |   |   |   |   |   |
| Provision for  loan losses                |       | $                                                                 | 70,392     |   | $ | 112,608 |   | $ | — |   | $ | 183,000 |   |
| Depreciation,  amortization and accretion |       | 9,641                                                             |       | 627 |   | 2,486 |   | 12,754 |   |
| Goodwill                                  |       | 320,464                                                           |       | 16,867 |   | — |   | 337,331 |   |
| Segment pretax  (loss) profit             |       | (5,907                                                            | )          | (13,396 | ) | (66,657 | ) | (85,960 | ) |
| Segment assets                            |       | 4,027,073                                                         |       | 5,229,446 |   | 2,465,797 |   | 11,722,316 |   |

 

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**11.****      ****SUBSEQUENT EVENTS**

 

*Dividend Payout*

 

On October 19, 2009,the Company’s Board of Directors approved the payment of fourth quarterdividends of $20.00 per share on the Company’s Series A preferredstock.  The dividend is payable on orabout November 1, 2009 to shareholders of record as of October 15,2009.  Additionally, on October 19,2009, the Board declared a dividend of $0.01 per share on the Company’s commonstock payable on or about November 24, 2009 to shareholders of record asof November 10, 2009.

 

The Board has alsoauthorized the payment of fourth quarter dividends of $12.50 per share on theCompany’s Series B Preferred Stock to be paid on November15, 2009.

 

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**ITEM2.   MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionprovides information about the results of operations, financial condition,liquidity, and capital resources of East West Bancorp, Inc. and itssubsidiaries.  This information isintended to facilitate the understanding and assessment of significant changesand trends related to our financial condition and the results of ouroperations.  This discussion and analysisshould be read in conjunction with our Annual Report on Form 10-K for theyear ended December 31, 2008, and the condensed consolidated financialstatements and accompanying notes presented elsewhere in this report.

 

**Critical AccountingPolicies**

 

Our financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America and generalpractices within the banking industry. The financial information contained within these statements is, to asignificant extent, financial information that is based on approximate measuresof the financial effects of transactions and events that have alreadyoccurred.  Various elements of ouraccounting policies, by their nature, are inherently subject to estimationtechniques, valuation assumptions and other subjective assessments.  In addition, certain accounting policiesrequire significant judgment in applying complex accounting principles toindividual transactions to determine the most appropriate treatment.  We have established procedures and processesto facilitate making the judgments necessary to prepare financial statements.

 

The following is a summary of the areas which require more judgment andcomplex accounting estimates and principles. In each area, we have identified the variables most important in theestimation process.  We have used thebest information available to make the estimations necessary to value therelated assets and liabilities.  Actualperformance that differs from our estimates and future changes in the keyvariables could change future valuations and impact the results of operations.

 

·                  fair valuation of financialinstruments;

·                  investment securities;

·                  allowance for loan losses;

·                  other real estate owned;

·                  loan sales;

·                  goodwill impairment; and

·                  share-based compensation

·                  income taxes and deferredtax asset valuation

 

Our significant accounting policies are described in greater detail inour 2008 Annual Report on Form 10-K in the “Critical Accounting Policies”section of Management’s Discussion and Analysis and in Note 1 to theConsolidated Financial Statements—“Significant Accounting Policies” which areessential to understanding Management’s Discussion and Analysis of FinancialCondition and Results of Operations.

 

**Overview**

 

Duringthe third quarter of 2009, we continued to sustain losses brought about by theprolonged recessionary climate and the downturn in the real estate market.  As a result of our strategy to accelerate theresolution of problem assets, we recorded a net loss of $68.5 million or$(0.91) per share, largely due to $159.2 million in loan loss provisions and$24.2 million in other than temporary impairment (“OTTI”) losses on our pooledtrust preferred securities.  Despite theongoing economic challenges, we ended the 

 

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quarter with record depositsand strong levels of both capital and the allowance for loan losses.  Our core profitability (refer to the non-GAAPreconciliation of our loss before benefit from income taxes to core pre-taxoperating income below) and liquidity position also remain strong, and our netinterest margin has notably improved.

 

Buildingon the initiatives that we commenced in the second quarter of 2009, wecompleted several transactions during the third quarter of 2009 to furtherstrengthen capital and increased tangible common equity.  In July 2009, we completed the exchangeof approximately 111 thousand shares of Series A preferred stock forapproximately 10 million shares of our common stock, resulting in $107.5million of additional tangible common equity net of original stock issuance costs.  In July 2009, we entered into privateplacement transactions to sell 5 million newly issued shares of common stock ata price of $5.50 per share increasing tangible common equity by $26.0 millionnet of stock issuance costs.  Also in July 2009, we completed apublic offering of 12.65 million shares of our common stock for which theCompany received total proceeds of approximately $76.7 million net of stockissuance costs.  The combined impact ofour comprehensive capital plan initiatives has resulted in a $240.8 millionincrease to tangible common equity, net of stock issuance costs.  As of September 30, 2009, our totalrisk-based capital ratio was 15.13% or $512.4 million more than the 10.00%regulatory requirement for well-capitalized banks.  Our Tier 1 risk-based capital ratio of 13.08%and our Tier 1 leverage ratio of 10.62% as of September 30, 2009 alsosignificantly exceeded regulatory guidelines for well-capitalized banks.

 

During the third quarter of 2009, we continued tomanage our exposure to problem assets through sales of $206.3 million inproblem loans and other real estate owned (“OREO”) as well as a reduction inland and construction loan balances of $355.6 million, or 25% from June 30,2009.  Total delinquent loans decreasedfor the second consecutive quarter, declining $71.8 million or 24% as of September 30,2009 relative to June 30, 2009. Specifically, loans 30 to 59 days delinquent decreased 63% or $37.3million, 60 to 89 day delinquent loans decreased 30% or $27.1 million, and 90or more day delinquent loans decreased 5.0% or $7.4 million, as of September 30,2009 relative to June 30, 2009.  Thedecline in delinquent loans is primarily due to the sale, payoff and resolutionof problem assets.    During the thirdquarter of 2009, we sold $180.6 million in loans and $25.7 million in OREOproperties.  These sales of problemassets have resulted in net chargeoffs of $60.1 million and $91.9 million forthe third quarter of 2009 and first nine months of 2009, respectively.  Our proactive actions to identify and manageour exposure to problem assets have resulted in elevated chargeoff levelsthroughout 2008 and 2009.  If the REO issold shortly after it is received in a foreclosure, the adjustment made to theloss is charged against or credit to the allowance for loan losses, if deemedmaterial.  Total net chargeoffs amountedto $151.2 million during the third quarter of 2009, compared to $133.9 millionand $59.6 million during the second and first quarters of 2009,respectively.  At September 30,2009, the allowance for loan losses amounted to $230.7 million or 2.74% oftotal gross loans, compared to $223.7 million or 2.62% as of June 30,2009, and $195.5 million or 2.42% as of March 31, 2009.  We recorded $159.2 million in loan lossprovisions during the third quarter of 2009, compared to $151.4 million and$43.0 million recorded during the second quarter of 2009 and third quarter of2008, respectively.

 

Nonperforming assets totaled$230.2 million representing 1.84% of total assets at September 30,2009.  This compares to $189.4 million or1.49% at June 30, 2009 and $286.6 million or 2.28% of total assets at March 31,2009.  Nonperforming assets as of September 30,2009 are comprised of nonaccrual loans totaling $204.4 million, OREO totaling$24.2 million, and accruing loans past due 90 days or more of $1.6million.  Total nonaccrual loansincreased 26% to $204.4 million as of September 30, 2009 from $162.2million as of June 30, 2009 but decreased 18% from $248.0 million as of March 31,2009.  Included in nonaccrual loans as ofSeptember 30, 2009 are loans totaling $66.0 million which were not 90 dayspast due as of September 30, 2009, but have been classified as nonaccrualdue to concerns surrounding collateral values and future collectibility.  The increase in nonperforming assets at September 30,2009, relative to June 30, 2009, was largely due to increases innonaccrual land loans that 

 

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are current or otherwiseless than 90 days delinquent.  Theseloans were placed on nonaccrual status to proactively manage these problemassets.  We also had $116.5 million and $89.5million in total performing restructured loans as of September 30, 2009and June 30, 2009, respectively, which were excluded from nonperformingassets.

 

Included in the $116.5million total restructured loans as of September 30, 2009 were $104.1million in performing A/B notes.  In A/Bnote restructurings, the original loan is bifurcated into two notes where the Anote represents the portion of the original loan which allows for acceptableloan-to-value and debt coverage on the collateral and is expected to becollected in full and the B note represents the portion of the original loanwhich is the shortfall in value and is fully charged off.  The A/B notes balance as of September 30,2009 is comprised of A note balances only. The A notes are performing loans at market interest rates that havedemonstrated sustained repayment and performance with adequate collateral andcash flows and are accruing interest.  Inaccordance with generally accepted accounting principles, A notes must bedisclosed as troubled debt restructurings until the beginning of the nextfiscal year.

 

In addition to the loan loss provision of $159.2million posted during the third quarter of 2009, we also recorded $24.2 millionin OTTI losses on our pooled trust preferred securities prompted by diminishingcollateral values, deteriorating cash flows, and increased deferrals anddefaulted payments from many small banks that issued these instruments.  We also recorded $767 thousand in OREOexpenses during the quarter ended September 30, 2009.  Excluding these items, our core pre-taxoperating income before extraordinary item was $63.0 million for the thirdquarter of 2009.  This compares to $56.0million and $50.1 million in core pre-tax operating income during the secondquarter of 2009 and third quarter of 2008, respectively.  We believe that core pre-tax operating incomeis a strong indicator of our stable core earnings.  Although a non-GAAP measure, a reconciliationof our loss before benefit from income taxes to core pre-tax operating incomeis as follows:

 
| ** **                               | ** ** | **Three Months Ended**      | ** ** |
|------------------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **September 30, 2009** | ** ** | **June 30, 2009** | ** ** | **September 30, 2008** | ** ** |
| ** **                               | ** ** | **(In thousands)**     | ** ** |
| Loss before benefit for income taxes     |       | $                           | (121,308   | ) | $ | (147,273 | ) | $ | (48,561 | ) |
| Add:                                     |       |                        |       |   |   |   |   |
| Provision for loan losses                |       | 159,244                     |       | 151,422 |   | 43,000 |   |
| Impairment loss on investment securities |       | 24,249                      |       | 37,447 |   | 53,567 |   |
| FDIC special assessment                  |       | —                      |       | 5,700 |   | — |   |
| Other real estate owned expense          |       | 767                         |       | 8,682 |   | 2,123 |   |
| Core pre-tax operating income            |       | $                           | 62,952     |   | $ | 55,978 |   | $ | 50,129 |   |

 

Net interest income amounted to $95.9 million duringthe quarter ended September 30, 2009, compared with $88.3 million duringthe second quarter of 2009 and $86.5 million during the third quarter of2008.  Our net interest margin increasedto 3.20% during the third quarter of 2009 relative to 2.98% during the second quarterof 2009 and 3.10% during the third quarter of 2008.  The increase in our net interest margin canbe attributed to the maturity of higher cost CDs, new core deposits at lowercosts, the maturity and paydown of FHLB advances, the impact from the desecuritization,and higher yields realized on investable funds and new loans.  We anticipate our net interest margin toincrease during the remainder of 2009 as we continue to increase our coredeposit base and pay down higher cost FHLB advances.

 

Total noninterest loss amounted to $(11.9) millionduring the third quarter of 2009, compared with noninterest loss of $(26.2)million during the second quarter of 2009 and $(43.6) million during the thirdquarter of 2008.  During the thirdquarter of 2009 we recorded $24.2 million in OTTI losses, compared with $37.4million and $53.6 million in such losses recorded during the second quarter of2009 and the third quarter of 2008, respectively.  Core noninterest income amounted to $10.2million during 

 

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thethird quarter of 2009, compared with $9.5 million and $9.8 million recordedduring the second quarter of 2009 and the third quarter of 2008,respectively.  We believe that corenoninterest income is a strong indicator of our stable core earnings.  Although a non-GAAP measure, a reconciliationof our noninterest income to core noninterest income is as follows:

 
| ** **                                | ** ** | **Three Months Ended**      | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **September 30, 2009** | ** ** | **June 30, 2009** | ** ** | **September 30, 2008** | ** ** |
| ** **                                | ** ** | **(In thousands)**     | ** ** |
| Noninterest loss                          |       | $                           | (11,880    | ) | $ | (26,199 | ) | $ | (43,550 | ) |
| Add:                                      |       |                        |       |   |   |   |   |
| Impairment loss on investment securities  |       | 24,249                      |       | 37,447 |   | 53,567 |   |
| Subtract:                                 |       |                        |       |   |   |   |   |
| Net gain on sale of investment securities |       | (2,177                      | )          | (1,680 | ) | — |   |
| Net gain on fixed assets                  |       | (25                         | )          | (25 | ) | (44 | ) |
| Net gain on sale of loans                 |       | (8                          | )          | (3 | ) | (144 | ) |
| Core noninterest income                   |       | $                           | 10,159     |   | $ | 9,540 |   | $ | 9,829 |   |

 

Total noninterest expense amounted to $46.1 millionduring the third quarter of 2009, compared with $57.9 million and $48.5 millionrecorded during the second quarter of 2009 and the third quarter of 2008,respectively.  The decrease innoninterest expense during the third quarter of 2009 relative to the secondquarter of 2009 is primarily due to lower losses on sales, writedowns andexpenses on OREO properties as well as lower deposit insurance premiums andregulatory assessments.  During thesecond quarter of 2009, we accrued $5.7 million in special FDIC assessments thatwas paid on September 30, 2009. There were no special assessments recorded during the third quarter of2009.  Our efficiency ratio, whichrepresents noninterest expense (excluding amortization and/or impairment losseson intangible assets and investments in affordable housing partnerships)divided by the aggregate of net interest income before provision for loanlosses and noninterest income, excluding impairment losses on investmentsecurities, was 39.99% during the third quarter of 2009 compared with 55.12%during the second quarter of 2009 and 46.40% during the third quarter of2008.  We will continue to explorevarious cost management opportunities during the remainder of 2009 and beyond.

 

Total consolidated assets at September 30, 2009slightly increased to $12.49 billion, compared with $12.42 billion at December 31,2008.  Similarly, total average assetsincreased to $12.64 billion during the third quarter of 2009, compared to$12.62 billion and $11.71 billion during the second quarter of 2009 and thethird quarter of 2008, respectively. Growth in average short-term investments and average held-to-maturityinvestment securities accounted for the majority of the increase in totalaverage assets during the first three quarters of 2009 relative to the thirdquarter of 2008.  The increases inaverage short-term investments and held-to-maturity investment securities canbe attributed to proceeds received in conjunction with our issuance of Series Bpreferred stock during December 2008, notable increases in our depositbase during the first three quarters of 2009, as well as the reinvestment of aportion of our loan payoffs into short-term securities and investmentsecurities.  Total average deposits grewto $8.66 billion during the third quarter of 2009, compared to $8.44 billionand $7.47 billion during the second quarter of 2009 and the third quarter of2008, respectively, with the largest increase coming from money marketaccounts.

 

Duringthe third quarter of 2009, we continued to experience deposit growth with totaldeposits increasing to a record $8.67 billion as of September 30, 2009,representing a 6% or $526.6 million, increase over year-end 2008.  This increase in total deposits waspredominantly due to a 30% or $1.03 billion increase in our core deposit baseas of September 30, 2009 relative to December 31, 2008.  Since mid-2008, we have experienced strongdeposit momentum through both our retail branch network and our commercialdeposit platforms despite volatile and challenging market conditions.  As a result of this increase in coredeposits, we were able to reduce our reliance on higher cost brokered timedeposits and pay down higher cost FHLB advances which decreased $430.1 millionor 32% to $923.2 million as of September 30, 2009.  We intend to pay down maturing FHLB advancestotaling $200.0 million during 

 

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the remainder of 2009.  These FHLB advances currently have interestrates ranging from 4% to over 5%.  Ourcost of deposits has steadily declined in conjunction with the growth of ourcore deposit base, decreasing 23 basis points to 1.24% during the third quarterof 2009, relative to the second quarter of 2009, and decreasing 90 basis pointssince the quarter ended December 31, 2008. Similarly, our cost of funds decreased 24 basis points to 1.88% duringthe third quarter of 2009, from 2.12% for the second quarter of 2009, anddecreased 89 basis points since the quarter ended December 31, 2008.

 

Ourliquidity position remains strong.  Ourtotal borrowing capacity and holdings of cash and due from banks, short-terminvestments and interest-bearing deposits in other banks amounted to $3.85billion as of September 30, 2009, compared to $3.97 billion as of June 30,2009 and $3.94 billion as of March 31, 2009.  As of September 30, 2009, we had $132.6million in cash and due from banks, $320.9 million in interest-bearingdeposits, $460.7 million in short-term investments, and approximately $2.94billion in available borrowing capacity from various sources including theFederal Home Loan Bank, the Federal Reserve Bank, and federal funds facilitieswith several financial institutions.  Webelieve that our liquidity position is more than sufficient to meet ouroperating expenses, borrowing needs and other obligations.

 

As of September 30, 2009, we updated ourgoodwill impairment analysis to determine whether and to what extent ourgoodwill asset was impaired.  As a resultof this updated analysis, we determined that there was no goodwill impairmentat September 30, 2009.

 

On July 15,2009, the Board of Directors declared third quarter dividends on our commonstock and remaining Series A preferred stock.  We will continue to review our dividendpolicy quarterly in light of the current economic environment.

 

Wecontinue to explore opportunities for growth and expansion both organically andby acquisition, including FDIC-assisted acquisitions for banks which fail andare placed in receivership.  During thethird quarter of 2009, we opened a Representative Office in Taipei.  Our growing physical presence in Asiaincludes a full service branch in Hong Kong and Representative Offices inBeijing and Shanghai.  With our increasingpresence in Asia, we will be better able to facilitate our customers’ lendingand overall banking needs.

 

**Results of Operations**

 

Net loss for the third quarter of 2009 totaled$(68.5) million, compared with net loss of $(31.2) million for the thirdquarter of 2008.  On a per basic anddiluted share basis, net loss was $(0.91) and $(0.56) during the third quartersof 2009 and 2008, respectively.  Duringthe third quarter of 2009, our operating results were significantly impacted by$159.2 million in loan loss provisions and $24.2 million in credit-relatedimpairment loss on investment securities, partially offset by a $52.8 millionbenefit from income taxes.  Incomparison, we recorded $43.0 million in loan loss provisions and $53.6 millionin impairment losses on investment securities, partially offset by a $17.4million benefit from income taxes during the third quarter of 2008.  Our annualized return on average total assetsdecreased to (2.17%) for the quarter ended September 30, 2009, from (1.07%)for the same period in 2008.  Theannualized return on average stockholders’ equity decreased to (17.76%) for thethird quarter of 2009, compared with (10.06%) for the third quarter of 2008.

 

We incurred a net loss after extraordinaryitem for the nine months ended September 30, 2009 of $(183.1) million, or$(3.19) loss per basic and diluted share, compared with net loss of $(52.0)million, or $(0.90) loss per basic and diluted share, reported during thecorresponding period in 2008.  The netloss reported during the first nine months of 2009 was primarily due to the$388.7 million in loan loss provisions and $61.9 million in credit-relatedimpairment losses on investment securities, partially offset 

 

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by a $126.8 million benefitfrom income taxes.  In comparison, werecorded $183.0 million in loan loss provisions recorded during the first ninemonths of 2008 and $63.5 million in impairment losses on investment securities,partially offset by a $33.9 million benefit from income taxes.  Our annualized return on average total assetsdecreased to (1.94%) for the first nine months ended September 30, 2009,compared to (0.59%) for the same period in 2008.  The annualized return on average totalstockholders’ equity decreased to (15.87%) for the first nine months of 2009,compared with (5.75%) for the same period in 2008.

 

## *Components of Net Loss*

## * *

| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                  | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **(In millions)** | ** ** | **(In millions)** | ** ** |
| Net interest  income                        |       | $                      | 95.9       |                   | $          | 86.5 |   | $ | 263.8 |   | $ | 278.3 |   |
| Provision for  loan losses                  |       | (159.2                 | )          | (43.0                  | )          | (388.7 | ) | (183.0 | ) |
| Noninterest  (loss) income                  |       | (11.9                  | )          | (43.6                  | )          | (24.3 | ) | (24.2 | ) |
| Noninterest  expense                        |       | (46.1                  | )          | (48.5                  | )          | (155.4 | ) | (157.1 | ) |
| Benefit from  income taxes                  |       | 52.8                   |       | 17.4                   |       | 126.9 |   | 34.0 |   |
| Net loss before  extraordinary item         |       | (68.5                  | )          | (31.2                  | )          | (177.7 | ) | (52.0 | ) |
| Impact of  desecuritization, net of tax     |       | —                 |       | —                 |       | 5.4 |   | — |   |
| Net loss after  extraordinary item          |       | $                      | (68.5      | )                      | $          | (31.2 | ) | $ | (183.1 | ) | $ | (52.0 | ) |
|                                        |       |                   |       |                   |       |   |   |   |   |
| Annualized  return on average total assets  |       | -2.17                  | %          | -1.07                  | %          | -1.94 | % | -0.59 | % |
| Annualized  return on average total equity  |       | -17.76                 | %          | -10.06                 | %          | -15.87 | % | -5.75 | % |
| Annualized  return on average common equity |       | -27.12                 | %          | -13.49                 | %          | -27.46 | % | -6.83 | % |

 

#### **NetInterest Income**

#### ** **

Ourprimary source of revenue is net interest income, which is the differencebetween interest earned on loans, investment securities and other earning assetsless the interest expense on deposits, borrowings and other interest-bearingliabilities.  Net interest income for thethird quarter of 2009 totaled $95.9 million, an 11% increase over net interestincome of $86.5 million same period in2008.  For the first nine months of2009, net interest income decreased 5% to $263.8 million, compared to $278.3million for the same period in 2008.

