Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

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

##### ** **

**Mark One**

 

| **x**                                                   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|---------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                    |                                                                                                     |
| **For the  quarterly period ended March 31, 2009** |
|                                                    |                                                                                                     |
| **or**                                                  |
|                                                    |                                                                                                     |
| **o**                                                   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For thetransition period from                to                .**

 

**Commissionfile number 000-24939**

 

**EAST WESTBANCORP, INC**.

(Exact name ofregistrant 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) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the 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 to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat 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” in Rule 12b-2of 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 Exchange Act). Yes o  No x

 

Number of shares outstanding of the issuer’s commonstock on the latest practicable date: 64,036,512 shares of common stock as of April 30,2009.

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| **PART I - FINANCIAL INFORMATION** | 4        |
|-----------------------------------------|----------|
| ** **                              |     |
|                                    | Item 1.  | Condensed  Consolidated Financial Statements (Unaudited) | 4-7 |
|                                    |     |   |   |
|                                    |     | Notes to Condensed Consolidated Financial Statements  (Unaudited) | 8-33 |
|                                    |     |   |   |
|                                    | Item 2.  | Management’s Discussion and Analysis  of Financial Condition and Results of Operations | 34-69 |
|                                    |     |   |   |
|                                    | Item 3.  | Quantitative  and Qualitative Disclosures of Market Risks | 68 |
|                                    |     |   |   |
|                                    | Item 4.  | Controls and  Procedures | 69-70 |
|                                    |     |   |   |
| **PART II  - OTHER INFORMATION**   | 70       |
| ** **                              |     |
|                                    | Item 1.  | Legal Proceedings | 70 |
|                                    |     |   |   |
|                                    | Item 1A. | Risk Factors | 70 |
|                                    |     |   |   |
|                                    | Item 2.  | Unregistered  Sales of Equity Securities and Use of Proceeds | 70 |
|                                    |     |   |   |
|                                    | Item 3.  | Defaults  Upon Senior Securities | 70 |
|                                    |     |   |   |
|                                    | Item 4.  | Submission  of Matters to a Vote of Security Holders | 70 |
|                                    |     |   |   |
|                                    | Item 5.  | Other Information | 71 |
|                                    |     |   |   |
|                                    | Item 6.  | Exhibits | 71 |
|                                    |     |   |   |
| **SIGNATURE**                           | 72       |

 

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### **Forward-Looking Statements**

### ** **

Certain matters discussed in this QuarterlyReport may constitute forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended (the “1933 Act”) and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and assuch, may involve risks and uncertainties. These forward-looking statements relate to, among other things,expectations of the environment in which the Company operates and projectionsof future performance including future earnings and financial condition.  The Company’s actual results, performance, orachievements may differ significantly from the results, performance, orachievements expected or implied in such forward-looking statements.  Such risk and uncertainties and other factors include,but are not limited to, adverse developments or conditions related to orarising 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 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.”  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. FINANCIAL STATEMENTS**

EAST WEST BANCORP,INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

*(Inthousands, except share data)*

*(Unaudited)*

 
| ** **                                                                                                                                                                                                                                                               | ** ** | **March 31,** | ** **     | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|----------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                               | ** ** | **2009**           | ** **     | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                               |       |               |           |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                               |       | $                  | 541,066        |                  | $          | 878,853 |   |
| Short-term  investments                                                                                                                                                                                                                                                  |       | 329,288            |           | 228,441               |       |
| Securities  purchased under resale agreements                                                                                                                                                                                                                            |       | 50,000             |           | 50,000                |       |
| Investment  securities held-to-maturity, at amortized cost (with fair value of $717,666  at March 31, 2009 and $123,105 at December 31, 2008)                                                                                                                  |       | 734,799            |           | 122,317               |       |
| Investment  securities available-for-sale, at fair value (with amortized cost of  $2,132,686 at March 31, 2009 and $2,189,570 at December 31, 2008)                                                                                                            |       | 1,994,403          |           | 2,040,194             |       |
| Loans  receivable, net of allowance for loan losses of $195,450 at March 31,  2009 and $178,027 at December 31, 2008                                                                                                                                           |       | 7,865,925          |           | 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                                                                                                                                                                                                                                            |       | 38,634             |           | 38,302                |       |
| Investment in  affordable housing partnerships                                                                                                                                                                                                                           |       | 49,684             |           | 48,141                |       |
| Premises and  equipment, net                                                                                                                                                                                