 

Net interest margin, defined as net interest incomedivided by average earning assets, increased 10 basis points to 3.20% duringthe quarter ended September 30, 2009, from 3.10% during the third quarterof 2008.  The increase in our netinterest margin can be attributed to the maturity of higher cost CDs, new coredeposits at lower costs, the maturity and paydown of FHLB advances, the impactfrom the desecuritization, and higher yields realized on investable funds andnew loans.  The net interest margin forthe first nine months of 2009 decreased 38 basis points to 2.97%, compared with3.35% during the same period in 2008.  Thedecline in the net interest margin for the first three quarters of 2009relative to the same period in 2008 reflects the steep decrease in the federalfunds target rate during 2008, the actions we took to resolve our problemassets, and the reinvestment of net loan payoffs into lower yielding investmentsecurities and other short-term investments.

 

The following table presents the net interestspread, net interest margin, average balances, interest income and expense, andthe average yields and rates by asset and liability component for the threemonths ended September 30, 2009 and 2008:

 

45

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| ** **                                      | ** ** | **Three  Months Ended September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                      | ** ** | **Average**                                | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                      | ** ** | **Volume**                                 | ** ** | **Interest** | ** ** | **Rate  (1)** | ** ** | **Volume** | ** ** | **Interest** | ** ** | **Rate  (1)** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                    | ** ** |
| **ASSETS**                                      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                        |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Short-term investments                          |       | $                                          | 387,753    |   | $ | 402 |   | 0.41 | % | $ | 340,228 |   | $ | 1,953 |   | 2.28 | % |
| Interest-bearing deposits in other banks        |       | 509,774                                    |       | 1,454 |   | 1.12 | % | 495 |   | 5 |   | 4.01 | % |
| Securities purchased under resale agreements    |       | 91,033                                     |       | 2,153 |   | 9.25 | % | 50,000 |   | 1,276 |   | 10.12 | % |
| Investment securities (2)(6)                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Held-to-maturity                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                         |       | 761,615                                    |       | 11,886 |   | 6.24 | % | — |   | — |   | — |   |
| Tax-exempt (4)(5)                               |       | 22,727                                     |       | 256 |   | 4.51 | % | — |   | — |   | — |   |
| Available-for-sale (3)(4)(5)                    |       | 1,543,004                                  |       | 16,425 |   | 4.22 | % | 2,126,894 |   | 23,315 |   | 4.35 | % |
| Loans receivable (2)(6)                    |       | 8,471,766                                  |       | 114,512 |   | 5.36 | % | 8,451,517 |   | 131,682 |   | 6.18 | % |
| FHLB and FRB stock                              |       | 123,514                                    |       | 918 |   | 2.97 | % | 114,281 |   | 1,803 |   | 6.26 | % |
| Total interest-earning assets                   |       | 11,911,186                                 |       | 148,006 |   | 4.93 | % | 11,083,415 |   | 160,034 |   | 5.73 | % |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Noninterest-earning assets:                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                         |       | 124,708                                    |       |   |   |   |   | 136,018 |   |   |   |   |   |
| Allowance for loan losses                       |       | (244,542                                   | )          |   |   |   |   | (171,025 | ) |   |   |   |   |
| Other assets                                    |       | 843,925                                    |       |   |   |   |   | 660,736 |   |   |   |   |   |
| Total assets                                    |       | $                                          | 12,635,277 |   |   |   |   |   | $ | 11,709,144 |   |   |   |   |   |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**   |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                   |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Checking accounts                               |       | $                                          | 342,922    |   | $ | 286 |   | 0.33 | % | $ | 399,866 |   | $ | 659 |   | 0.65 | % |
| Money market accounts                           |       | 2,160,722                                  |       | 6,830 |   | 1.25 | % | 1,046,721 |   | 5,664 |   | 2.15 | % |
| Savings deposits                                |       | 421,844                                    |       | 608 |   | 0.57 | % | 449,687 |   | 929 |   | 0.82 | % |
| Time deposits less than $100,000                |       | 1,090,647                                  |       | 5,572 |   | 2.03 | % | 1,151,876 |   | 7,932 |   | 2.73 | % |
| Time deposits $100,000 or greater               |       | 3,308,057                                  |       | 13,674 |   | 1.64 | % | 3,045,325 |   | 25,573 |   | 3.33 | % |
| Federal funds purchased                         |       | 1,385                                      |       | 2 |   | 0.57 | % | 87,606 |   | 430 |   | 1.95 | % |
| FHLB advances                                   |       | 1,046,056                                  |       | 11,172 |   | 4.24 | % | 1,541,799 |   | 17,140 |   | 4.41 | % |
| Securities sold under repurchase agreements     |       | 1,018,321                                  |       | 12,140 |   | 4.66 | % | 1,000,273 |   | 12,063 |   | 4.78 | % |
| Long-term debt                                  |       | 235,570                                    |       | 1,760 |   | 2.92 | % | 235,570 |   | 2,957 |   | 4.98 | % |
| Total interest-bearing liabilities              |       | 9,625,524                                  |       | 52,044 |   | 2.15 | % | 8,958,723 |   | 73,347 |   | 3.25 | % |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **Noninterest-bearing liabilities:**            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                 |       | 1,335,131                                  |       |   |   |   |   | 1,375,103 |   |   |   |   |   |
| Other liabilities                               |       | 130,800                                    |       |   |   |   |   | 134,809 |   |   |   |   |   |
| Stockholders’ equity                       |       | 1,543,822                                  |       |   |   |   |   | 1,240,509 |   |   |   |   |   |
| Total liabilities and stockholders’ equity |       | $                                          | 12,635,277 |   |   |   |   |   | $ | 11,709,144 |   |   |   |   |   |
| Interest rate spread                            |       |                                       |       |   |   | 2.78 | % |   |   |   |   | 2.48 | % |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income and net interest margin     |       |                                       |       | $ | 95,962 |   | 3.20 | % |   |   | $ | 86,687 |   | 3.10 | % |

 

----

(1) Annualized.

(2) Includesamortization of premium and accretion of discounts on investment securities andloans receivable totaling $(1.6) million and $(3.3) million for the threemonths ended September 30, 2009 and 2008, respectively.  Also includes the amortization of deferred loanfees totaling $(1.9) million and $284 thousand for the three months ended September 30,2009 and 2008, respectively.

(3) Average balances exclude unrealized gains or losses onavailable-for-sale securities.

(4) Total interestincome and average yield rate on an unadjusted basis for tax-exempt investmentsecurities held-to-maturity is $174 thousand and 3.06% for the three monthsended September 30, 2009, respectively, and none for the three monthsended September 30, 2008. Total interest income and average yield rate onan unadjusted basis for investment securities available-for-sale is $16.4million and 4.22% for the three months ended September 30, 2009,respectively. Total interest income and average yield rate on an unadjustedbasis for investment securities available-for-sale is $23.1 million and 4.32%for the three months ended September 30, 2008, respectively.

(5) Amounts calculated on a fully taxable equivalent basis usingthe current statutory federal tax rate.

(6) Average balancesinclude nonperforming loans.

 

46

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The following table presents the net interestspread, net interest margin, average balances, interest income and expense andthe average yields and rates by asset and liability component for the ninemonths ended September 30, 2009 and 2008:

 
| ** **                                      | ** ** | **Nine  Months Ended September 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | ** **                                | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                      | ** ** | **Average**                               | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                      | ** ** | **Volume**                                | ** ** | **Interest** | ** ** | **Rate  (1)** | ** ** | **Volume** | ** ** | **Interest** | ** ** | **Rate  (1)** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                        | ** ** |
| **ASSETS**                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Short-term investments                          |       | $                                         | 405,387    |   | $ | 2,663 |   | 0.88 | % | $ | 181,675 |   | $ | 3,093 |   | 2.27 | % |
| Interest-bearing deposits in other banks        |       | 430,382                                   |       | 4,678 |   | 1.45 | % | 495 |   | 14 |   | 3.77 | % |
| Securities purchased under resale agreements    |       | 64,286                                    |       | 4,695 |   | 9.63 | % | 76,898 |   | 5,533 |   | 9.58 | % |
| Investment securities (3)(6)                    |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Held-to-maturity                                |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                         |       | 646,936                                   |       | 30,464 |   | 6.28 | % | — |   | — |   | — |   |
| Tax-exempt (2)(5)                               |       | 20,737                                    |       | 907 |   | 5.83 | % | — |   | — |   | — |   |
| Available-for-sale (2)(4)(5)                    |       | 1,878,815                                 |       | 57,101 |   | 4.06 | % | 1,986,124 |   | 76,814 |   | 5.15 | % |
| Loans receivable (3)(6)                         |       | 8,305,602                                 |       | 336,997 |   | 5.42 | % | 8,725,596 |   | 425,113 |   | 6.49 | % |
| FHLB and FRB stock                              |       | 122,369                                   |       | 1,969 |   | 2.15 | % | 115,839 |   | 5,275 |   | 6.07 | % |
| Total interest-earning assets                   |       | 11,874,514                                |       | 439,474 |   | 4.95 | % | 11,086,627 |   | 515,842 |   | 6.20 | % |
|                                            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Noninterest-earning assets:                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                         |       | 120,493                                   |       |   |   |   |   | 136,708 |   |   |   |   |   |
| Allowance for loan losses                       |       | (210,015                                  | )          |   |   |   |   | (132,548 | ) |   |   |   |   |
| Other assets                                    |       | 799,008                                   |       |   |   |   |   | 664,711 |   |   |   |   |   |
| Total assets                                    |       | $                                         | 12,584,000 |   |   |   |   |   | $ | 11,755,498 |   |   |   |   |   |
|                                            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**   |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                   |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Checking accounts                               |       | $                                         | 351,933    |   | $ | 1,003 |   | 0.38 | % | $ | 416,636 |   | $ | 2,707 |   | 0.87 | % |
| Money market accounts                           |       | 1,826,626                                 |       | 18,664 |   | 1.37 | % | 1,081,520 |   | 20,246 |   | 2.49 | % |
| Savings deposits                                |       | 416,011                                   |       | 1,969 |   | 0.63 | % | 463,172 |   | 3,341 |   | 0.96 | % |
| Time deposits less than $100,000                |       | 1,194,374                                 |       | 22,137 |   | 2.48 | % | 1,018,609 |   | 24,333 |   | 3.18 | % |
| Time deposits $100,000 or greater               |       | 3,391,653                                 |       | 51,160 |   | 2.02 | % | 3,073,775 |   | 85,919 |   | 3.72 | % |
| Federal funds purchased                         |       | 2,889                                     |       | 8 |   | 0.37 | % | 115,370 |   | 2,176 |   | 2.51 | % |
| FHLB advances                                   |       | 1,200,713                                 |       | 38,191 |   | 4.25 | % | 1,622,429 |   | 54,363 |   | 4.46 | % |
| Securities sold under repurchase agreements     |       | 1,007,912                                 |       | 36,016 |   | 4.71 | % | 1,000,750 |   | 33,881 |   | 4.51 | % |
| Long-term debt                                  |       | 235,570                                   |       | 6,211 |   | 3.48 | % | 235,570 |   | 9,675 |   | 5.47 | % |
| Total interest-bearing liabilities              |       | 9,627,681                                 |       | 175,359 |   | 2.44 | % | 9,027,831 |   | 236,641 |   | 3.49 | % |
|                                            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Noninterest-bearing liabilities:**            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                 |       | 1,292,852                                 |       |   |   |   |   | 1,379,975 |   |   |   |   |   |
| Other liabilities                               |       | 125,183                                   |       |   |   |   |   | 141,275 |   |   |   |   |   |
| Stockholders’ equity                       |       | 1,538,284                                 |       |   |   |   |   | 1,206,417 |   |   |   |   |   |
| Total liabilities and stockholders’ equity |       | $                                         | 12,584,000 |   |   |   |   |   | $ | 11,755,498 |   |   |   |   |   |
| Interest rate spread                            |       |                                      |       |   |   | 2.51 | % |   |   |   |   | 2.71 | % |
|                                            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income and net interest margin     |       |                                      |       | $ | 264,115 |   | 2.97 | % |   |   | $ | 279,201 |   | 3.35 | % |

 

----

(1)Annualized.

(2)Amounts calculated on a fully taxable equivalent basis using the currentstatutory federal tax rate.

(3)Includes amortization of premium and accretion of discounts on investmentsecurities and loans receivable totaling $(3.3) million and $(5.4) million forthe nine months ended September 30, 2009, and 2008, respectively. Alsoincludes the amortization of deferred loan fees totaling $(4.6) million and$2.1 million for the nine months ended September 30, 2009 and 2008,respectively.

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

(5)Total interest income and average yield rate on an unadjusted basis fortax-exempt investment securities held-to-maturity is $613 thousand and 3.94%for the nine months ended September 30, 2009, respectively, and none forthe nine months ended September 30, 2008. Total interest income andaverage yield rate on an unadjusted basis for investment securitiesavailable-for-sale is $57.1 million and 4.06% for the nine months endedSeptember 30, 2009, and $75.9 million and 5.09% for the nine months endedSeptember 30, 2008, respectively.

(6)Average balances include nonperforming loans.

 

47

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### **Analysis of Changes in NetInterest Income**

 

Changes in net interest income are a functionof changes in rates and volumes of both interest-earning assets andinterest-bearing liabilities.  Thefollowing table sets forth information regarding changes in interest income andinterest expense for the periods indicated. The total change for each category of interest-earning asset andinterest-bearing liability is segmented into the change attributable tovariations in volume (changes in volume multiplied by old rate) and the changeattributable to variations in interest rates (changes in rates multiplied byold volume).  Nonaccrual loans areincluded in average loans used to compute this table.

 
| ** **                                   | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                   | ** ** | **2009 vs. 2008**                         | ** ** | **2009 vs. 2008**                        | ** ** |
| ** **                                   | ** ** | **Total**                                 | ** ** | **Changes Due to**                       | ** ** | **Total** | ** ** | **Changes Due to** | ** ** |
| ** **                                   | ** ** | **Change**                                | ** ** | **Volume (1)**                           | ** ** | **Rates (1)** | ** ** | **Change** | ** ** | **Volume (1)** | ** ** | **Rates (1)** | ** ** |
| ** **                                   | ** ** | **(In thousands)**                        | ** ** | **(In thousands)**                       | ** ** |
| **INTEREST-EARNING ASSETS:**                 | ** ** | ** **                                | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Short-term investments                       |       | $                                         | (1,551     | )                                        | $          | 240 |   | $ | (1,791 | ) | $ | (430 | ) | $ | 2,235 |   | $ | (2,665 | ) |
| Interest-bearing deposits in other banks     |       | 1,449                                     |       | 1,455                                    |       | (6 | ) | 4,664 |   | 4,678 |   | (14 | ) |
| Securities purchased under resale agreements |       | 877                                       |       | 977                                      |       | (100 | ) | (838 | ) | (937 | ) | 99 |   |
| Investment securities held-to-maturity       |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |
| Taxable                                      |       | 11,886                                    |       | —                                   |       | — |   | 30,464 |   | — |   | — |   |
| Tax-exempt (2)                               |       | 256                                       |       | —                                   |       | — |   | 907 |   | — |   | — |   |
| Investment securities available-for-sale (2) |       | (6,890                                    | )          | (6,047                                   | )          | (843 | ) | (19,713 | ) | (3,544 | ) | (16,169 | ) |
| Loans receivable                             |       | (17,170                                   | )          | 315                                      |       | (17,485 | ) | (88,116 | ) | (19,981 | ) | (68,135 | ) |
| FHLB and FRB stock                           |       | (885                                      | )          | 135                                      |       | (1,020 | ) | (3,306 | ) | 279 |   | (3,585 | ) |
| Total interest and dividend income           |       | $                                         | (12,028    | )                                        | $          | (2,925 | ) | $ | (21,245 | ) | $ | (76,368 | ) | $ | (17,270 | ) | $ | (90,469 | ) |
|                                         |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |
| **INTEREST-BEARING LIABILITIES**             |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |
| Checking accounts                            |       | $                                         | (373       | )                                        | $          | (83 | ) | $ | (290 | ) | $ | (1,704 | ) | $ | (370 | ) | $ | (1,334 | ) |
| Money market accounts                        |       | 1,166                                     |       | 4,226                                    |       | (3,060 | ) | (1,582 | ) | 10,059 |   | (11,641 | ) |
| Savings deposits                             |       | (321                                      | )          | (55                                      | )          | (266 | ) | (1,372 | ) | (315 | ) | (1,057 | ) |
| Time deposits less than $100,000             |       | (2,360                                    | )          | (403                                     | )          | (1,957 | ) | (2,196 | ) | 3,739 |   | (5,935 | ) |
| Time deposits $100,000 or greater            |       | (11,899                                   | )          | 2,044                                    |       | (13,943 | ) | (34,759 | ) | 8,048 |   | (42,807 | ) |
| Federal funds purchased                      |       | (428                                      | )          | (249                                     | )          | (179 | ) | (2,168 | ) | (1,157 | ) | (1,011 | ) |
| FHLB advances                                |       | (5,968                                    | )          | (5,318                                   | )          | (650 | ) | (16,172 | ) | (13,684 | ) | (2,488 | ) |
| Securities sold under resale agreements      |       | 78                                        |       | 216                                      |       | (138 | ) | 2,135 |   | 230 |   | 1,905 |   |
| Long-term debt                               |       | (1,198                                    | )          | —                                   |       | (1,198 | ) | (3,464 | ) | — |   | (3,464 | ) |
| Total interest expense                       |       | (21,303                                   | )          | 378                                      |       | (21,681 | ) | (61,282 | ) | 6,550 |   | (67,832 | ) |
| **CHANGE IN NET INTEREST INCOME**            |       | $                                         | 9,275      |                                     | $          | (3,303 | ) | $ | 436 |   | $ | (15,086 | ) | $ | (23,820 | ) | $ | (22,637 | ) |

 

----

(1) Change in interestincome/expense not arising from volume or rate variances are allocatedproportionately to rate and volume.

(2) Amounts calculatedon a fully taxable equivalent basis using the current statutory federal taxrate.  Total change on an unadjustedbasis for tax-exempt investment securities held-to-maturity is $174 thousand,and there is no total change due to volume and rates on an unadjusted basis fortax-exempt investment securities held-to-maturity for the three months ended September 30,2009 vs. 2008. Total change on an unadjusted basis for investment securitiesavailable-for-sale is $(6.7) million, and total changes due to volume and rateson an unadjusted basis for investment securities available-for-sale is $(6.0)million and $(754) thousand for the three months ended September 30, 2009vs. 2008, respectively.

Total change on an unadjustedbasis for tax-exempt investment securities held-to-maturity is $613 thousand,and there is no total change due to volume and rates on an unadjusted basis fortax-exempt investment securities held-to-maturity for the nine months ended September 30,2009 vs. 2008. Total change on an unadjusted basis for investment securitiesavailable-for-sale is $(18.8) million, and total changes due to volume andrates on an unadjusted basis for investment securities available-for-sale is$(3.1) million and $(15.7) million for the nine months ended September 30,2009 vs. 2008, respectively.

 

**Provision for Loan Losses**

 

We recorded $159.2 million and $388.7 million inprovisions for loan losses during the third quarter and first nine months of2009, respectively.  In comparison, werecorded $43.0 million and $183.0 million in provisions for loan losses duringthe third quarter and first nine months of 2008, respectively.  The significant increase in loan lossprovisions recorded during the third quarter of 2009 reflects our elevatedchargeoff levels as we continue to manage down our exposure to problemassets.  During the third quarter of2009, our ongoing efforts to proactively identify and resolve problem assetsresulted in the sale of $180.6 million in problem loans and $25.7 million inOREO properties.  Losses of

 

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$60.1million realized from the sale of problem loans and OREO properties during thethird quarter of 2009 are included in total chargeoffs.  Gain or losses from the sale of OREOproperties that are sold shortly after they are received in a foreclosure arecredited or charged against the allowance for loan losses, if deemed material.  In conjunctionwith our efforts to manage and reduce our problem assets, we recorded $151.2million and $344.7 million in net chargeoffs during the third quarter and firstnine months of 2009.  This compares to$39.7 million and $99.9 million in net chargeoffs recorded during the thirdquarter and first nine months of 2008, respectively.  Although we believe that credit challengeswill continue throughout 2009, we have actively lowered our exposure to landand construction loans and our overall credit risk on these portfolios havebeen significantly reduced.  Throughoutthe course of 2008 and the first nine months of 2009, we have substantiallypared down both the outstanding loan balances as well as the total commitmentson these loan categories by $2.03 billion or 63%.  We continue to aggressively monitordelinquencies and proactively review the credit risk exposure of other segmentsof our loan portfolio to mitigate losses.

 

During May 2009, we desecuritized our privatelabel mortgage backed securities which resulted in $635.6 million of single andmultifamily loans being added to the loan portfolio with a correspondingdecrease in investment securities available-for-sale.  As a result of this transaction, we recordedan extraordinary loss of $5.4 million on a net of tax basis during the secondquarter of 2009 which represents the allowance for loan losses on these singlefamily and multifamily loans.

 

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

 

### **Noninterest (Loss) Income**

 

*Components of Noninterest (Loss) Income*

 
| ** **                                | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
| ** **                                | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(In  millions)**      | ** ** | **(In  millions)**     | ** ** |
| Impairment loss on  investment securities |       | $                       | (24.2      | )                      | $          | (53.6 | ) | $ | (61.9 | ) | $ | (63.5 | ) |
| Branch fees                               |       | 4.7                     |       | 4.3                    |       | 14.5 |   | 12.7 |   |
| Net gain on investment  securities        |       | 2.2                     |       | —                 |       | 7.4 |   | 7.8 |   |
| Letters of credit fees and  commissions   |       | 2.0                     |       | 2.3                    |       | 5.8 |   | 7.5 |   |
| Ancillary loan fees                       |       | 1.2                     |       | 1.8                    |       | 4.8 |   | 3.9 |   |
| Income from life insurance  policies      |       | 1.1                     |       | 1.0                    |       | 3.3 |   | 3.1 |   |
| Net gain on sale of loans                 |       | —                  |       | 0.1                    |       | — |   | 2.3 |   |
| Other operating income                    |       | 1.1                     |       | 0.4                    |       | 1.8 |   | 2.0 |   |
| Total                                     |       | $                       | (11.9      | )                      | $          | (43.6 | ) | $ | (24.3 | ) | $ | (24.2 | ) |

 

Noninterest (loss) income includes revenues earned from sources otherthan interest income.  These sourcesinclude service charges and fees on deposit accounts, fees and commissions generated fromtrade finance activities and the issuance of letters of credit, ancillary feeson loans, net gains on sales of loans, investment securities, and other assets,impairment losses on investment securities and other assets, and othernoninterest-related revenues.

 

Noninterest loss amounted to $(11.9) million duringthe quarter ended September 30, 2009 compared with ($43.6) million for thecorresponding quarter in 2008.  For thefirst nine months of 2009, noninterest loss totaled $(24.3) million, comparedto ($24.2) million recorded during the first nine months of 2008.  Included in noninterest loss during the thirdquarter of 2009 is a $24.2 million credit-related impairment loss on our pooledtrust preferred securities recorded pursuant to the provisions of 

 

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ASC320-10-65 which the Company implemented during the first quarter of 2009.  During the third quarter of 2008, we recorded$53.6 million in total impairment charges, of which $47.0 million were relatedto Fannie Mae and Freddie Mac preferred stock and $6.6 million were related topooled trust preferred securities.  Forthe first nine months of 2009, total credit-related impairment losses oninvestment securities amounted to $61.9 million.  This compares to $63.5 million in impairmentlosses recorded on investment securities during the first nine months of 2008.

 

Branch fees, which represent revenues derived frombranch operations, increased 9% to $4.7 million in the third quarter of 2009,from $4.3 million for the same quarter in 2008. Similarly, branch fee income for the first nine months of 2009 increased14% to $14.5 million, compared to $12.7 million in the same prior year period.  The increase in branch-related fees can beattributed primarily to higher revenues from service and transaction charges ondeposit accounts.

 

Lettersof credit fees and commissions, which represent revenues from trade financeoperations as well as fees related to the issuance and maintenance of standbyletters of credit, decreased 14% to $2.0 million during the third quarter of 2009, from $2.3 million recorded during the sameperiod in 2008.  For the first nine months of2009, letters of credit fees and commissions decreased 23% to $5.8 million,compared to $7.5 million for the first nine months of 2008.  The decrease in letters of credit fees and commissionsis primarily due to the decline in the volume of standby letters of creditduring 2009 relative to the prior year as well as a decrease in commissionsgenerated from trade finance activities due to the downturn in the economy.

 

Net gain on sales of investment securities amountedto $2.2 million during the third quarter of 2009.  There were no sales of investment securitiesduring the third quarter of 2008.  Duringthe first nine months of 2009, net gain on sales of investment securitiesdecreased 5% to $7.4 million, from the $7.8 million recorded during the sameperiod in 2008.  Proceeds from the saleof investment securities provide additional liquidity to purchase additionalinvestment securities, to fund loan originations, and to pay down borrowings.

 

Ancillary loan fees consist of revenues earned fromthe servicing of mortgages, fees related to the monitoring and disbursement ofconstruction loan proceeds, and other miscellaneous loan income.  Ancillary loan fees decreased 31% to $1.2million during the third quarter of 2009, compared to $1.8 million recordedduring the same period in 2008.  For thefirst nine months of 2009, ancillary loan fees increased 23% to $4.8 million,compared to $3.9 million for the first nine months of 2008.

 

We hadminimal secondary market activity during the first three quarters of 2009.  The net gain on sales of loans recordedduring 2008 is primarily due to sales of single family loans to Fannie Mae aswell as bulk sales of commercial real estate loans to various third partiesconsummated during these periods.

 

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**Noninterest Expense**

 

*Components of Noninterest Expense*

* *
| ** **                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                        | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                        | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                        | ** ** | **(In millions)**      | ** ** | **(In millions)**      | ** ** |
| Compensation and employee benefits                                |       | $                      | 15.9       |                   | $          | 17.5 |   | $ | 49.5 |   | $ | 66.6 |   |
| Occupancy and equipment expense                                   |       | 6.3                    |       | 6.8                    |       | 20.0 |   | 20.4 |   |
| Deposit insurance premiums and regulatory assessments             |       | 6.1                    |       | 1.7                    |       | 19.0 |   | 5.2 |   |
| Other real estate owned expense                                   |       | 0.8                    |       | 2.1                    |       | 16.5 |   | 3.5 |   |
| Loan related expense                                              |       | 2.2                    |       | 2.4                    |       | 5.3 |   | 6.0 |   |
| Amortization of investments in affordable housing partnerships    |       | 1.7                    |       | 1.9                    |       | 5.1 |   | 5.5 |   |
| Legal expense                                                     |       | 1.3                    |       | 0.9                    |       | 4.9 |   | 3.9 |   |
| Data processing                                                   |       | 1.1                    |       | 1.1                    |       | 3.4 |   | 3.4 |   |
| Amortization and impairment loss of premiums on deposits acquired |       | 1.1                    |       | 1.6                    |       | 3.3 |   | 6.1 |   |
| Deposit-related expenses                                          |       | 0.9                    |       | 1.2                    |       | 2.9 |   | 3.4 |   |
| Impairment loss on goodwill                                       |       | —                 |       | 0.3                    |       | — |   | 0.9 |   |
| Other operating expenses                                          |       | 8.7                    |       | 11.0                   |       | 25.5 |   | 32.2 |   |
| Total noninterest expense                                         |       | $                      | 46.1       |                   | $          | 48.5 |   | $ | 155.4 |   | $ | 157.1 |   |
| Efficiency Ratio (1)                                              |       | 39.99                  | %          | 46.40                  | %          | 48.67 | % | 45.51 | % |

 

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(1)  Representsnoninterest expense, excluding the amortization and/or impairment losses ofintangibles, and amortization of investments in affordable housingpartnerships, divided by the aggregate of net interest income before provisionfor loan losses and noninterest income, excluding impairment loss on investmentsecurities.

 

Noninterest expense, which is comprisedprimarily of compensation and employee benefits, occupancy and other operatingexpenses decreased 5% to $46.1 million during the third quarter of 2009, from$48.5 million for the same quarter in 2008. For the first nine months of 2009, noninterest expense decreased 1% to$155.4 million, compared with $157.1 million during the same period in 2008.

 

Compensation and employee benefits decreased9% to $15.9 million during the third quarter of 2009, compared to $17.5 millionfor the third quarter of 2008.  For thefirst nine months of 2009, compensation and employee benefits decreased 26% to$49.5 million, compared with $66.6 million for the first nine months of2008.  The decrease in compensation andemployee benefit expenses is due to the impact of initiatives undertaken by theCompany throughout the past year and 2008 to reduce overall staffing levels andlower compensation-related incentives and expenses.

 

Deposit insurance premiums and regulatoryassessments increased to $6.1 million during the quarter ended September 30,2009, compared with $1.7 million during the same period in 2008.  For the first nine months of 2009, depositinsurance premiums and regulatory assessments increased to $19.0 millioncompared to $5.2 million for the same period in 2008.  Increases in the FDIC deposit assessment rateduring the third quarter of 2009 contributed to the increase in depositinsurance premiums and regulatory assessments during the third quarter andfirst nine months of 2009, relative to the same periods in 2008.  Furthermore, the special assessment imposedby the Federal Deposit Insurance Corporation (“FDIC”) resulted in a $5.7million impact to our pretax earnings during the second quarter of 2009 and waspaid on September 30, 2009.

 

We recorded OREO expenses, net of OREO revenues andgains, totaling $767 thousand during the quarter ended September 30,2009, compared with$2.1 million recorded during the same period in 2008.  For the firstnine months of 2009, net OREO expenses increased to $16.5 million, comparedwith $3.5 million in net OREO expenses during the first nine months of2008.  The $767 thousand in total OREO expenses incurredduring the third quarter of 2009 is comprised of $1.1 million in variousoperating and maintenance expenses related to our higher volume of OREOproperties, $559 thousand in valuation losses, and $920 thousand in net gainsfrom the sale of ten OREO properties consummated during the third quarter of2009.  For the first nine months of 2009,total net OREO expenses amounting to $16.5 million were comprised of $4.0million in various operating and maintenance expenses on

 

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OREO properties, $7.5 million in valuation losses, and$5.0 million in net losses from the sale of 110 OREO properties consummatedduring the first nine months of 2009.  Asof September 30, 2009, total OREO, net amounted to $24.2 million, comparedto $17.6 millionas of September 30,2008.

 

Amortization expense andimpairment losses on premiums on deposits acquired decreased 32% to $1.1million during the quarter ended September 30, 2009, compared with $1.6million during the same period in 2008. For the first nine months of 2009, amortization expense and impairmentlosses on premiums on deposits totaled $3.3 million, compared with $6.1 millionincurred during the same period in 2008. During the first quarter of 2008, we recognized an $855 thousandimpairment loss on deposit premiums initially recorded for the Desert CommunityBank acquisition due to higher than anticipated runoffs in certain depositcategories.  In comparison, we did notrecord any impairment losses on deposit premiums during the first threequarters of 2009.  Additionally, theamortization expense on deposit premiums related to the United National Bankand Standard Bank acquisitions decreased during the first nine months of 2009,relative to the same period in 2008. This is due to lower runoff or decay rates incorporated into our coredeposit amortization model after three years following the consummation of eachacquisition.  The projected deposit runoffrates incorporated into the core deposit amortization models simulate the decayrates used in the Company’s current asset liability model.  Premiums on acquired deposits are amortizedover their estimated useful lives.

 

Other operating expensesinclude advertising and public relations, telephone and postage, stationery andsupplies, bank and item processing charges, insurance expenses, and otherprofessional fees, and charitable contributions.  Other operating expenses decreased 21% to$8.8 million during the quarter ended September 30, 2009, compared with$11.1 million during the same period in 2008. Similarly, other operating expenses decreased 20% to $25.7 million forthe first nine months of 2009, from $32.2 million for the same period in 2008.  The decrease in other operating expenses forboth periods in 2009, relative to the same periods in 2008, is primarily due tovarious cost-cutting measures and initiatives that we undertook throughout 2008and the first nine months of 2009.

 

Our efficiency ratio decreased to 39.99% for thequarter ended September 30, 2009, compared to 46.40% for the correspondingperiod in 2008.  The decrease in ourefficiency ratio during the third quarter of 2009 reflects our ongoing expensemanagement efforts.  For the first ninemonths of 2009, the efficiency ratio was 48.67% compared with 45.51% for thesame period in 2008.  The increase in ourefficiency ratio for the first nine months of 2009 can be attributed largely tohigher deposit insurance premiums and higher credit cycle related expensesassociated with OREO/foreclosure transactions as well as lower net interestincome before the provision for loan losses.

 

**Income Taxes**

 

Theincome tax benefit amounted to $52.8 million for the third quarter of 2009,representing an effective tax benefit rate of 43.5%.  In comparison, the income tax benefit of$17.4 million represented an effective tax rate of 35.7% for the third quarterof 2008.   Included in the income taxbenefit recognized during the third quarters of 2009 and 2008 are $1.6 millionand $2.0 million, respectively, in tax credits generated from our investmentsin affordable housing partnerships.

 

Forthe first nine months of 2009, the income tax benefit totaled $126.8 millionrepresenting an effective tax rate of 41.6%. This compares to $33.9 million income tax benefit, representing a 39.4%effective tax rate, recorded during the first nine months of 2008.  For the first nine months of 2009, the incometax benefit includes $4.7 million in tax credits, compared to $5.3 million intax credits during the same period in 2008. Due to the high degree of variability of the estimated annual effectivetax rate when considering the range of projected income (loss) for theremainder of the year, we have determined that the actual year-to-dateeffective tax rate is the best estimate of the annual effective tax rate.  Our 

 

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effective tax rate is derived based on our corporate statutory tax rateadjusted for permanent differences and available tax credits.

 

Management regularly reviews the Company’s taxpositions and deferred tax assets.  Inaccordance with ASC 740-10 (previously FIN 48, *Acccountingfor Uncertainty in Income Taxes—and interpretation of FASB Statement No. 109*),the Company applies a more likely than not recognition threshold for therealization of deferred tax assets. Factors considered in this analysis include future reversals of existingtemporary differences, future taxable income exclusive of reversingdifferences, taxable income in prior carryback years, and tax planningstrategies.  Although realization is notassured, management believes that it is more likely than not that the recordeddeferred tax assets are fully recoverable.

 

At September 30, 2009, the total deferred tax assetamounted to $156.0 million.  Thiscompares to $184.6 million in total deferred tax asset at December 31,2008.  Our current earnings forecastsreflect that it is more likely than not that the Company will producesufficient taxable income to realize the entire deferred tax asset as ofSeptember 30, 2009.  Should theexpectations of future profitability materially change or should earnings inthe short term differ materially from the Company’s forecast, a valuationallowance may be established if management believes any portion of the deferredtax asset will not be realized.  Thereceivable related to the deferred tax asset is reflected in the condensedconsolidated balance sheets under the caption accrued interest receivable andother assets.

 

Management’s analysis of the deferred tax asset recognizes that theCompany has incurred a cumulative loss during the preceding three-year periodended September 30, 2009 of $75.4 million, including substantial losses in 2008and 2009.  A majority of the cumulativeloss has been caused by the deterioration in credit and the substantialincrease to the allowance for loan losses in the past two years.

 

**Operating Segment Results**

 

We had previously identified five operating segmentsfor purposes of management reporting: retail banking, commercial lending,treasury, residential lending, and other. Our strategic focus has been shifting and evolving over the last severalyears which has influenced how our chief operating decision maker views theCompany’s business operations and assesses its economic performance.  Specifically, our business focus hasculminated in a two-segment core business structure: Retail Banking andCommercial Banking.  A third segment,which is comprised of a combination of our previous operating segments—Treasuryand Other, provides broad administrative support to these two core segments.  As a result of this evolution in ourstrategic focus, we realigned our segment methodology during the first quarterof 2009, and identified these three business divisions as meeting the criteriaof an operating segment.  The objectiveof combining certain segments under a new reporting structure was to better alignour service structure with our customer base, and to provide a platform to moreefficiently manage the complexities and challenges impacting our currentbusiness environment.

 

The Retail Banking segment focuses primarily onretail operations through the Bank’s branch network.  The Commercial Banking segment, whichincludes commercial real estate, primarily generates commercial loans throughthe efforts of the commercial lending offices located in the Bank’s northernand southern California production offices. Furthermore, the Commercial Banking segment also offers a wide varietyof international finance and trade services and products.  The former residential lending segment hasbeen combined with the Retail Banking segment due to the consumer-centricnature of the products and services offered by these two segments as well asthe synergistic relationship between these two units in generating consumermortgage loans.  The remainingcentralized functions, including the former Treasury segment, and eliminationsof intersegment amounts have been aggregated and included in “Other.”

 

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Changes in our management structure or reportingmethodologies may result in changes in the measurement of operating segmentresults.  Results for prior periods aregenerally restated for comparability for changes in management structure orreporting methodologies unless it is not deemed practicable to do so.

 

Given the significant decline in short-term andlong-term interest rates since 2007, we reassessed our transfer pricingassumptions during the first quarter of 2009 to be consistent with the Company’sstrategic goal of growing core deposits and originating profitable, good creditquality loans.  Changes to our fundstransfer pricing assumptions were made with the intent to promote core depositgrowth and, given our recent credit experience, to better reflect the currentrisk profiles of various loan categories within our credit portfolio.  Our transfer pricing assumptions andmethodologies are reviewed at least annually to ensure that our process isreflective of current market conditions. Our transfer pricing process is formulated with the goal of incentingloan and deposit growth that is consistent with the Company’s overall growthobjectives as well as provide a reasonable and consistent basis for measurementof our business segments and product net interest margins.  Changes to our transfer pricing assumptionsand methodologies are approved by the Asset Liability Committee.

 

The changes in transfer pricing assumptions that weimplemented during the first quarter of 2009 have not been reflected in thesegment results for 2008 since these changes were adopted on a prospectivebasis.  We have, however, performed ahigh level assessment of the impact of these transfer pricing assumptionchanges to the various operating segments. Based on this assessment, we determined that the full year impact ofthese changes was not significant overall, and would have been favorable to thesegment pretax profit (loss) results for the Retail Banking and Commercialbanking segments but unfavorable to the Other segment during 2008.  Additionally, the changes in transfer pricingassumptions implemented during the first quarter of 2009 would not have alteredthe conclusion of our goodwillimpairment test performed as of September 30,2008, had these assumptions been retroactively implemented during 2008.

 

For more information about our segments, includinginformation about the underlying accounting and reporting process, please seeNote 10 to the condensed consolidated financial statements presented elsewherein this report.

 

*RetailBanking*

 

TheRetail Banking segment reported a $(45.0) million pretax loss for the quarterended September 30, 2009, compared to a $(9.7) million pretax loss for the same quarterin 2008.  The increase in pretax loss forthis segment during the third quarter of 2009 is comprised of a $42.6 millionincrease in loan loss provision, a $1.6 million decrease in noninterest income,a $1.8 million increase in noninterest expense, and a $351 thousand decrease innet interest income.

 

Forthe nine months ended September 30, 2009, the pretax loss for the Retail Bankingsegment amounted to $(85.0) million, compared to the $(5.9) million in pretaxloss recorded for the same period in 2008. The increase in pretax loss for this segment during the nine monthsended September 30,2009 is comprised of a $74.2 million or 105% increase in loan loss provisions,a $9.4 million or 32% decrease in noninterest income, and a $9.1 million or 10%increase in noninterest expense, partially offset by a $1.2 million or 1%increase in net interest income.

 

The slightincrease in net interest income during the first nine months of 2009 isattributable to the interest rate floors on newly originated variable-rateloans, which partially offsets the steep decline in interest rates since 2008.  The sizeable increase in loan loss provisionsfor this segment during the third quarter of 2009 and first nine months of2009, relative to the same periods in 2008, were due to increased 

 

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chargeoff activityresulting from the downturn in the real estate housing market.  Loan loss provisions are also impacted byaverage loan balances for each reporting segment.

 

Noninterestincome for this segment decreased 21%, to $5.9 million for the quarter ended September 30, 2009, from $7.4 million recordedduring the same period in 2008.  For thefirst nine months of 2009, noninterest income for the retail banking segmentdecreased 32% to $20.4 million, compared to $29.8 million for the same periodin 2008.  The decrease in noninterestincome for both periods is primarily due to lower loan fee income resultingfrom a notable decrease in our loan origination activities and lower net gainon sale of loans, partially offset by an increase in branch-relatedrevenues pertaining to service and transaction charges on depositaccounts.  Additionally, noninterestincome during the first nine months of 2008 reflects the $6.1 million gain onsale of investment securities from loans originated by this segment that havebeen securitized as part of the Company’s securitization activities.

 

Noninterest expense for this segmentincreased 7% to $28.9 million during the third quarter of 2009, compared with$27.1 million recordedduring the third quarter of 2008.  Forthe first nine months of 2009, noninterest expense increased 10% to $97.2million, from $88.1 million for the same period in 2008.  The increase in noninterest expense for bothperiods is primarily due to higher FDIC insurance premiums, partially offset bya decrease in compensation and employee benefits and amortization andimpairment losses on premiums on deposits acquired.  Higher OREO expenses further contributed to highernoninterest expense during the first nine months of 2009 relative to the sameperiod in 2008.

 

*CommercialBanking*

 

TheCommercial Banking segment reported a pretax loss of $(56.8) million during thequarter ended September 30, 2009, compared with pretax income of $9.1 millionfor the same period in 2008.  For thefirst nine months of 2009, the pretax loss for the Commercial Banking segmentamounted to $(136.3) million, compared to a pretax loss of $(13.4) millionrecorded during the same period in 2008. The primary driver of the increase in pretax loss for both periods forthis segment is due to a significant increase in loan loss provisions resultingfrom increased chargeoff activity.  Loanloss provisions increased 361% to $94.1 million during the third quarter of2009, compared with $20.4 million for the same period in 2008.  During the first nine months of 2009, loanloss provisions increased 117% to $244.1 million, compared with $112.6 millionfor the same period in 2008.  Netinterest income for this segment slightly decreased 1% to $43.7 million duringthe quarter ended September 30, 2009, compared to $44.4 million for the sameperiod in 2008.  For the first ninemonths of 2009, net interest income for the Commercial Banking segment amountedto $136.1 million, or a 2% increase from net interest income of $133.0 millionrecorded during the same period in 2008.

 

Theslight increases in net interest income during the first nine months of 2009 isprimarily due to a significant decrease in the charge for funds applied to theloan portfolio as a result of the declining interest rate environment.  Although interest income on loans alsodecreased in response to declining interest rates, the interest rate floors onvariable loans helped to support the interest income on these loans.

 

Noninterestincome for this segment decreased 12% to $4.8 million during the third quarterof 2009, compared with $5.4 million recorded in the same quarter of 2008.  For the first nine months of 2009,noninterest income decreased 19% to $15.2 million, from $18.9 million for thesame period in 2008.  The decrease innoninterest income is primarily due to a decrease in net gain on sale of loansas well as a decrease in letters of credit fees and commissions driven by adecline in the volume of standby letters of credit and commissions generatedfrom trade finance activities due to the downturn in the economy.

 

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Noninterestexpense for this segment decreased 5% to $10.3 million during the third quarterof 2009, compared with $10.8 million recorded during the same quarter in2008.  The decrease in noninterestexpense during the third quarter of 2009 is due to a decline in OREO expensesand compensation and employee benefits, partially offset by an increase in FDICinsurance premiums.  For the first nine months of 2009,noninterest expense for this segment increased 1%, to $36.2 million, from $35.9million for the same period in 2008 due to an increase in OREOexpenses and FDIC insurance premiums, partially offset by a decrease incompensation and employee benefits for this segment.

 

*Other*

 

Thissegment reported a pretax loss of $(19.6) million during the quarter ended September 30, 2009, compared with a pretax loss of$(47.9) million recorded in the same quarter of 2008.  The decrease in pretax loss during the thirdquarter of 2009 is primarily due to an increase in net interest income anddecreases in both noninterest loss and noninterest expense.  For the first nine months of 2009, the pretaxloss for this segment amounted to $(83.2) million, compared to a pretax loss of$(66.7) million recorded during the same period in 2008.  The increase in the pretax loss for the firstthree quarters of 2009 is primarily due to an increase in net interest expense,partially offset by decreases in noninterest loss and noninterest expense.

 

Netinterest income for this segment amounted to $3.4 million during the quarterended September 30,2009, compared to net interest expense of $7.0 million recorded in the samequarter of 2008.  For the first ninemonths of 2009, net interest expense for this segment amounted to $31.5million, compared with net interest expense of $12.8 million recorded duringthe same period in 2008.  Since thissegment now includes the treasury function, which is responsible for theliquidity and interest rate risk management of the Bank, it bears the cost ofadverse movements in interest rates affecting our net interest margin andsupports the Retail Banking and Commercial Banking segments through fundstransfer pricing.

 

Noninterestloss for this segment amounted to $22.5 million, compared with $56.4 million innoninterest loss recorded during the same quarter of 2008.  For the first nine months of 2009,noninterest loss amounted to $59.9 million, compared with $72.9 million for thesame period in 2008.  The noninterestloss recorded for this segment is primarily due to the $24.2 million and $61.9million in credit-related impairment losses recorded on our investmentsecurities during the third quarter and nine months ended September 30,2009, respectively.  In comparison, werecorded $53.6 million and $63.5 million in impairment losses on our investmentsecurities during the third quarter and first nine months of 2008,respectively.  For the first nine monthsof 2009, noninterest loss is partially offset by a higher gain on saleof investment securities amounting to $7.4 million.  This compares to $641 thousand in gains frominvestment securities sales for the same period in 2008.

 

Noninterest expense for thissegment decreased 35% to $6.9 million, compared with $10.6 million recordedduring the same quarter in 2008.  For the first nine months of 2009,noninterest expense for this segment decreased 34%, to $22.0 million, from$33.0 million for the same period in 2008. The decrease in noninterest expense for both periods is primarily due toa decrease in compensation and employee benefits, partially offset by higherFDIC insurance premiums.

 

### **Balance Sheet Analysis**

 

Total assets increased $63.1 million, or 1%, to $12.49billion at September 30, 2009, relative to total assets of $12.42 billionat December 31, 2008.  The increasein total assets is comprised predominantly of increases ininterest-bearing deposits totaling $92.4 million, held-to-maturity investmentsecurities totaling $659.0 million, and net loans receivable amounting to $87.5million, 

 

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partially offset by decreases in short-terminvestments totaling $273.7 million, and available-for-sale investmentsecurities totaling $583.2 million.  A largeportion of the net increase in total assets was funded by deposit growth of$526.6 million, partially offset by a decrease in FHLB advances of$430.1 million.

 

**Fair Value Measurement and Fair Value Option**

 

ASC 820 (previously SFAS 157, *Fair ValueMeasurement*) and ASC 825 (previously SFAS 159, *Fair ValueOption*) became effective on January 1, 2008.  We adopted ASC 820 which provides a frameworkfor measuring fair value under GAAP. This standard applies to all financial assets and liabilities that arebeing measured and reported at fair value on a recurring and non-recurringbasis.  For the Company, this includesthe investment securities available-for-sale portfolio, equity swap agreements,derivatives payable, mortgage servicing assets and, impaired loans.  The adoption of ASC 820 did not have anyimpact on our financial condition, results of operations, or cash flows.

 

We adopted ASC 820-10 (previously FSP SFAS 157-2,*Effective Date of FASB StatementNo. 157*) effective January 1,2009, which provided for a one-year deferral of the implementation of ASC 820for other nonfinancial assets and liabilities, effective for fiscal yearsbeginning after November 15, 2008. As a result of adopting this guidance, we are now providing fair valuedisclosures related to our OREO properties. See Note 3 to our condensed consolidated financial statements presentedelsewhere in this report.

 

We did not elect to adopt the fair value option, butto continue recording the financial instruments in accordance with currentpractice.

 

**Securities****Purchased Under Resale Agreements**

 

We purchase securities under resale agreements(“resale agreements”) with terms that range from one day to several years.  Total resale agreements increased to $75.0million as of September 30, 2009, compared with $50.0 million as of December 31,2008, all of which are long-term agreements. On June 26, 2009, we entered into a new resale agreement amountingto $25.0 million, which has a stated termination date of June 26,2024.  This resale agreement was calledon September 26, 2009.  On July 31,2009, we entered into a new resale agreement amounting to $25.0 million, whichhas a stated termination date of July 31, 2024.  The collateral for these resale agreements consists ofU.S. Government agency and/or U.S. Government sponsored enterprise debt and/ormortgage-backed securities held in safekeeping by a third party custodian.

 

Purchases of securitiesunder resale agreements are overcollateralized to ensure against unfavorablemarket price movements.  We monitor themarket value of the underlying securities which collateralize the relatedreceivable on resale agreements, including accrued interest.  In the event that the fair market value ofthe securities decreases below the carrying amount of the related repurchaseagreement, our counterparty is required to designate an equivalent value ofadditional securities.  Thecounterparties to these agreements are nationally recognized investment bankingfirms that meet credit eligibility criteria and with whom a master repurchaseagreement has been duly executed.

 

**Investment Securities**

 

Incomefrom investing activities provides a significant portion of our totalincome.  We aim to maintain an investmentportfolio with an adequate mix of fixed-rate and adjustable-rate securitieswith 

 

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relatively shortmaturities to minimize overall interest rate risk.  Our investment securities portfolio primarilyconsists of U.S. Treasury securities, U.S. Government agency securities, U.S.Government sponsored enterprise debt securities, U.S. Government sponsored andother mortgage-backed securities, municipal securities, corporate debtsecurities, and U.S. Government sponsored enterprise equity securities.  We classify certain investment securities asheld-to-maturity, and accordingly, these securities are recorded based on theiramortized cost.  We also classify certaininvestments as available-for-sale, and accordingly, these securities arecarried at their estimated fair values with the corresponding changes in fairvalues recorded in accumulated other comprehensive income, as a component ofstockholders’ equity.

 

Investmentsecurities held-to-maturity totaled $781.3 million and $122.3 million at September 30,2009 and December 31,2008, respectively, representing U.S. Government agency and U.S. Governmentsponsored enterprise debt securities, municipal securities, corporate debtsecurities and mortgage backed-securities, and other securities purchasedduring the first nine months of 2009 and fourth quarter of 2008.  The increase in investment securities wasfunded by deposit growth and capital raised during 2008.

 

Total investmentsecurities available-for-sale decreased 29% to $1.46 billion as of September 30,2009, compared with$2.04 billion at December 31, 2008.  The decrease is due to the desecuritization of our private-labelmortgage backed securities in May 2009 which resulted in a $635.6 millionincrease in single and multifamily loan receivable with a correspondingdecrease in available-for-sale investment securities.  Total repayments/maturitiesand proceeds from sales of investment securities amounted to $1.04 billion and$336.7 million, respectively, during the nine months ended September 30,2009.

 

We recorded net gains on sales of investmentsecurities totaling $2.2 million during the third quarter of 2009.  There were no sales of investment securitiesduring the same period in 2008.  For the firstnine months of 2009, we recorded net gains on sales of investment securitiestotaling $7.4 million, compared with $7.8 million recorded during the firstnine months of 2008.

 

A portion of the proceeds from repayments,maturities, sales, and redemptions of investment securities were appliedtowards additional investment securities purchases totaling $2.01 billion.

 

At September 30, 2009, investment securitiesheld-to-maturity with an aggregate par value of $667.1 million andavailable-for-sale securities with an aggregate par value of $1.09 billion werepledged to secure public deposits, repurchase agreements, the FRB discountwindow, and other purposes required or permitted by law.

 

We perform regularimpairment analyses on our portfolio of investment securities.  If we determine that a decline in fair value isother-than-temporary, a credit-related impairment loss is recognized in currentearnings.  Noncredit-related impairmentlosses are charged to other comprehensive income.  Other-than-temporarydeclines in fair value are assessed based on factors including the duration thesecurity has been in a continuous unrealized loss position, the severity of thedecline in value, the rating of the security, the probability that we will beunable to collect all amounts due, and our ability and intent to not sell the securitybefore recovery of its amortized cost basis. For securities that are determined to have other-than-temporary declinesin value, we have both the ability and the intent to hold these securities andit is not more likely than not that we will be required to sell thesesecurities before recovery of their amortized cost bases.

 

The fair values of investment securities aregenerally determined by reference to the average of at least two quoted marketprices obtained from independent external brokers or prices obtained fromindependent external pricing service providers who have experience in valuingthese securities.  We perform a monthlyanalysis on the broker quotes received from third parties to ensure that the prices

 

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representa reasonable estimate of fair value.  Ourprocedures include, but are not limited to, initial and ongoing review of thirdparty pricing methodologies, review of pricing trends, and monitoring oftrading volumes.  We ensure that pricesreceived from independent brokers represent a reasonable estimate of fair valuethrough the use of internal and external cash flow models that are developedbased on spreads, and when available, market indices. As a result of thisanalysis, if we determine that there is a more appropriate fair value basedupon available market data, the price received from third parties is adjustedaccordingly.

 

Prices from third party pricingservices are often unavailable for securities that are rarely traded or aretraded only in privately negotiated transactions.  As a result, certain securities are pricedvia independent broker quotations which utilize inputs that may be difficult tocorroborate with observable market based data. Additionally, the majority of these independent broker quotations arenon-binding.

 

As a result of the global financial crisis andilliquidity in the U.S. markets, we believe that current broker prices obtainedon one private-label mortgage-backed security and certain pooled trustpreferred securities are based on forced liquidation or distressed sale valuesin very inactive markets that are not representative of the economic value ofthese securities.  The fair values of theprivate-label mortgage-backed security and pooled trust preferred securitieshave traditionally been based on the average of at least two quoted marketprices obtained from independent external brokers since broker quotes in anactive market are given the highest priority. However, in light of these circumstances, we modified our approach indetermining the fair values of these securities.  For the pooled trust preferred securities, webelieve that the cash flow analyses which demonstrate that the realizable valueof these securities are equal to their carrying values should be the primaryfactor considered when making a judgment about other-than-temporaryimpairment.  For the private-labelmortgage-backed security, we determined fair value by using the appropriatecombination of the market approach reflecting current broker prices and adiscounted cash flow approach.  Thevalues resulting from each approach (i.e. market and income approaches) wereweighted to derive the final fair value on the private-label mortgage-backedsecurity.  In calculating the fair valuederived from the income approach, we made assumptions related to the impliedrate of return, general change in market rates, estimated changes in creditquality and liquidity risk premium, specific non-performance and defaultexperience in the collateral underlying the security, as well as brokerdiscount rates.

 

*Corporate Debt Securities(Available-for-Sale)*

 

The majority of unrealized losses in theavailable-for-sale portfolio at September 30, 2009 are related to pooledtrust preferred debt securities.  As of September 30,2009, the Company had $6.4 million in pooled trust preferred debt securitiesavailable-for-sale, representing less than 1% of the total investmentsecurities available-for-sale portfolio. In April 2009, except for one security which was downgraded butremained at investment grade status, the ratings for the other twelve pooledtrust preferred securities were downgraded to non-investment grade status dueto increased deferral and default activity from the issuers of the underlyingdebt collateralizing these instruments. As of September 30, 2009, these debt instruments had grossunrealized losses amounting to $55.4 million, or 90% of the total amortizedcost basis of these securities, comprised of $34.4 million in gross unrealizedlosses and $21.0 million, or $12.2 million on a net of tax basis, innoncredit-related impairment losses recorded during the first nine months of2009 pursuant to the provisions of ASC 320-10-65.

 

Almost all of the pooled trust preferred securities held by us haveunderlying collateral issued by banks and insurance companies.  Continued deterioration in market conditionshave resulted in many more small banks either deferring or defaulting on theirtrust preferred debt during the third quarter of 2009.  As a result of diminishing collateral values,deteriorating cash flows, and increasing estimates of future deferrals anddefaults, we recorded an impairment loss of $45.2 million on our portfolio oftrust preferred securities during the third quarter of 2009, of which $24.2million was a pre-tax credit loss 

 

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recordedthrough earnings.  **The remaining $21.0 million, or $12.2 million on a net of tax basis, innoncredit-related impairment** loss was recorded in othercomprehensive income as of September 30, 2009.  We determined the amount of credit-relatedimpairment by discounting the expected future cash flows with the effectiveyield of the security in accordance with generally accepted accountingprinciples**. **During the first quarter of 2009, we recorded animpairment loss of $13.4 million on a non-investment grade pooled trustpreferred security.  During the secondquarter of 2009, we recorded an impairment loss of $100.8 million on itsportfolio of trust preferred securities, of which $37.4 million was a pre-taxcredit loss recorded in other comprehensive income.  As of March 31, 2009, of the totalimpairment loss amount, $200 thousand was a pretax credit loss recorded throughearnings.  The remaining $13.2 million,or $7.6 million on a net of tax basis, in noncredit-related impairment loss wasrecorded in other comprehensive income.

 

During 2008 and 2007, we recorded $13.6 million and $405 thousand,respectively, in non-credit related impairment losses on three pooled trustpreferred securities due to rating downgrades caused by increases in market spreads, concernsregarding the housing market, and lack of liquidity in the market.  None of these securities have experienced anycredit-related losses for which OTTI was previously recorded.  Upon the implementation of ASC 320-10-65, we reclassifiedthe combined $14.0 million, or $8.1 million on a net of tax basis, innoncredit-related OTTI impairment losses recognized during 2008 and 2007 fromthe opening balance of retained earnings to other comprehensive income as of March 31,2009.

 

*Mortgage-backed Securities(Held-to-Maturity)*

 

As of September 30,2009, the aggregatefair value of the non-agency held-to-maturity mortgage-backed securitiesamounted to $105.5 million.  Thesesecurities are collateralized by single family loans and secured by first lienson these residential properties.  During thesecond and third quarter of 2009, three mortgage-backed securities weredowngraded from investment grade to non-investment grade.  Except for these three non-investment gradesecurities, the remaining held-to-maturity mortgage-backed securities areinvestment grade.  As of September 30,2009, these debt instruments had gross unrealized losses for less than twelvemonths amounting to $1.9 million, or 2% of the aggregate amortized cost basisof held-to-maturity mortgage-backed securities, comprised of $1.8 million and$115 thousand that are non-investment grade and investment grade, respectively.

 

The decline infair values of these securities is due to widening market spreads, concernsregarding the downturn in the housing market, and lack of liquidity in themarket.  However, these securities havestrong credit support, low loan-to-values, low delinquency, and low OREOratios.  We do not intend to sellthese securities and it is not more likely than not that we will be required tosell these securities before recovery of their amortized cost bases.  As such, we do not deem these securities tobe other-than-temporarily impaired as of September 30, 2009.

 

*Mortgage-backed Securities(Available-for-Sale)*

 

As of September 30,2009, we had oneprivate-label available-for-sale mortgage-backed security with a fair value of$15.5 million, with a gross unrealized loss of $5.8 million, or 27% of theamortized cost basis of this security, for more than 12 months.  During the second quarter of 2009, thissecurity was downgraded from investment grade to non-investment grade.  This security is collateralized by singlefamily loans and secured by the first lien on these residentialproperties.  Additionally, any principaland interest shortfall that may arise from the deterioration of the collateralwill be covered by a monoline insurance provider.  We do not intend to sell thissecurity and it is not more likely than not that the Company will be requiredto sell this security before recovery of its amortized cost basis.  As such, we do not deem this security to beother-than-temporarily impaired as of September 30, 2009.

 

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In May 2009,we desecuritized our private-label mortgage backed securities which resulted ina $635.6 million increase in single and multifamily loans receivable with acorresponding decrease in available-for-sale investment securities.  These single family and multifamily loanswere previously originated by us and were securitized in 2006 and 2007 foradditional liquidity purposes.  All ofthe resulting securities were retained by us in our available-for-sale investmentportfolio.  Our decision to desecuritizethese securities was prompted by the mark-to-market adjustments recorded onthese securities that were based on price points observed in the general marketfor mortgage-backed securities that were not reflective of the better creditquality of the underlying loans.  Theseloans had very low overall delinquency rates as of September 30, 2009. The accumulated mark-to-market adjustments on these securities, recordedin other comprehensive income, were negatively impacting our tangible commonequity.  The desecuritization added $30.6million to the Company’s tangible common equity.

 

*Government-SponsoredEquity Preferred Stock (Available-for Sale)*

 

In September 2008, liquidity and credit concerns led the U.S. FederalGovernment to assume a conservatorship role in Fannie Mae and Freddie Mac.  The rating on Fannie Mae and Freddie Macpreferred stock securities was downgraded from investment grade tonon-investment grade status reflecting the cessation of dividend payments onthese securities.  These securities arenon-cumulative perpetual preferred stock in which unpaid dividends do notaccumulate.  The purchase agreementbetween the U.S. Treasury and these government-sponsored entities contains acovenant prohibiting the payment of dividends on existing preferred stock.  As the assessment on the status of anyresumption in dividend payments on these securities was uncertain, we recorded $55.3 million in OTTIcharges on Fannie Mae and Freddie Mac preferred stock securities in 2008.  As of September 30, 2009, the fair valueof these preferred stock securities was $3.3 million.  Gross unrealized losses on these securitiesamounted to $221 thousand as of September 30, 2009, or 7% of the aggregateamortized cost basis of these securities. The outlook for these preferred securities remains stable.  We do not intend to sell these securities andit is not more likely than not that we will be required to sell thesesecurities before recovery of their amortized cost bases.  As such, we do not deem these remainingsecurities to be other-than-temporarily impaired as of September 30, 2009.

 

We have thirteen individual securities that have been in a continuousunrealized loss position for twelve months or longer as of September 30,2009.  These securities are comprised often corporate debtsecurities witha total fair value of $12.1 million, two government-sponsored equity preferredsecurities with a total fair value of $1.8 million, and one mortgage-backedsecurity with a fair value of $15.5 million. As of September 30, 2009, there were also 28 securities that havebeen in a continuous unrealized loss position for less than twelve months.  The unrealized losses on these securities areprimarily attributed to changes in interest rates as well as the liquiditycrisis that has impacted all financial industries.  The issuers of these securities have not, toour knowledge, established any cause for default on these securities.  These securities have fluctuated in valuesince their purchase dates as market interest rates have fluctuated.  We do not intend to sell these securities andit is not more likely than not that we will be required to sell the investmentsbefore recovery of their amortized cost bases. As such, we do not deem these securities to be other-than-temporarilyimpaired as of September 30, 2009.

 

The following table sets forth the amortized cost ofinvestment securities held-to-maturity and the fair values of investmentsecurities available-for-sale as of September 30, 2009 and December 31,2008:

 

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| ** **                                                                                  | ** **   | **As of September 30, 2009** | ** **   |
|---------------------------------------------------------------------------------------------|--------------|-----------------------------------|--------------|
| ** **                                                                                  | ** **   | ** **                        | ** **   | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                                                                  | ** **   | **Amortized**                     | ** **   | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                                                                                  | ** **   | **Cost**                          | ** **   | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| *** ***                                                                                | *** *** | **(In thousands)**                | *** *** |
| **Held-to-maturity**                                                                        |         |                              |         |   |   |   |   |   |   |
| U.S. Government agency and U.S. Government sponsored  enterprise debt securities            |         | $                                 | 252,638      |   | $ | 530 |   | $ | (1,145 | ) | $ | 252,023 |   |
| Municipal  securities                                                                       |         | 36,118                            |         | 1,720 |   | — |   | 37,838 |   |
| Other  residential mortgage-backed securities                                               |         |                              |         |   |   |   |   |   |   |
| Investment grade                                                                            |         | 75,033                            |         | 1,909 |   | (115 | ) | 76,827 |   |
| Non-investment  grade                                                                       |         | 30,461                            |         | — |   | (1,770 | ) | 28,691 |   |
| Corporate debt  securities                                                                  |         |                              |         |   |   |   |   |   |   |
| Investment grade                                                                            |         | 377,947                           |         | 17,417 |   | (89 | ) | 395,275 |   |
| Non-investment  grade                                                                       |         | 4,625                             |         | — |   | (59 | ) | 4,566 |   |
| Other securities                                                                            |         | 4,509                             |         | — |   | — |   | 4,509 |   |
| **Total  investment securities held-to-maturity**                                           |         | $                                 | 781,331      |   | $ | 21,576 |   | $ | (3,178 | ) | $ | 799,729 |   |
|                                                                                        |         |                              |         |   |   |   |   |   |   |
| **Available-for-sale**                                                                      |         |                              |         |   |   |   |   |   |   |
| U.S. Treasury  securities                                                                   |         | $                                 | 2,214        |   | $ | 1 |   | $ | — |   | $ | 2,215 |   |
| U.S. Government agency and U.S. Government sponsored  enterprise debt securities            |         | 474,896                           |         | 2,311 |   | (472 | ) | 476,735 |   |
| U.S. Government agency and U.S. Government sponsored  enterprise mortgage-backed securities |         |                              |         |   |   |   |   |   |   |
| Commercial  mortgage-backed securities                                                      |         | 26,107                            |         | 873 |   | — |   | 26,980 |   |
| Residential  mortgage-backed securities                                                     |         | 752,671                           |         | 19,705 |   | (2 | ) | 772,374 |   |
| Municipal  securities                                                                       |         | 17,759                            |         | 193 |   | (26 | ) | 17,926 |   |
| Other  residential mortgage-backed securities                                               |         |                              |         |   |   |   |   |   |   |
| Investment grade                                                                            |         | 27,099                            |         | — |   | (107 | ) | 26,992 |   |
| Non-investment  grade                                                                       |         | 21,329                            |         | — |   | (5,795 | ) | 15,534 |   |
| Corporate debt  securities                                                                  |         |                              |         |   |   |   |   |   |   |
| Investment grade                                                                            |         | 102,052                           |         | 2,534 |   | (1,308 | ) | 103,278 |   |
| Non-investment  grade (1)                                                                   |         | 69,824                            |         | — |   | (58,123 | ) | 11,701 |   |
| U.S. Government  sponsored enterprise equity securities                                     |         | 3,041                             |         | 468 |   | (221 | ) | 3,288 |   |
| **Total  investment securities available-for-sale**                                         |         | $                                 | 1,496,992    |   | $ | 26,085 |   | $ | (66,054 | ) | $ | 1,457,023 |   |
|                                                                                        |         |                              |         |   |   |   |   |   |   |
| **Total  investment securities**                                                            |         | $                                 | 2,278,323    |   | $ | 47,661 |   | $ | (69,232 | ) | $ | 2,256,752 |   |

 
| ** **                                                                                             | ** **   | **As of December 31, 2008** | ** **   |
|--------------------------------------------------------------------------------------------------------|--------------|----------------------------------|--------------|
| ** **                                                                                             | ** **   | ** **                       | ** **   | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                                                                             | ** **   | **Amortized**                    | ** **   | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                                                                                             | ** **   | **Cost**                         | ** **   | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| *** ***                                                                                           | *** *** | **(In thousands)**               | *** *** |
| **Held-to-maturity**                                                                                   |         |                             |         |   |   |   |   |   |   |
| Municipal  securities                                                                                  |         | $                                | 5,772        |   | $ | 118 |   | $ | — |   | $ | 5,890 |   |
| Corporate debt  securities                                                                             |         | 116,545                          |         | 904 |   | (234 | ) | 117,215 |   |
| **Total  investment securities held-to-maturity**                                                      |         | $                                | 122,317      |   | $ | 1,022 |   | $ | (234 | ) | $ | 123,105 |   |
|                                                                                                   |         |                             |         |   |   |   |   |   |   |
| **Available-for-sale**                                                                                 |         |                             |         |   |   |   |   |   |   |
| U.S. Treasury  securities                                                                              |         | $                                | 2,505        |   | $ | 8 |   | $ | — |   | $ | 2,513 |   |
| U.S. Government agency securities and U.S.  Government sponsored enterprise debt securities            |         | 1,020,355                        |         | 4,762 |   | (1,183 | ) | 1,023,934 |   |
| U.S. Government agency securities and U.S.  Government sponsored enterprise mortgage-backed securities |         | 373,690                          |         | 6,758 |   | (397 | ) | 380,051 |   |
| Other  mortgage-backed securities                                                                      |         | 645,940                          |         | — |   | (108,614 | ) | 537,326 |   |
| Corporate debt  securities (1)                                                                         |         | 116,127                          |         | 266 |   | (73,849 | ) | 42,544 |   |
| U.S. Government  sponsored enterprise equity securities (1)                                            |         | 3,340                            |         | — |   | (2,156 | ) | 1,184 |   |
| Residual  securities                                                                                   |         | 25,043                           |         | 25,019 |   | — |   | 50,062 |   |
| Other securities  (1)                                                                                  |         | 2,570                            |         | 10 |   | — |   | 2,580 |   |
| **Total  investment securities available-for-sale**                                                    |         | $                                | 2,189,570    |   | $ | 36,823 |   | $ | (186,199 | ) | $ | 2,040,194 |   |
|                                                                                                   |         |                             |         |   |   |   |   |   |   |
| **Total  investment securities**                                                                       |         | $                                | 2,311,887    |   | $ | 37,845 |   | $ | (186,433 | ) | $ | 2,163,299 |   |

 

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(1) As ofDecember 31, 2008, the Company recorded an OTTI charge of $13.6 millionfor corporate debt securities, $55.3 million for U.S. Government sponsoredenterprise equity securities, and $4.3 million for other securities. Uponadoption of ASC 320, the Company reclassified the noncredit portion ofpreviously recognized OTTI for pooled trust preferred securities totaling $8.1million, on a net of tax basis, from the opening balance of retained earningsto other comprehensive income as of March 31, 2009. Additionally, theCompany recorded $61.9 million, on a pre-tax basis, of the credit portion ofOTTI through earnings and $12.2 million, net of tax, of the non-credit portionof OTTI for pooled trust preferred securities in other comprehensive income forthe nine months ended September 30, 2009.

 

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The following table sets forth certain information regarding theamortized cost of our investment securities held-to-maturity and fair values ofour investment securities available-for-sale, as well as the weighted averageyields, and contractual maturity distribution, excluding periodic principalpayments, of our investment securities held-to-maturity and available-for-saleportfolio at September 30, 2009.  Securitieswith no stated maturity dates, such as equity securities, are included in the “indeterminatematurity” category.

 
| ** **                                                                                  | ** **   | ** **                 | ** **   | **After  One**  | ** ** | **After  Five** | ** ** | ** **     | ** ** | ** **        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------|--------------|----------------------------|--------------|-----------------|------------|-----------------|------------|----------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                  | ** **   | **Within**                 | ** **   | **But  Within** | ** ** | **But  Within** | ** ** | **After**      | ** ** | **Indeterminate** | ** ** | ** ** | ** ** |
| ** **                                                                                  | ** **   | **One Year**               | ** **   | **Five  Years** | ** ** | **Ten  Years**  | ** ** | **Ten  Years** | ** ** | **Maturity**      | ** ** | **Total**  | ** ** |
| ** **                                                                                  | ** **   | **Amount**                 | ** **   | **Yield**       | ** ** | **Amount**      | ** ** | **Yield**      | ** ** | **Amount**        | ** ** | **Yield**  | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| *** ***                                                                                | *** *** | **(Dollars in thousands)** | *** *** |
| **Held-to-maturity**                                                                        | ** **   | ** **                 | ** **   | ** **      | ** ** | ** **      | ** ** | ** **     | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Government  agency and U.S. Government sponsored enterprise debt securities            |         | $                          | 100,000      |            | 4.38       | %               | $          | 25,000         |       | 4.00              | %          | —     |       | — |   | $ | 127,638 |   | 5.50 | % | — |   | — |   | $ | 252,638 |   | 4.91 | % |
| Municipal  securities                                                                       |         | 3,472                      |         | 4.21            | %          | 15,301          |       | 5.27           | %          | 14,690            |       | 6.67       | %          | 2,655 |   | 7.11 | % | — |   | — |   | 36,118 |   | 5.87 | % |
| Other residential  mortgage-backed securities                                               |         |                       |         |            |       |            |       |           |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment grade                                                                            |         | —                     |         | —          |       | —          |       | —         |       | 32,277            |       | 5.91       | %          | 42,756 |   | 7.00 | % | — |   | — |   | 75,033 |   | 6.53 | % |
| Non-investment  grade                                                                       |         | —                     |         | —          |       | —          |       | —         |       | —            |       | —     |       | 30,461 |   | 10.77 | % | — |   | — |   | 30,461 |   | 10.77 | % |
| Corporate debt  securities                                                                  |         |                       |         |            |       |            |       |           |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment grade                                                                            |         | 114,084                    |         | 6.01            | %          | 258,790         |       | 5.47           | %          | 5,073             |       | 4.31       | %          | — |   | — |   | — |   | — |   | 377,947 |   | 5.61 | % |
| Non-investment  grade                                                                       |         | —                     |         | —          |       | 4,625           |       | 8.11           | %          | —            |       | —     |       | — |   | — |   | — |   | — |   | 4,625 |   | 8.11 | % |
| Other securities                                                                            |         | 2,576                      |         | 0.17            | %          | 1,933           |       | 0.47           | %          | —            |       | —     |       | — |   | — |   | — |   | — |   | 4,509 |   | 0.30 | % |
| **Total  investment securities held-to-maturity**                                           |         | $                          | 220,132      |            | 5.17       | %               | $          | 305,649        |       | 5.34              | %          | $          | 52,040     |   | 5.97 | % | $ | 203,510 |   | 6.63 | % | — |   | — |   | $ | 781,331 |   | 5.67 | % |
|                                                                                        |         |                       |         |            |       |            |       |           |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Available-for-sale**                                                                      |         |                       |         |            |       |            |       |           |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasury  securities                                                                   |         | $                          | 1,204        |            | 0.31       | %               | $          | 1,011          |       | 0.43              | %          | —     |       | — |   | — |   | — |   | — |   | — |   | $ | 2,215 |   | 0.37 | % |
| U.S. Government agency and U.S. Government sponsored  enterprise debt securities            |         | 299,922                    |         | 3.84            | %          | 60,324          |       | 2.27           | %          | 44,786            |       | 3.06       | %          | 71,703 |   | 3.80 | % | — |   | — |   | 476,735 |   | 3.57 | % |
| U.S. Government  agency and U.S. Government sponsored enterprise mortgage-backed securities |         |                       |         |            |       |            |       |           |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial  mortgage-backed securities                                                      |         | —                     |         | —          |       | 2,955           |       | 6.34           | %          | 7,465             |       | 5.48       | %          | 16,560 |   | 5.09 | % | — |   | — |   | 26,980 |   | 5.33 | % |
| Residential  mortgage-backed securities                                                     |         | 1,217                      |         | —          |       | —          |       | —         |       | 39,542            |       | 4.56       | %          | 731,615 |   | 5.12 | % | — |   | — |   | 772,374 |   | 5.10 | % |
| Municipal  securities                                                                       |         | —                     |         | —          |       | 16,964          |       | 3.24           | %          | 962               |       | 5.42       | %          | — |   | — |   | — |   | — |   | 17,926 |   | 3.36 | % |
| Other residential  mortgage-backed securities                                               |         |                       |         |            |       |            |       |           |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment grade                                                                            |         | —                     |         | —          |       | —          |       | —         |       | 9,120             |       | 4.63       | %          | 17,872 |   | 4.96 | % | — |   | — |   | 26,992 |   | 4.85 | % |
| Non-Investment  grade                                                                       |         | —                     |         | —          |       | —          |       | —         |       | —            |       | —     |       | 15,534 |   | 6.37 | % | — |   | — |   | 15,534 |   | 6.37 | % |
| Corporate debt  securities                                                                  |         |                       |         |            |       |            |       |           |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment grade                                                                            |         | 12,454                     |         | 4.38            | %          | 72,813          |       | 3.36           | %          | 17,151            |       | 4.84       | %          | 860 |   | 1.26 | % | — |   | — |   | 103,278 |   | 3.68 | % |
| Non-Investment  grade                                                                       |         | 1,395                      |         | 3.04            | %          | —          |       | —         |       | —            |       | —     |       | 10,306 |   | 2.88 | % | — |   | — |   | 11,701 |   | 2.90 | % |
| U.S. Government  sponsored enterprise equity securities                                     |         | —                     |         | —          |       | —          |       | —         |       | —            |       | —     |       | — |   | — |   | 3,288 |   | — |   | 3,288 |   | — |   |
| **Total  investment securities available-for-sale**                                         |         | $                          | 316,192      |            | 3.82       | %               | $          | 154,067        |       | 2.96              | %          | $          | 119,026    |   | 4.10 | % | $ | 864,450 |   | 4.89 | % | $ | 3,288 |   | — |   | $ | 1,457,023 |   | 4.39 | % |
|                                                                                        |         |                       |         |            |       |            |       |           |       |              |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total  investment securities**                                                            |         | $                          | 536,324      |            | 4.37       | %               | $          | 459,716        |       | 4.55              | %          | $          | 171,066    |   | 4.68 | % | $ | 1,067,960 |   | 5.21 | % | $ | 3,288 |   | — |   | $ | 2,238,354 |   | 4.83 | % |

 

**Loans**

 

We offer a broad range of products designed to meetthe credit needs of our borrowers.  Ourlending activities consist of residential single family loans, residentialmultifamily loans, commercial real estate loans, land loans, constructionloans, commercial business loans, trade finance loans, and consumer loans.  Net loans receivable increased $87.5 million,or 1%, to $8.16 billion at September 30, 2009, relative to December 31, 2008.  The increase in net loans receivable at September 30, 2009 is primarily due to thedesecuritization of our private-label mortgage backed securities which resultedin a $635.6 million increase in single and multifamily loan receivable with acorresponding decrease in available-for-sale investment securities.  Loan purchases from third parties totaling$350.0 million, comprised of $179.2 million in consumer loans, $76.6 million insingle family loans, $76.1 million in commercial real estate loans, and $18.1million in multifamily loans, also contributed to the increase in net loansreceivable during the first nine months of 2009.  These transactions were partially offset byloan sales, payoffs, and higher loan loss provisions recorded during the thirdquarter of 2009 as a result of the sustained downtown in the real estate market.

 

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

 

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| ** **                                  | ** **   | **September 30, 2009** | ** **   | **December 31, 2008** | ** ** |
|---------------------------------------------|--------------|-----------------------------|--------------|----------------------------|------------|
| ** **                                  | ** **   | **Amount**                  | ** **   | **Percent**                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| *** ***                                | *** *** | **(in thousands)**          | *** *** |
| Real estate  loans:                         |         |                        |         |                       |       |   |   |   |   |
| Residential,  single family                 |         | $                           | 912,391      |                       | 10.8       | % | $ | 491,315 |   | 6.0 | % |
| Residential,  multifamily                   |         | 1,036,932                   |         | 12.3                       | %          | 677,989 |   | 8.2 | % |
| Commercial real  estate                     |         | 3,624,469                   |         | 43.0                       | %          | 3,472,000 |   | 42.1 | % |
| Land                                        |         | 415,228                     |         | 4.9                        | %          | 576,564 |   | 7.0 | % |
| Construction                                |         | 654,115                     |         | 7.8                        | %          | 1,260,724 |   | 15.3 | % |
| Total real  estate loans                    |         | 6,643,135                   |         | 78.9                       | %          | 6,478,592 |   | 78.6 | % |
|                                        |         |                        |         |                       |       |   |   |   |   |
| Other loans:                                |         |                        |         |                       |       |   |   |   |   |
| Commercial  business                        |         | 1,110,373                   |         | 13.2                       | %          | 1,210,260 |   | 14.6 | % |
| Trade finance                               |         | 233,123                     |         | 2.8                        | %          | 343,959 |   | 4.2 | % |
| Automobile                                  |         | 7,365                       |         | 0.1                        | %          | 9,870 |   | 0.1 | % |
| Other consumer                              |         | 425,479                     |         | 5.0                        | %          | 206,772 |   | 2.5 | % |
| Total other  loans                          |         | 1,776,340                   |         | 21.1                       | %          | 1,770,861 |   | 21.4 | % |
| Total gross  loans                          |         | 8,419,475                   |         | 100.0                      | %          | 8,249,453 |   | 100.0 | % |
|                                        |         |                        |         |                       |       |   |   |   |   |
| Unearned fees,  premiums and discounts, net |         | (31,987                     | )            |                       |       | (2,049 | ) |   |   |
| Allowance for  loan losses                  |         | (230,650                    | )            |                       |       | (178,027 | ) |   |   |
| Loan receivable,  net                       |         | $                           | 8,156,838    |                       |       |   | $ | 8,069,377 |   |   |   |

 

### **Nonperforming Assets**

### ** **

Nonperforming assets are comprised of nonaccrual loans, accruingloans past due 90 days or more, and other real estate owned, net.  Nonperforming assets totaled$230.2 million, or 1.84% of totalassets, at September 30, 2009 and $252.9 million, or 2.04% of totalassets, at December 31, 2008. Nonaccrual loans amounted to $204.4million at September 30, 2009, comparedwith $214.6 million at year-end 2008. During the first nine months of 2009, we took aggressive actions toreduce our exposure to problem assets. In conjunction with these efforts, we sold $313.3 million in problemloans and $105.5 million in OREO properties during the first nine months of2009.  These sales of problem assets haveresulted in net chargeoffs of $60.1 million and $91.9 million for the third quarterof 2009 and first nine months of 2009, respectively.

 

Approximately 35% of our problem loan sales during thefirst nine months of 2009 were all–cash transactions.  We also partially financed selected loansales to unrelated third parties. Problem loans are sold on a servicing released basis and the shortfallbetween the loan balance and any new notes is charged off.  A substantial down payment, typically in therange of 25% to 40%, is received from the new borrower purchasing the problemloan.  The underlying sales agreementsprovide for full recourse to the new borrower and require that periodic updatedfinancial information be provided to demonstrate their ability to service thenew loan.  The Company maintains no effectivecontrol over the transferred loans.

 

Loans totaling $245.6million were placed onnonaccrual status during the third quarter of 2009.  As a part of our comprehensive loan review,loans totaling $66.0million whichwere not 90 days past due as of September 30, 2009, were classified asnonaccrual loans due to concerns regarding collateral values and futurecollectibility.  Additions to nonaccrualloans were offset by $53.9million in net chargeoffs, $65.9 million in payoffs and principalpaydowns, $47.7 million in loans that were transferred to other real estateowned and other real estate investments, and $35.8million in loans brought current.  The additions to nonaccrual loans during thethird quarter of 2009 were comprised of $12.2 million in 

 

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single family loans, $13.0million in multifamily loans, $55.4 million in commercial real estate loans,$57.4 million in land loans, $71.0 million in construction loans, $33.9 millionin commercial business loans including SBA loans, $2.2 million in trade financeloans, and $498 thousand in automobile and other consumer loans.

 

There was one loan in theamount of $1.6 million that was past due 90 days or more but not on nonaccrualstatus as of September 30, 2009 that was fully guaranteed by theExport-Import Bank of the United States. All loans that were past due 90 days or more were on nonaccrual statusas of December 31, 2008.

 

We had$116.5 million and $11.0 million in total performing restructured loans as ofSeptember 30, 2009 and December 31, 2008, respectively, that wereexcluded from nonperforming assets.  Asof September 30, 2009, the $116.5 million of restructured loans includes$104.1 million of performing, accrual loans that were structured as A/Bnotes.  In these A/B notes, the originalloan was restructured into two notes where the A note represents the portion ofthe original loan that that have demonstrated sustained repayment andperformance and is expected to be collected in full.  The B note represents the portion of theoriginal loan which was the shortfall in value and was fully charged off.  The A/B notes balance as ofSeptember 30, 2009 is comprised of the A note balances.  As of September 30, 2009, restructuredloans were comprised of $13.7 million in single family loans, $53.0 million inmultifamily loans, $14.9 million in commercial real estate loans, $27.9 millionin construction loans, $6.6 million in commercial business loans and $375 thousandin land loans.

 

Other real estate owned includes properties acquired throughforeclosure or through full or partial satisfaction of loans.  We had 40 OREO properties as ofSeptember 30, 2009 with a combined aggregate carrying value of $24.2million.  The majority of theseproperties were related to our construction and land loan portfolios.  Approximately 76% of OREO properties as ofSeptember 30, 2009 were located in California and 13% were located inTexas.  As of December 31, 2008, wehad 41 OREO properties with an aggregate carrying value of $38.3 million.  During the first nine months of 2009, weforeclosed on 101 properties with an aggregate carrying value of $102.8 millionas of the foreclosure date.  During thefirst nine months of 2009, we sold 110 OREO properties with a total carryingvalue of $105.5 million resulting in a total combined net loss on sale of $5.0million and charges against the allowance for loans losses totaling $10.2million.  As previously mentioned, losseson sale of OREO properties that are sold shortly after they are received in aforeclosure are charged against the allowance for loan losses.  We financed sales of OREO properties totaling$38.6 million during the first nine months of 2009.  During the first nine months of 2008, we soldeleven OREO properties with a combined carrying value of $28.4 million for atotal net loss on sale of $302 thousand.

 

The following table sets forth information regardingnonperforming assets and performing restructured loans as of the datesindicated:

 

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| ** **                                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                           | ** ** | **(in thousands)**     | ** ** |
|                                                 | ** ** | ** **             | ** ** | ** **            | ** ** |
| Nonaccrual loans                                     |       | $                      | 204,439    |                  | $          | 214,607 |   |
| Loans past due 90 days or more but not on nonaccrual |       | 1,556                  |       | —                |       |
| Total nonperforming loans                            |       | 205,995                |       | 214,607               |       |
|                                                 |       |                   |       |                  |       |
| Other real estate owned, net                         |       | 24,185                 |       | 38,302                |       |
| Total nonperforming assets                           |       | $                      | 230,180    |                  | $          | 252,909 |   |
|                                                 |       |                   |       |                  |       |
| Performing restructured loans                        |       | $                      | 116,516    |                  | $          | 10,992 |   |
|                                                 |       |                   |       |                  |       |
| Total nonperforming assets to total assets           |       | 1.84                   | %          | 2.04                  | %          |
| Allowance for loan losses to nonperforming loans     |       | 111.97                 | %          | 82.95                 | %          |

 

Weevaluate loan impairment in accordance with applicable GAAP principles.  Loans are considered impaired when it isprobable that we will be unable to collect all amounts due according to thecontractual terms of the loan agreement, including scheduled interestpayments.  Impaired loans are measuredbased on the present value of expected future cash flows discounted at theloan’s effective interest rate or, as an expedient, at the loan’s observablemarket price or the fair value of the collateral if the loan is collateraldependent, less costs to sell.  If themeasure 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 or,alternatively, a specific allocation will be established.  Additionally, loans that are consideredimpaired are specifically excluded from the quarterly migration analysis whendetermining the amount of the allowance for loan and lease losses required forthe period.

 

At September 30,2009, our totalrecorded investment in impaired loans was $232.9million, compared with $232.1 million at December 31, 2008.  All nonaccrual loans are included in impairedloans.  Impaired loans at September 30,2009 are comprised ofsingle family loans totaling $6.2 million, multifamily loans totaling $11.9million, commercial real estate loans totaling $41.4 million, land totaling $57.2 million,construction loans totaling $75.5 million,commercial business loans totaling $34.9million, trade finance loans amounting to$3.9 million,SBA loans totaling $1.0 million, and automobile and other consumerloans totaling $969 thousand.

 

Specific reserves on impaired loans amounted to$18.8 million and $23.4 million at September 30, 2009 andDecember 31, 2008, respectively. Our average recorded investment in impaired loans for the nine monthsended September 30, 2009 and 2008 were $275.3 million and $233.1 million,respectively.  During the nine monthsended September 30, 2009 and 2008, gross interest income that would havebeen recorded on impaired loans had they performed in accordance with theiroriginal terms, totaled $12.7 million and $12.7 million, respectively.  Of this amount, actual interest recognized onimpaired loans, on a cash basis, was $7.5 million and $7.6 million, for thenine months ended September 30, 2009 and 2008, respectively.

 

In light of the credit andmortgage crisis affecting the entire financial industry and its impact on ourborrowers, we took a more proactive approach in assessing potential loanimpairment in our overall portfolio.  Wehave expanded our scope to perform focused reviews of certain sectors of ourloan portfolio to identify and mitigate potential losses.  Our recent experience made us aware of therapid deterioration occurring in the market in a relatively short period oftime.  Specifically, we have noted that 

 

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while our borrowers maycontinue to pay as agreed in accordance with their contractual terms and/oreven though loans may not have reached a significant stage of delinquency, theexistence of certain warning signs indicating possible collectibility issueswarranted a more careful scrutiny of these loans for potential impairment.  Specifically, we reviewed loans thatexhibited the following characteristics:

 

·                  diminishing oradverse changes in cash flows that serve as the principal source of repayment;

·                  adverse changesin the financial position or net worth of guarantors or investors;

·                  adverse changesin collateral values for collateral-dependent loans;

·                  declining oradverse changes in inventory levels securing commercial business and tradefinance;

·                  failure inmeeting financial covenants; or

·                  other changesor conditions that may adversely impact the ultimate collectibility of loans.

 

Although certain loans are not 90 days or moredelinquent and therefore still accruing interest, we have classified them asimpaired as of September 30, 2009 because they exhibit one or more of thecharacteristics described above.

 

**Allowance for Loan Losses**

 

We are committed to maintaining the allowance for loan losses at alevel that is commensurate with estimated and known risks in the loanportfolio.  In addition to regularquarterly reviews of the adequacy of the allowance for loan losses, we performan ongoing assessment of the risks inherent in the loan portfolio.  While we believe that the allowance for loanlosses is adequate at September 30, 2009, future additions to the allowance will be subject toa continuing evaluation of estimated and known, as well as inherent, risks inthe loan portfolio.

 

The allowance for loan losses is increased by the provision for loanlosses which is charged against current period operating results, and isincreased or decreased by the amount of net recoveries or chargeoffs,respectively, during the period.  At September 30,2009, the allowancefor loan losses amounted to $230.7 million, or 2.74% of total loans, comparedwith $178.0 million, or 2.16% of total loans, at December 31, 2008, and $177.2 million,or 2.14% of total loans,at September 30,2008.  The $52.6 million increase in theallowance for loan losses at September 30, 2009, from year-end 2008, reflects $388.7 millionin additional loss provisions and $9.3 million of additional allowance for loanlosses resulting from the impact of the desecuritization in May 2009, less$344.7 million in net chargeoffs recorded during the first nine months of2009.  The allowance for unfunded loancommitments, off-balance-sheet credit exposures, and recourse provisions isincluded in accrued expenses and other liabilities and amounted to $7.0 millionat September 30,2009, compared to $6.3 million at December 31, 2008.

 

We recorded $159.2 million in loan loss provisionsduring the third quarter of 2009 and $388.7 million during the first ninemonths of 2009.  In comparison, we recorded$43.0 million in loan loss provisions during the third quarter of 2008 and$183.0 million during the first nine months of 2008.  The increase in loss provisions recorded during the thirdquarter of 2009resulted from our actions to reduce our exposure to problem assets brought onby the sustained downturn in the real estate market and continued instabilityin the overall economy.  During the thirdquarter of 2009, we recorded $151.2million in netchargeoffs representing 7.14% of average loans outstanding during thequarter.  In comparison, we recorded netchargeoffs totaling $39.7 million, or 1.88% of average loans outstanding for the sameperiod in 2008.  Although both the provision for loan lossesand chargeoffs may continue to be elevated in the near future, we expect theselevels will be lower than the third quarter of 2009.  During the first nine monthsof 2009, net chargeoffs amounted to $344.7 million, or 5.53% of average loansoutstanding during the period.  This comparesto net chargeoffs of $99.9 million, or 1.53% of average loans outstandingduring the same period in 2008.

 

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The following tablesummarizes activity in the allowance for loan losses for the three and ninemonths ended September 30, 2009 and 2008:

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                     | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                     | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                     | ** ** | **(in thousands)**     | ** ** | **(in thousands)**     | ** ** |
|                                                           | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allowance balance, beginning of period                         |       | $                      | 223,700    |                   | $          | 168,413 |   | $ | 178,027 |   | $ | 88,407 |   |
| Allowance for unfunded loan  commitments and letters of credit |       | (1,051                 | )          | 5,437                  |       | (617 | ) | 5,669 |   |
| Provision for loan losses                                      |       | 159,244                |       | 43,000                 |       | 388,666 |   | 183,000 |   |
| Impact of desecuritization                                     |       | —                 |       | —                 |       | 9,262 |   | — |   |
| Chargeoffs:                                                    |       |                   |       |                   |       |   |   |   |   |
| Single family real estate                                      |       | 8,371                  |       | 1,023                  |       | 26,487 |   | 1,732 |   |
| Multifamily real estate                                        |       | 7,235                  |       | 1,006                  |       | 11,333 |   | 1,442 |   |
| Commercial real estate                                         |       | 23,715                 |       | 666                    |       | 39,574 |   | 666 |   |
| Land                                                           |       | 40,397                 |       | 21,024                 |       | 86,519 |   | 42,442 |   |
| Construction                                                   |       | 56,354                 |       | 16,138                 |       | 134,880 |   | 40,429 |   |
| Commercial business                                            |       | 17,696                 |       | 4,401                  |       | 50,873 |   | 18,136 |   |
| Automobile                                                     |       | 6                      |       | 63                     |       | 41 |   | 226 |   |
| Other consumer                                                 |       | 109                    |       | 34                     |       | 1,727 |   | 74 |   |
| Total chargeoffs                                               |       | 153,883                |       | 44,355                 |       | 351,434 |   | 105,147 |   |
|                                                           |       |                   |       |                   |       |   |   |   |   |
| Recoveries:                                                    |       |                   |       |                   |       |   |   |   |   |
| Single family real estate                                      |       | 337                    |       | 1                      |       | 563 |   | 3 |   |
| Multifamily real estate                                        |       | 4                      |       | —                 |       | 222 |   | — |   |
| Commercial and industrial real estate                          |       | 610                    |       | 3                      |       | 1,207 |   | 1,905 |   |
| Land                                                           |       | 409                    |       | 1,896                  |       | 825 |   | — |   |
| Construction                                                   |       | 768                    |       | 2,581                  |       | 1,734 |   | 2,581 |   |
| Commercial business                                            |       | 484                    |       | 177                    |       | 2,132 |   | 714 |   |
| Automobile                                                     |       | 14                     |       | 2                      |       | 45 |   | 23 |   |
| Other consumer                                                 |       | 14                     |       | —                 |       | 18 |   | — |   |
| Total recoveries                                               |       | 2,640                  |       | 4,660                  |       | 6,746 |   | 5,226 |   |
| Net chargeoffs                                                 |       | 151,243                |       | 39,695                 |       | 344,688 |   | 99,921 |   |
| Allowance balance, end of period                               |       | $                      | 230,650    |                   | $          | 177,155 |   | $ | 230,650 |   | $ | 177,155 |   |
| Average loans outstanding                                      |       | $                      | 8,471,766  |                   | $          | 8,451,517 |   | $ | 8,305,602 |   | $ | 8,725,596 |   |
| Total gross loans outstanding, end of period                   |       | $                      | 8,419,475  |                   | $          | 8,289,433 |   | $ | 8,419,475 |   | $ | 8,289,433 |   |
| Annualized net chargeoffs to average loans                     |       | 7.14                   | %          | 1.88                   | %          | 5.53 | % | 1.53 | % |
| Allowance for loan losses to total gross loans, end of period  |       | 2.74                   | %          | 2.14                   | %          | 2.74 | % | 2.14 | % |

 

Our methodology to determinethe overall appropriateness of the allowance is based on a classificationmigration model and qualitative considerations. The technique of migration analysis essentially looks at pools of loanshaving similar characteristics and analyzes their loss rates over a historicalperiod.  We utilize historical lossfactors derived from trends and losses associated with each pool over aspecified period of time.  Based on thisprocess, we assign loss factors to each loan grade within each category ofloans.  Loss rates derived by themigration model are based predominantly on historical loss trends that may notbe indicative of the actual or inherent loss potential for loancategories.  As such, we utilizequalitative and environmental factors as adjusting mechanisms to supplement thehistorical results of the classification migration model.

 

Qualitative considerationsinclude, but are not limited to, prevailing economic or market conditions,relative risk profiles of various loan segments, the strength or deficiency ofthe internal control environment, volume concentrations, growth trends,delinquency and nonaccrual status, problem loan trends, and geographicconcentrations.  Qualitative andenvironmental factors are reflected as 

 

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percent adjustments and are added to thehistorical loss rates derived from the classified asset migration model todetermine the appropriate allowance amount for each loan category.

 

In consideration of thesignificant growth and increasing diversity and credit risk profiles of loansin our portfolio over the past several years, our classification migrationmodel utilizes eighteen risk-rated or heterogeneous loan pool categories andthree homogeneous loan categories.  Theloan sectors included in the heterogeneous loan pools are residential singlefamily, residential multifamily, commercial real estate, construction,commercial business, trade finance, and automobile loans.  With the exception of automobile loans, allother heterogeneous loan categories have been broken down into additionalsubcategories.  For example, thecommercial real estate loan category is further segmented into sixsubcategories based on industry sector. These subcategories include retail, office, industrial, land,hotel/motel, and other special purpose or miscellaneous.  By sectionalizing these broad loan categoriesinto smaller subgroups, we are better able to isolate and identify the risksassociated with each subgroup based on historical loss trends.

 

In addition to the eighteen heterogeneous loancategories, our classification migration model also utilizes three homogeneousloan categories which encompass predominantly consumer-related credits.  Specifically, these homogeneous loancategories are home equity lines, overdraft protection lines, and credit cardloans.

 

The following table reflectsmanagement’s allocation of the allowance for loan losses by loan category andthe ratio of each loan category to total loans as of the dates indicated:

 
| ** **                 | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **Amount**                  | ** ** | **%**                      | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **                 | ** ** | **(in thousands)**          | ** ** |
| Residential, single family |       | $                           | 18,672     |                       | 10.8       | % | $ | 6,178 |   | 5.9 | % |
| Residential, multifamily   |       | 9,532                       |       | 12.3                       | %          | 6,811 |   | 8.2 | % |
| Commercial real estate     |       | 47,261                      |       | 43.0                       | %          | 19,169 |   | 42.1 | % |
| Land                       |       | 51,435                      |       | 4.9                        | %          | 30,398 |   | 7.0 | % |
| Construction               |       | 48,224                      |       | 7.8                        | %          | 60,478 |   | 15.3 | % |
| Commercial business        |       | 46,849                      |       | 13.2                       | %          | 40,843 |   | 14.7 | % |
| Trade finance              |       | 7,410                       |       | 2.8                        | %          | 12,721 |   | 4.2 | % |
| Automobile                 |       | 77                          |       | 0.1                        | %          | 282 |   | 0.1 | % |
| Other consumer             |       | 1,190                       |       | 5.1                        | %          | 1,147 |   | 2.5 | % |
| Total                      |       | $                           | 230,650    |                       | 100.0      | % | $ | 178,027 |   | 100.0 | % |

 

**Deposits**

 

Depositsincreased 6% to $8.67 billion at September 30, 2009, from $8.14 billion atDecember 31, 2008.  The net increasein deposits primarily came from money market accounts which rose $939.9 millionor 71%, and noninterest bearing accounts of $104.2 million or 8%.  These were offset by decreases in timedeposits of $502.2 million or 11% and interest-bearing checking accounts of$15.5 million or 4%.

 

Sincemid-2008, as a result of the turbulence in the banking sector, we haveexperienced a heightened interest in deposit products that afford greaterdeposit insurance coverage to deposit customers.  As of September 30, 2009, time depositswithin the Certificate of Deposit Account Registry 

 

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Service (“CDARS”) programamounted to $939.3 million, compared with $946.8 million at December 31,2008.   The CDARS program allowscustomers with deposits in excess of FDIC-insured limits to obtain fullcoverage on time deposits through a network of banks within the CDARS program.  Additionally, during the third quarter of2008, we partnered with another financial institution to implement a new retailsweep product for non-time deposit accounts to provide added deposit insurancecoverage for deposits in excess of FDIC-insured limits.  Deposits gathered through these programs areconsidered brokered deposits under regulatory reporting guidelines.

 

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

 
| ** **                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                 | ** ** | **(In thousands)**     | ** ** |
|                       |       |                   |       |                  |       |
| Noninterest-bearing demand |       | $                      | 1,397,217  |                  | $          | 1,292,997 |   |
| Interest-bearing checking  |       | 347,745                |       | 363,285               |       |
| Money market               |       | 2,263,319              |       | 1,323,402             |       |
| Savings                    |       | 420,365                |       | 420,133               |       |
| Total core deposits        |       | 4,428,646              |       | 3,399,817             |       |
| Time deposits:             |       |                   |       |                  |       |
| Less than $100,000         |       | 1,062,575              |       | 1,521,988             |       |
| $100,000 or greater        |       | 3,177,336              |       | 3,220,154             |       |
| Total time deposits        |       | 4,239,911              |       | 4,742,142             |       |
| Total deposits             |       | $                      | 8,668,557  |                  | $          | 8,141,959 |   |

 

### **Borrowings**

### ** **

We utilize a combination ofshort-term and long-term borrowings to manage our liquidity position.  Federal funds purchased generally maturewithin one business day to six months from the transaction date.  At September 30, 2009, federal fundspurchased decreased to $3.0 million from the $28.0 million balance atDecember 31, 2008.  FHLB advancesdecreased 32% to $923.2million as of September 30, 2009, compared to $1.35 billion atDecember 31, 2008.  The decrease infederal funds purchased and FHLB advances is consistent with our overallstrategy to deleverage our balance sheet. During the first nine months of 2009, a portion of the proceeds from thematurities and sales of investment securities and redemption of ourmoney-market mutual funds were used to pay down our borrowings.  During the first nine months of 2009, severallong-term FHLB advances totaling $430.0 million matured and were paid off.  As of September 30, 2009 andDecember 31, 2008, we had no overnight FHLB advances.

 

In addition to federal funds purchased and FHLBadvances, we also utilize securities sold under repurchase agreements(“repurchase agreements”) to manage our liquidity position.  Repurchase agreements totaled $1.02 billionand $998.4 million as of September 30, 2009 and December 31, 2008,respectively.  Included in this balanceis $24.4 million in overnight repurchase agreements with customers.  The interest rates on these customerrepurchase agreements ranged from 0.50% to 0.75% as of September 30,2009.  All of the other repurchaseagreements are long-term with ten year maturity terms.  Repurchase agreements are accounted for ascollateralized financing transactions and recorded at the amounts at which thesecurities were sold.  The collateral forthese agreements consist of U.S. Government agency and U.S. Governmentsponsored enterprise debt and mortgage-backed securities.  All of these repurchase agreements have anoriginal term of ten years.  The rateswere generally initially 

 

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floatingrate for a period of time ranging from six months to three years, with thefloating interest rates ranging from the three-month Libor minus 80 basispoints to the three-month Libor minus 340 basis points.  With the exception of one repurchaseagreement, the rates have been switched to fixed rates for the remainder of theterm, with fixed interest rates ranging from 4.29% to 5.13%.  The counterparty has the right to either aone-time call or a quarterly call when the rates change from floating to fixed,for each of the repurchase agreements.

 

**Long-term Debt**

 

**Long-term debt remained at $235.6million at**September 30, 2009 andDecember 31,2008.  Long-term debt is comprised ofsubordinated debt which qualifies as Tier II capital and junior subordinateddebt issued in connection with our various trust preferred securities offeringswhich qualify as Tier I capital for regulatory purposes.

** **

### **Off-Balance SheetArrangements and Aggregate Contractual Obligations**

### ** **

Thefollowing table presents, as of September 30, 2009, theCompany’s significant fixed and determinable contractual obligations, withinthe categories described below, by payment date.  With the exception of operating leaseobligations, thesecontractual obligations are included in the consolidated balance sheets.  The payment amounts represent the amounts andinterest contractually due to the recipient.

 
| ** **                                   | ** ** | **Payment Due by Period** | ** ** |
|----------------------------------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **Less than**             | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** | **Indeterminate** | ** ** | ** ** | ** ** |
| **Contractual  Obligations**                 | ** ** | **1  year**               | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **5  years** | ** ** | **Maturity** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(In thousands)**        | ** ** |
| * *                                     | * *   | * *                  | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Deposits                                     |       | $                         | 4,150,354  |   | $ | 114,491 |   | $ | 29,487 |   | $ | 9,790 |   | $ | 4,540,400 |   | $ | 8,844,523 |   |
| Federal funds purchased                      |       | 3,023                     |       | — |   | — |   | — |   | — |   | 3,023 |   |
| FHLB advances                                |       | 780,087                   |       | 163,540 |   | 266 |   | 3,090 |   | — |   | 946,984 |   |
| Securities sold under repurchase  agreements |       | 71,862                    |       | 94,823 |   | 94,823 |   | 1,079,588 |   | — |   | 1,341,095 |   |
| Notes payable                                |       | —                    |       | — |   | — |   | — |   | 7,111 |   | 7,111 |   |
| Long-term debt obligations                   |       | 6,430                     |       | 12,860 |   | 12,860 |   | 335,041 |   | — |   | 367,190 |   |
| Operating lease obligations                  |       | 11,665                    |       | 21,395 |   | 14,156 |   | 20,218 |   | — |   | 67,434 |   |
| Unrecognized tax benefits                    |       | —                    |       | — |   | — |   | — |   | 7,392 |   | 7,392 |   |
| Postretirement benefit payments              |       | 250                       |       | 1,531 |   | 2,354 |   | 46,128 |   | — |   | 50,263 |   |
| Total contractual obligations                |       | $                         | 5,023,671  |   | $ | 408,640 |   | $ | 153,947 |   | $ | 1,493,855 |   | $ | 4,554,903 |   | $ | 11,635,016 |   |

 

As a financial service provider, we routinely enterinto commitments to extend credit to customers, such as loan commitments, commercialletters of credit for foreign and domestic trade, standby letters of credit,and financial guarantees.  Many of thesecommitments to extend credit may expire without being drawn upon.  The same credit policies are used inextending these commitments as in extending loan facilities to customers.  A schedule of significant commitments toextend credit to our customers as of September 30, 2009****is as follows:

 

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| ** **                   | ** ** | **Commitments**    | ** ** |
|------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **Outstanding**    | ** ** |
| ** **                   | ** ** | **(In thousands)** | ** ** |
| Undisbursed loan commitments |       | $                  | 1,100,083  |   |
| Standby letters of credit    |       | 642,452            |       |
| Commercial letters of credit |       | 32,290             |       |
|                              |            |                    |            |  |

 

### **Capital Resources**

### ** **

At September 30, 2009, stockholders’ equity totaled $1.52billion, a 2% decrease from the year-end 2008 balanceof $1.55 billion.  The decrease iscomprised of the following: (1) net loss after extraordinary item of$183.1 million recorded during the first nine months of 2009; (2) anoncredit-related impairment loss on investment securities recorded in thecurrent year of $12.2 million, net of tax; (3) issuance and conversioncosts related to preferred and common stock of $5.7 million; (4) taxprovision of $498 thousand from various stock plans; (5) purchase oftreasury shares related to vested restricted stock amounting to $54 thousand,representing 11,166 shares; and (6) accrual and payment of quarterly cashdividends on common and preferred stock totaling $23.9 million during the firstnine months of 2009.  These transactionswere offset by: (1) net unrealized gains on investment securitiesavailable-for-sale of $53.0 million; (2) reversal of net unrealized lossesamounting to $30.6 million as a result of the desecuritization of ourprivate-label mortgage-backed securities; (3) stock compensation costsamounting to $4.4 million related to grants of restricted stock and stockoptions; (4) issuance of common stock totaling $27.5 million, representing5,000,000 shares, pursuant to the private placement; (5) issuance ofcommon stock totaling $80.3 million, representing12,650,000 shares, pursuant toa public offering;  (6) issuance ofcommon stock totaling $400 thousand, representing 423,597 shares, pursuant tovarious stock plans and agreements; and (7) issuance of common stock totaling$219 thousand, pursuant to directors’ retainer fee.

 

Historically,our primary source of capital has been the retention of operatingearnings.  In order to ensure adequatelevels of capital, we conduct an ongoing assessment of projected sources, needsand uses of capital in conjunction with projected increases in assets and thelevel of risk.  As part of this ongoingassessment, the Board of Directors reviews the various components of capitaland the adequacy of capital.  Although weare not one of the 19 large financial institutions required to conduct aforward-looking capital assessment, or “stress test”, pursuant to the U.S.Treasury’s Capital Assistance Program (“CAP”) the stress assessment requirementsunder the CAP or similar requirements could be extended or otherwise impactfinancial institutions beyond the 19 participating institutions, includingus.  As a result, we could determineindependently, or our regulators could require us, to raise additional capital.

 

*Series A Preferred Stock Offering*

 

We raised $194.1 million in additional capital, net ofunderwriting discounts, commissions and offering expenses, duringApril 2008 through the issuance of 200,000 shares of non-cumulative,perpetual convertible preferred stock. The proceeds from this offering were used to reduce our borrowings,enhance our liquidity position, and boost our already strong capitallevels.  For a further discussion on thispreferred stock offering, see Note 9 to the condensed consolidated financialstatements presented elsewhere in this report.

 

In July 2009, we completed the exchange ofapproximately 111 thousand shares of Series A preferred stock forapproximately 10 million shares of common stock.  This transaction was accounted for as aninduced conversion with the settlement of shares occurring in July 2009,resulting in $107.5 million of additional tangible common equity, net oforiginal stock issuance costs.  For a further

 

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discussionon this exchange, see Notes 9 and 11 to the condensed consolidated financialstatements presented elsewhere in this report.

 

*Series B PreferredStock Offering*

 

On December 5, 2008, wereceived $306.5 million of additional Tier 1 qualifying capital from the U.S.Treasury through the issuance of 306,546 shares of fixed-rate, cumulativeperpetual preferred stock.  The issuanceof Series B preferred stock was made in conjunction with the Company’sparticipation in the U.S. Treasury’s Capital Purchase Program. For a further discussion on this preferred stock offering, see Note 9 tothe condensed consolidated financial statements presented elsewhere in this report.

 

***Private Salesof Common Stock***

 

**In July 2009, in private placement transactions, twocustomers of the Bank purchased 5 million newly issued shares of our commonstock at a price of $5.50 per share. We received net proceeds of approximately$26.0 million, net of stock issuance costs, in conjunction with this commonstock offering.  We have registered theseshares for resale to the public.**

** **

*Public Offering of Common Stock*

 

In July 2009, wecompleted a public offering of 11 million shares of our common stockpriced at $6.35.  The underwriter alsoexercised its option to purchase an additional 1.65 million shares of ourcommon stock.  We received net proceedsof approximately $76.7 million, net of stock issuance costs, in conjunctionwith this common stock offering.

 

***Risk-Based Capital***

 

**We are committed to maintaining capital at a levelsufficient to assure our shareholders, our customers and our regulators thatour company and our bank subsidiary are financially sound.  We are subject to risk-based capitalregulations and capital adequacy guidelines adopted by the federal bankingregulators.  These guidelines are used toevaluate capital adequacy and are based on an institution’s asset risk profileand off-balance sheet exposures. According to these guidelines, institutions whose Tier I and totalcapital ratios meet or exceed 6.0% and 10.0%, respectively, may be deemed“well-capitalized.”  At**September 30, 2009, the Bank’s Tier I and totalcapital ratios were 11.9% and 13.9%, respectively, compared to 13.6% and 15.6%, respectively, atDecember 31, 2008.

 

The following table compares East WestBancorp, Inc.’s and East West Bank’s actual capital ratios at September 30,2009, to thoserequired by regulatory agencies for capital adequacy and well-capitalized classificationpurposes:

 
| ** **                               | ** ** | ** **    | ** ** | ** **    | ** ** | **Minimum**      | ** ** | **Well**         | ** ** |
|------------------------------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                               | ** ** | **East West** | ** ** | **East West** | ** ** | **Regulatory**   | ** ** | **Capitalized**  | ** ** |
| ** **                               | ** ** | **Bancorp**   | ** ** | **Bank**      | ** ** | **Requirements** | ** ** | **Requirements** | ** ** |
| Total Capital (to Risk-Weighted Assets)  |       | 15.1          | %          | 13.9          | %          | 8.0              | %          | 10.0             | %          |
| Tier 1 Capital (to Risk-Weighted Assets) |       | 13.1          | %          | 11.9          | %          | 4.0              | %          | 6.0              | %          |
| Tier 1 Capital (to Average Assets)       |       | 10.6          | %          | 9.7           | %          | 4.0              | %          | 5.0              | %          |

 

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**ASSET LIABILITY AND MARKET RISK MANAGEMENT**

 

**Liquidity**

 

Liquiditymanagement involves our ability to meet cash flow requirements arising fromfluctuations in deposit levels and demands of daily operations, which includefunding of securities purchases, providing for customers’ credit needs andongoing repayment of borrowings.  Ourliquidity is actively managed on a daily basis and reviewed periodically by theAsset/Liability Committee and the Board of Directors.  This process is intended to ensure themaintenance of sufficient funds to meet the needs of the Bank, includingadequate cash flow for off-balance sheet instruments.

 

Our primary sources of liquidity are derived fromfinancing activities which include the acceptance of customer and brokereddeposits, federal funds facilities, repurchase agreement facilities, advancesfrom the Federal Home Loan Bank of San Francisco, and issuances of long-termdebt.  These funding sources areaugmented by payments of principal and interest on loans, the routineliquidation of securities from the available-for-sale portfolio andsecuritizations of loans.  In addition,government programs, such as the FDIC’s TLGP, may influence depositbehavior.  Primary uses of funds includewithdrawal of and interest payments on deposits, originations and purchases ofloans, purchases of investment securities, and payment of operating expenses.

 

Duringthe first nine months of 2009, we experienced net cash inflows from operatingactivities of $188.3 million, compared to net cash inflows of $144.3 millionfor the first nine months of 2008.  Netcash inflows from operating activities reflect the $397.9 million and $183.0million in loan loss provisions recorded during the first nine months of 2009and 2008, respectively.

 

Netcash outflows from investing activities totaled $636.1million for the first nine monthsof 2009 compared with net inflows from investing activities of $264.5 millionfor the first nine months 2008.  Net cashoutflows from investing activities for the first nine months of2009 were due primarilyto purchases of interest-bearing deposits, securities purchased under resaleagreements, and investment securities. These factors were partially offset by the proceeds from the sale ofinvestment securities, as well as repayments, maturities and redemptions ofinvestment securities, sale of loans receivable due to the sale of problemassets, and a decrease in loans receivable due to lower loan origination volumeduring the first nine months of 2009 relative to the first nine months 2008.  Net cash inflows from investing activities forthe first nine months of 2008 were due primarily to proceeds from the sale ofinvestment securities and loans, repayments on loans, the early termination ofa resale agreement, as well as repayments, maturities and redemptions ofinvestment securities.  These factorswere partially offset by purchases of available-for-sale investment securities.

 

Weexperienced net cash inflows from financing activities of $162.2 million duringthe first nine months of 2009, primarily due to the net increase indeposits.  As a result of the turbulencein the banking sector, we experienced a notable growth in deposit products thatafford greater deposit insurance coverage to deposit customers beginning in thesecond half of 2008.  We have focused onattracting new customers and growing deposits through both our retail branchand commercial deposit platforms.  Wehave successfully introduced new core deposit products and increased moneymarket deposits during the first nine months of 2009.  We also received proceeds in the amount of$107.8 million from the issuance of common stock through a public offering anda private placement during July 2009. Cash from financing activities were partially offset by net decreases inFHLB advances, and dividends paid on our common and preferred stock for thefirst nine months of 2009.  Weexperienced net outflows from financing activities of $41.6 for the first ninemonths of 2008 primarily due to the repayment of federal funds purchased, FHLBadvances and dividends paid on our preferred and common stock during the firstnine months of 2008.  These factors werepartially offset by a net increase in deposits as well as net proceeds receivedfrom the issuance of convertible preferred stock.

 

Asa means of augmenting our liquidity, we have available a combination ofborrowing sources  comprised of theFederal Reserve Bank’s discount window, FHLB advances, federal funds lines with

 

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various correspondent banks,and several master repurchase agreements with major brokerage companies.  As of September 30, 2009, our totalborrowing capacity and holdings of cash and due from banks, short-terminvestments, and interest-bearing deposits in other banks amounted to $3.85billion, compared to $3.57 billion as of December 31, 2008.  We believe our liquidity sources to be stableand adequate to meet our day-to-day cash flow requirements.

 

Historically, the liquidityof the Company was primarily dependent on the payment of cash dividends by theBank subject to applicable statutes and regulations.  The amount of dividends that the Bank can payto the Bancorp is restricted by earnings, retained earnings, and risk-basedcapital requirements.  For the ninemonths ended September 30, 2009 and 2008, total dividends paid by the Bankto the Company amounted to $25.4 million and $23.1 million, respectively.   This was partially offset by the reductionsin quarterly common stock dividends to $0.01 per share and $0.02 per shareduring the second and first quarter of 2009, respectively, from $0.10 per shareduring the first half of 2008.  Theincrease in dividend payments for the nine months ended September 30, 2009reflects the additional dividends paid by the Bank to allow the Company to, inturn, make the dividend payments on the Series A and B preferred stockissued in April 2008 and December 2008, respectively.  Our liquidity was strengthened through theissuance of over $100 million raised from the private and public sale of commonstock.

 

On October 19, 2009,the Company’s Board of Directors approved the declaration of fourth quarter2009 dividends on our Series A preferred stock and on our commonshares.  Additionally, our Board ofDirectors also approved the payment of fourth quarter dividends on ourSeries B preferred stock payable on November 15, 2009.  The quarterly dividend rate is $0.01 pershare on our common stock payable on or about November 24, 2009 toshareholders of record as of November 10, 2009.  Future dividend payments from Bank to theCompany and to our common and preferred shareholders will continue to bereviewed quarterly in light of the business conditions we are operating in, andconsidering current and projected earnings and desired capital levels.

 

#### **InterestRate Sensitivity Management**

#### ** **

Our success islargely dependent upon our ability to manage interest rate risk, which is theimpact of adverse fluctuations in interest rates on our net interest income andnet portfolio value.  Although in thenormal course of business we manage other risks, such as credit and liquidityrisk, we consider interest rate risk to be among the more significant marketrisks and could potentially have material effect on our financial condition andresults of operations.

 

Thefundamental objective of the asset liability management process is to manageour exposure to interest rate fluctuations while maintaining adequate levels ofliquidity and capital.  Our strategy isformulated by the Asset Liability Committee, which coordinates with the Boardof 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 interestrate changes, the book and market values of assets and liabilities, unrealizedgains and losses on the available-for-sale portfolio (including thoseattributable to hedging transactions, if any), purchase and securitization activity,and maturities of investments and borrowings.

 

Our overall strategy is to minimize the adverse impactof immediate incremental changes in market interest rates (rate shock) on netinterest income and net portfolio value. Net portfolio value is defined as the present value of assets, minus thepresent value of liabilities.  Theattainment of this goal requires a balance between profitability, liquidity andinterest rate risk exposure.  To minimizethe adverse impact of changes in market interest rates, we simulate the effectof instantaneous interest rate changes on net interest income and net portfoliovalue on a quarterly basis.  The tablebelow shows the 

 

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estimated impact of changes in interest rates on netinterest income and market value of equity as of September 30, 2009 and December 31, 2008,assuming a non-parallel shift of 100 and 200 basis points in both directions:

 
| ** **                    | ** ** | **Net Interest Income** | ** ** | **Net Portfolio Value** | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **Volatility (1)**      | ** ** | **Volatility (2)**      | ** ** |
| **Change in  Interest Rates** | ** ** | **September 30,**  | ** ** | **December 31,**   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **(Basis  Points)**           | ** ** | **2009**                | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| +200                          |       | 4.3                     | %          | 11.6                    | %          | (4.2 | )% | 8.8 | % |
| +100                          |       | 1.6                     | %          | 5.4                     | %          | (2.5 | )% | 4.4 | % |
| -100                          |       | 1.7                     | %          | (1.6                    | )%         | 3.1 | % | (4.5 | )% |
| -200                          |       | 3.0                     | %          | (1.4                    | )%         | 7.5 | % | (9.7 | )% |

 

----

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

 

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

 

All interest-earningassets, interest-bearing liabilities and related derivative contracts areincluded in the interest rate sensitivity analysis at September 30, 2009 andDecember 31, 2008.  As of September 30,2009, 64% of our total loan portfolio has interest rate floors.  In a declining rate environment, the interestrate floors on these loans contribute to the favorable impact on our netinterest income.  However, in a risingrate environment, these interest rate floors also serve to lessen the fullbenefit of higher interest rates.  AtSeptember 30, 2009 and December 31, 2008, our estimated changes in net interestincome and net portfolio value were within the ranges established by the Boardof Directors.

 

Our primary analytical tool to gauge interest ratesensitivity is a simulation model used by many major banks and bank regulators,and is based on the actual maturity and repricing characteristics ofinterest-rate sensitive assets and liabilities. The model attempts to predict changes in the yields earned on assets andthe rates paid on liabilities in relation to changes in market interestrates.  As an enhancement to the primarysimulation model, prepayment assumptions and market rates of interest providedby independent broker/dealer quotations, an independent pricing model and otheravailable public sources are incorporated into the model.  Adjustments are made to reflect the shift inthe Treasury and other appropriate yield curves.  The model also factors in projections ofanticipated activity levels by product line and takes into account our increasedability to control rates offered on deposit products in comparison to ourability to control rates on adjustable-rate loans tied to the publishedindices.

 

The following table provides the outstanding principalbalances and the weighted average interest rates of our financial instrumentsas of September 30,2009.  The information presented below isbased on the repricing date for variable rate instruments and the expectedmaturity date for fixed rate instruments.

 

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| ** **                                                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | **Fair  Value at** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|------------|------------|------------------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|--------------------|------------|
| ** **                                                    | ** ** | **Expected  Maturity or Repricing Date by Year** | ** ** | ** ** | ** ** | **September 30,** | ** ** |
| *** ***                                                  | ** ** | **Year 1**                                       | ** ** | **Year 2** | ** ** | **Year 3**             | ** ** | **Year 4** | ** ** | **Year 5** | ** ** | **Thereafter** | ** ** | **Total**  | ** ** | **2009**           | ** ** |
| ** **                                                    |       | **(in thousands)**                               |       |
| **Assets:**                                                   |       |                                             |       |       |       |                   |       |       |       |       |       |           |       |       |       |               |       |
| Interest-bearing  deposits in other banks                     |       | $                                                | 310,182    |       | $          | 10,428                 |       |       |       |       |       | $              | 250        |       |       |               | $          | 320,860 |   | $ | 320,865 |   |
| average yield  (fixed rate)                                   |       | 0.81                                             | %          | 2.15       | %          |                   |       |       |       | 4.00       | %          |           |       | 0.86       | %          |               |       |
| Short-term  investments                                       |       | $                                                | 460,665    |       |       |                   |       |       |       |       |       |           |       |       | $          | 460,665            |       | $ | 460,665 |   |
| Weighted average  rate                                        |       | 0.32                                             | %          |       |       |                   |       |       |       |       |       |           |       | 0.32       | %          |               |       |
| Securities  purchased under resale agreements                 |       | $                                                | 50,000     |       |       |                   |       |       |       |       |       |           | $          | 25,000     |       | $                  | 75,000     |   | $ | 86,292 |   |
| Weighted average  rate                                        |       | 10.45                                            | %          |       |       |                   |       |       |       |       |       | 7.05           | %          | 9.32       | %          |               |       |
| Investment  securities held-to-maturity (fixed rate)          |       | $                                                | 109,096    |       | $          | 51,816                 |       | $          | 48,629     |       | $          | 129,704        |       | $          | 47,071     |               | $          | 104,485 |   | $ | 490,801 |   | $ | 506,909 |   |
| Weighted average  rate                                        |       | 6.17                                             | %          | 5.78       | %          | 6.01                   | %          | 5.40       | %          | 5.57       | %          | 5.30           | %          | 5.67       | %          |               |       |
| Investment  securities held-to-maturity (variable rate)       |       | $                                                | 128,080    |       | $          | 55,687                 |       | $          | 100,780    |       | $          | 4,594          |       | $          | 1,389      |               |       |   | $ | 290,530 |   | $ | 292,820 |   |
| Weighted average  rate                                        |       | 1.94                                             | %          | 4.17       | %          | 4.42                   | %          | 5.11       | %          | 5.29       | %          |           |       | 3.29       | %          |               |       |
| Investment  securities available-for-sale (fixed rate)        |       | $                                                | 186,367    |       | $          | 98,089                 |       | $          | 151,187    |       | $          | 89,636         |       | $          | 137,753    |               | $          | 171,507 |   | $ | 834,539 |   | $ | 844,485 |   |
| Weighted average  rate                                        |       | 5.96                                             | %          | 5.83       | %          | 4.40                   | %          | 4.55       | %          | 3.93       | %          | 5.16           | %          | 5.01       | %          |               |       |
| Investment  securities available-for-sale (variable rate) (1) |       | $                                                | 359,180    |       | $          | 205,604                |       | $          | 45,934     |       | $          | 36,505         |       | $          | 14,862     |               | $          | 369 |   | $ | 662,454 |   | $ | 612,538 |   |
| Weighted average  rate                                        |       | 4.00                                             | %          | 4.22       | %          | 5.47                   | %          | 4.52       | %          | 4.44       | %          | 4.73           | %          | 4.21       | %          |               |       |
| Total gross loans                                             |       | $                                                | 6,663,039  |       | $          | 942,210                |       | $          | 331,116    |       | $          | 185,744        |       | $          | 109,617    |               | $          | 187,749 |   | $ | 8,419,475 |   | $ | 8,064,302 |   |
| Weighted average  rate                                        |       | 5.31                                             | %          | 6.59       | %          | 6.75                   | %          | 6.69       | %          | 6.17       | %          | 4.64           | %          | 5.54       | %          |               |       |
|                                                          |       |                                             |       |       |       |                   |       |       |       |       |       |           |       |       |       |               |       |
| **Liabilities:**                                              |       |                                             |       |       |       |                   |       |       |       |       |       |           |       |       |       |               |       |
| Checking accounts                                             |       | $                                                | 347,745    |       |       |                   |       |       |       |       |       |           |       |       | $          | 347,745            |       | $ | 284,730 |   |
| Weighted average  rate                                        |       | 0.33                                             | %          |       |       |                   |       |       |       |       |       |           |       | 0.33       | %          |               |       |
| Money market  accounts                                        |       | $                                                | 2,263,319  |       |       |                   |       |       |       |       |       |           |       |       | $          | 2,263,319          |       | $ | 2,182,162 |   |
| Weighted average  rate                                        |       | 1.17                                             | %          |       |       |                   |       |       |       |       |       |           |       | 1.17       | %          |               |       |
| Savings deposits                                              |       | $                                                | 420,365    |       |       |                   |       |       |       |       |       |           |       |       | $          | 420,365            |       | $ | 348,368 |   |
| Weighted average  rate                                        |       | 0.48                                             | %          |       |       |                   |       |       |       |       |       |           |       | 0.48       | %          |               |       |
| Time deposits                                                 |       | $                                                | 4,107,241  |       | $          | 98,673                 |       | $          | 9,349      |       | $          | 24,004         |       | $          | 589        |               | $          | 55 |   | $ | 4,239,911 |   | $ | 4,248,498 |   |
| Weighted average  rate                                        |       | 1.56                                             | %          | 2.39       | %          | 4.55                   | %          | 4.02       | %          | 2.36       | %          | 1.98           | %          | 1.60       | %          |               |       |
| Federal funds  purchased                                      |       | $                                                | 3,022      |       |       |                   |       |       |       |       |       |           |       |       | $          | 3,022              |       | $ | 3,022 |   |
| Weighted average  rate                                        |       | 1.35                                             | %          |       |       |                   |       |       |       |       |       |           |       | 1.35       | %          |               |       |
| FHLB advances  (term)                                         |       | $                                                | 760,216    |       | $          | 155,000                |       | $          | 5,000      |       |       |           |       |       | $          | 3,000              |       | $ | 923,216 |   | $ | 943,118 |   |
| Weighted average  rate                                        |       | 4.03                                             | %          | 4.59       | %          | 4.46                   | %          |       |       |       |       | 4.44           | %          | 4.13       | %          |               |       |
| Customer  repurchase agreements                               |       | $                                                | 24,450     |       |       |                   |       |       |       |       |       |           |       |       | $          | 24,450             |       | $ | 24,450 |   |
| Weighted average  rate                                        |       | 0.52                                             | %          |       |       |                   |       |       |       |       |       |           |       | 0.52       | %          |               |       |
| Securities sold  under repurchase agreements (fixed rate)     |       |                                             |       |       |       |                   |       |       |       |       |       | $              | 945,000    |       | $          | 945,000            |       | $ | 1,186,700 |   |
| Weighted average  rate                                        |       |                                             |       |       |       |                   |       |       |       |       |       | 4.80           | %          | 4.80       | %          |               |       |
| Securities sold  under repurchase agreements (variable rate)  |       | $                                                | 50,000     |       |       |                   |       |       |       |       |       |           |       |       | $          | 50,000             |       | $ | 53,657 |   |
| Weighted average  rate                                        |       | 4.15                                             | %          |       |       |                   |       |       |       |       |       |           |       | 4.15       | %          |               |       |
| Subordinated debt                                             |       | $                                                | 75,000     |       |       |                   |       |       |       |       |       |           |       |       | $          | 75,000             |       | $ | 44,831 |   |
| Weighted average  rate                                        |       | 1.60                                             | %          |       |       |                   |       |       |       |       |       |           |       | 1.60       | %          |               |       |
| Junior  subordinated debt (fixed rate)                        |       |                                             |       |       |       |                   |       |       |       |       |       | $              | 21,392     |       | $          | 21,392             |       | $ | 18,512 |   |
| Weighted average  rate                                        |       |                                             |       |       |       |                   |       |       |       |       |       | 10.91          | %          | 10.91      | %          |               |       |
| Junior  subordinated debt (variable rate)                     |       | $                                                | 139,178    |       |       |                   |       |       |       |       |       |           |       |       | $          | 139,178            |       | $ | 26,629 |   |
| Weighted average  rate                                        |       | 2.08                                             | %          |       |       |                   |       |       |       |       |       |           |       | 2.08       | %          |               |       |

 

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(1) Includes hybridsecurities that have fixed interest rates for the first three or fiveyears.  Thereafter, interest rates becomeadjustable based on a predetermined index.

 

Expected maturities of assets are contractualmaturities adjusted for projected payment based on contractual amortization andunscheduled prepayments of principal as well as repricing frequency.  Expected maturities for deposits are based oncontractual maturities adjusted for projected rollover rates for deposits withno stated maturity dates.  We utilize assumptions supported bydocumented analyses for the expected maturities of our loans and repricing ofour deposits.  We also use prepaymentprojections for amortizing securities. The actual maturities of these instruments could vary significantly iffuture prepayments and repricing frequencies differ from our expectations basedon historical experience.

 

The fair values of interest-bearing deposits inother banks are based on the discounted cash flow approach.  The discount rate is derived from the Bank’stime deposit rate curve.  The fair valuesof short-

 

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terminvestments generally approximate their book values due to their shortmaturities.  For securities purchasedunder resale agreements, fair values are calculated by discounting future cashflows based on expected maturities or repricing dates utilizing estimatedmarket discount rates and taking into consideration the call features of eachinstrument.  The fair values of theinvestment securities are generally determined by reference to the average ofat least two quoted market prices obtained from independent external brokers orprices obtained from independent external pricing service providers who haveexperience in valuing these securities. In obtaining such valuation information from third parties, the Companyhas reviewed the methodologies used to develop the resulting fair values.  For the private-label mortgage-backedsecurity, the fair value was derived based on a combination of broker pricesand discounted cash flow analyses that is weighted as deemed appropriate.  For the pooled trust preferred securities,the fair value was derived based on a discounted cash flow analyses.  The discount rate is derived from assumptionsusing an exit pricing approach related to the implied rate of return which havebeen adjusted for general change in market rates, estimated changes in creditquality and liquidity risk premium, and specific non-performance and defaultexperience in the collateral underlying the securities.

 

The fair value of deposits is determined based onthe discounted cash flow approach.  Thediscount rate is derived from the associated yield curve, plus spread, ifany.  For core deposits, the cashoutflows are projected by the decay rate based on the Bank’s core deposit premiumstudy.  Cash flows for all non-timedeposits are discounted using the LIBOR yield curve.  For time deposits, the cash flows are basedon the contractual runoff and are discounted by the Bank’s current offeringrates, plus spread.  For federal funds purchased,fair value approximates book value due to their short maturities.  The fair value of FHLB term advances isestimated by discounting the cash flows through maturity or the next repricingdate based on current rates offered by the FHLB for borrowings with similarmaturities.  Customer repurchaseagreements, which have maturities ranging from one to three days, are presumedto have equal book and fair values because the interests rates paid on theseinstruments are based on prevailing market rates.  The fair values of securities sold underrepurchase agreements are calculated by discounting future cash flows based onexpected maturities or repricing dates, utilizing estimated market discountrates and taking into consideration the call features of each instrument.  For both subordinated and junior subordinateddebt instruments, fair values are estimated by discounting cash flows throughmaturity based on current market rates the Bank would pay for new issuances.

 

The Asset/Liability Committee is authorizedto utilize a wide variety of off-balance sheet financial techniques to assistin the management of interest rate risk. We may elect to use derivative financial instruments as part of ourasset and liability management strategy, with the overall goal of minimizingthe impact of interest rate fluctuations on our net interest margin andstockholders’ equity.  Currently,derivative instruments do not have a material impact on our operating resultsor financial position.

 

In August and November 2004, we enteredinto four equity swap agreements with a major investment brokerage firm tohedge against market fluctuations in a promotional equity index certificate ofdeposit product that we offered to Bank customers for a limited time during thelatter half of 2004.  This product, whichhas a term of 5 1/2 years, pays interest based on the performance of the HangSeng China Enterprises Index, or the “HSCEI”. As of September 30, 2009, the combined notional amounts of the equity swap agreementstotaled $15.6 million with termination dates similar to the stated maturitydates on the underlying certificate of deposit host contracts.  For the equity swap agreements, we agreed topay interest based on the one-month Libor minus a spread on a monthly basis andreceive any increase in the HSCEI at swap termination date.  Under ASC 815 (previously SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*),a certificate of deposit that pays interest based on changes in an equity indexis a hybrid instrument with an embedded derivative (i.e., equity call option)that must be accounted for separately from the host contract (i.e., thecertificate of deposit).  Both theembedded equity call options on the certificates of deposit and thefreestanding equity swap agreements 

 

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aremarked-to-market every month with resulting changes in fair value recorded inthe consolidated statements of operations**.**

 

On April 1, 2005, we amended the four equityswap agreements entered into in 2004 effectively removing the swap payableleg.  The amendments to the swapagreements changed the terms of the agreements such that instead of paying interestbased on the one-month Libor minus a spread on a monthly basis for theremaining terms of the agreements, we prepaid this amount based on the currentmarket value of the cash streams.  Thetotal amount paid in conjunction with these swap agreement amendments was $4.2million on April 1, 2005.

 

In December 2007, we entered into twoadditional equity swap agreements with a major investment brokerage firm tohedge against market fluctuations in a promotional equity index certificate ofdeposit product offered to bank customers. This product, which has a term of 5 years, also pays interest based onthe performance of the HSCEI similar to the previous index certificate offeringin 2004.  As of September 30, 2009, the combinednotional amounts of these new equity swap agreements totaled $23.3 million andhave termination dates similar to the stated maturities of the underlyingcertificate of deposit host contracts. On December 3, 2007, we prepaid $4.5 million for the option costbased on the current market value of the cash streams.

 

The fair values of the equity swap agreements andembedded derivative liabilities for these six derivative contracts amounted to$13.7 million as of September 30, 2009, compared to $13.9 million as ofDecember 31, 2008.

 

The embedded derivative liabilities are included ininterest-bearing deposits and the equity swap agreements are included in otherassets on the consolidated balance sheets. The fair value of the derivative contracts is determined based on thechange in value of the HSCEI and the volatility of the call option over thelife of the individual swap agreement. The option value is derived based on the volatility, the interest rateand the time remaining to maturity of the call option.  We also considered the counterparty’s as wellas our own credit risk in determining the valuation.

 

**ITEM 3:  QUANTITATIVE ANDQUALITATIVE DISCLOSURES OF MARKET RISKS**

 

For quantitative andqualitative disclosures regarding market risks in our portfolio, see,“Management’s Discussion and Analysis of Consolidated Financial Condition andResults of Operations -- Asset Liability and Market Risk Management.”

 

**ITEM 4:  CONTROLS AND PROCEDURES**

 

*DisclosureControls and Procedures*

 

As of September 30, 2009, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures pursuant toExchange Act Rule 13a-15(e) and 15d-15(e).  Based upon that evaluation, our ChiefExecutive Officer and our Chief Financial Officer concluded that our disclosurecontrols and procedures are effective as of September 30, 2009.

 

Our disclosure controls and procedures are designed toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.  Our disclosure 

 

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controls and procedures include, without limitation,controls and procedures designed to ensure that information required to bedisclosed by us in the reports that we file under the Exchange Act isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

*Internal Controls*

 

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

 

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# **PART II - OTHERINFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

Neitherthe Company nor the Bank is involved in any material legal proceedings.  The Bank, from time to time, is party tolitigation which arises in the ordinary course of business, such as claims toenforce liens, claims involving the origination and servicing of loans, andother issues related to the business of the Bank.  After taking into consideration informationfurnished by counsel to the Company and the Bank, management believes that theresolution of such issues would not have a material adverse impact on thefinancial position, results of operations, or liquidity of the Company or theBank.

 

**ITEM 1A. RISK FACTORS**

 

The Company’s 2008 Form 10-K containsdisclosure regarding the risks and uncertainties related to the Company’sbusiness under the heading “Item A. Risk Factors.”  The informationpresented below updates and should be read in conjunction with the risk factorsand information disclosed in the 2008 Form 10-K.  Other than as set forth below, there are nomaterial changes to our risk factors as presented in the Company’sForm 10-K.

 

***We may engage in FDIC-assistedtransactions, which could present additional risks to our business*****. **We may have opportunities toacquire the assets and liabilities of failed banks in FDIC-assistedtransactions.  Although thesetransactions typically provide for FDIC assistance to an acquirer to mitigatecertain risks, such as sharing exposure to loan losses and providingindemnification against certain liabilities of the failed institution, we wouldstill be subject to many of the same risks we would face in acquiring anotherbank in negotiated transactions, including risks associated with maintainingcustomer relationships and failure to realize the anticipated acquisitionbenefits in the amounts and within the timeframes we expect.  In addition, because these acquisitions arestructured in a manner that would not allow us the time and access toinformation normally associated with preparing for and evaluating a negotiatedacquisition, we may face additional risk in FDIC-assisted transactions,including additional strain on management resources, management of problem loans,problems related to integration of personnel and operating systems and impactto our capital resources requiring us to raise additional capital.  We cannot assure you that we will besuccessful in overcoming these risks or any other problems encountered inconnection with FDIC-assisted transactions. Our inability to overcome these risks could have a material adverseeffect on our business, financial condition and net income.

 

***If the Bank continues to incur losses thaterode its capital, it may need more capital and become subject to enhancedregulation or supervisory action. ***If economicconditions continue to deteriorate, particularly in the California commercialreal estate and residential building markets where our business isconcentrated, we may need to raise additional capital to support any additionalprovisions for loan losses and loan chargeoffs.  We cannot provideassurance that we would succeed in raising any such additional capital, and anycapital we obtain may dilute the interests of holders of our common stock, orotherwise have an adverse effect on their investment.

 

Under federal and state laws and regulationspertaining to the safety and soundness of insured depository institutions, theDFI and the Federal Reserve, and separately the FDIC as insurer of the Bank’sdeposits, have authority to compel or restrict certain actions if the Bank’scapital should fall below adequate capital standards as a result of futureoperating losses, or if its bank regulators determine that it has insufficientcapital.  Among other matters, thecorrective actions include but are not limited to requiring affirmative actionto correct any conditions resulting from any violation or practice; directingan increase in capital and the maintenance of specific minimum capital ratios;restricting the Bank’s operations; limiting the rate of interest it may pay onbrokered deposits; restricting the amount of 

 

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distributions and dividends and payment of interest on its trustpreferred securities; requiring the Bank to enter into informal or formalenforcement orders, including memoranda of understanding, written agreementsand consent or cease and desist orders to take corrective action and enjoinunsafe and unsound practices; removing officers and directors and assessingcivil monetary penalties; and taking possession and closing and liquidating theBank.  See Supervision and Regulation inour Annual Report on Form 10-K for the fiscal year ended December 31,2008.

 

***Our ability to pay dividends is limited by various statutesand regulations and depends primarily on East West Bank’s ability to distributefunds to us, which is also limited by various statutes and regulations.**** *Our ability to paydividends may be limited because we are a holding company and, as such, do nothave any significant operations or assets other than our ownership of theshares of our operating subsidiaries. The principal source of funds from which we service our debt and pay ourobligations and dividends is the receipt of dividends from the Bank.  The availability of dividends from the Bankis limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank andother supervisory factors, that the DFI, FDIC or Federal Reserve could restrictor prohibit the Bank from paying dividends to us. In this regard, and as aresult of the losses we reported for the year ended December 31, 2008, weare required, under the Federal Reserve’s November 14, 1985 PolicyStatement on the Payment of Cash Dividends relating to when earnings are at aloss, to obtain the approval of the Federal Reserve before we receive or theBank pays dividends to us.  In the eventthat the Bank is unable to pay dividends to us, we may not be able to serviceour debt, pay our obligations or pay dividends on our outstanding equitysecurities or debt securities, which would adversely affect our business,financial condition, results of operations and prospects.  In addition, our ability to pay dividends islimited by various statutes and regulations. As a result of losses we reported for the year ended December 31,2008, we will continue to seek the prior approval of the Federal Reserve priorto declaring or paying any dividends on our outstanding equity securities.

 

***If we were toundergo an “ownership change” for tax purposes, our ability to use certain taxbenefits would be limited.***  If we were to undergoan “ownership change” for tax purposes, our ability to deduct then existing netoperating loss carryforwards would be limited. In addition, our ability to claim certain subsequent deductions could belimited if we had a “net unrealized built-in loss” at the time of the ownershipchange.  The rules for determiningwhen a company has an ownership change and the subsequent calculation ofapplicable limitations are highly complex. If we were to undergo an ownershipchange, limitations on our ability to use our tax benefits could have amaterially adverse effect on us.

 

***Our outstandingdebt securities restrict our ability to pay dividends on our capital stock.***  We expect to seek the prior approval of theFederal Reserve prior to paying any interest on our junior subordinateddecurities (which will be used to make distributions on our Trust PreferredSecurities).  If we are unable to makepayments on any of our junior subordinated securities for more than 20consecutive quarters, we would be in default under the governing agreements forsuch securities and the amounts due under such agreements would be immediatelydue and payable.  Additionally, if forany interest payment period we do not pay interest in respect of the juniorsubordinated securities (which will be used to make distributions on the TrustPreferred Securities), or if for any interest payment period we do not payinterest in respect of our subordinated debt, or if any other event of defaultoccurs, then we generally will be prohibited from declaring or paying anydividends or other distributions, or redeeming, purchasing or acquiring, any ofour capital securities, including our Common Stock, during the next succeedinginterest payment period applicable to any of the Junior Subordinated Securities,or next succeeding interest payment period applicable to the SubordinatedSecurities, as the case may be.

 

Moreover, any other financing agreements that weenter into in the future may limit our ability to pay cash dividends on ourcapital stock, including our Common Stock. In the event that our existing or future financing agreements restrictour ability to pay dividends in cash on our Common Stock, we may be unable topay dividends in cash on our Common Stock unless we can refinance amountsoutstanding under those agreements.

 

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**ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

Except as previously disclosed on Reports onForm 8-K, there were no unregistered sales of equity securities during thequarter ended September 30, 2009. The following summarizes share repurchase activities during thethird quarter of 2009:

 
| ** **               | ** ** | ** **        | ** ** | ** **     | ** ** | **Total Number**          | ** ** | **Approximate Dollar**          | ** ** |
|--------------------------|------------|-------------------|------------|----------------|------------|---------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **Total**         | ** ** | ** **     | ** ** | **of Shares**             | ** ** | **Value in Millions of Shares** | ** ** |
| ** **               | ** ** | **Number**        | ** ** | **Average**    | ** ** | **Purchased as**          | ** ** | **that May Yet Be**        | ** ** |
| ** **               | ** ** | **of Shares**     | ** ** | **Price Paid** | ** ** | **Part of Publicly** | ** ** | **Purchased Under**             | ** ** |
| **Month Ended**          | ** ** | **Purchased (1)** | ** ** | **per Share**  | ** ** | **Announced Programs**    | ** ** | **the Programs (2)**            | ** ** |
| July 31,  2009      |       | —            |       | $              | —     |                      | —     |                            | $          | 26.2 |   |
| August 31,  2009    |       | —            |       | —         |       | —                    |       | 26.2                            |       |
| September 30,  2009 |       | —            |       | —         |       | —                    |       | 26.2                            |       |
| Total                    |       | —            |       | $              | —     |                      | —     |                            | $          | 26.2 |   |

 

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(1)          Excludes 71,744 in repurchased shares totaling $1.5 million due to forfeitures and vestingof restricted stock awards pursuant to the Company’s 1998 Stock Incentive Plan.

 

(2)          During the first quarter of 2007, theCompany’s Board of Directors announced a repurchase program authorizing therepurchase of up to $80.0 million of its common stock.  This repurchase program has no expirationdate and, to date, 1,392,176 shares totaling $53.8 million have been purchasedunder this program.

 

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES**

 

Not applicable.

 

**ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

Not applicable.

 

**ITEM 5.  OTHER INFORMATION**

 

Not applicable.

 

**ITEM 6.  EXHIBITS**

 
| (i) Exhibit 31.1   | Chief Executive Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  |
|------------------------------|--------------------------------------------------------------------------------------------------------|
|                         |                                                                                                   |
| (ii) Exhibit 31.2  | Chief Financial Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  |
|                         |                                                                                                   |
| (iii) Exhibit 32.1 | Chief Executive Officer  Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to |

 

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|                        | Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                        |
|-----------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                        |                                                                                                                                                       |
| (iv) Exhibit 32.2 | Chief Financial Officer  Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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

 

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**SIGNATURE**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| Dated: November 3, 2009 |                                                 |
|------------------------------|------------------------------------------------------|
|                         |                                                 |
|                         |                                                 |
|                         | EAST WEST BANCORP, INC.                              |
|                         |                                                 |
|                         |                                                 |
|                         | By:                                                  | /s/ Thomas J. Tolda |
|                         | THOMAS J. TOLDA                                      |
|                         | Executive Vice President and Chief Financial Officer |

 

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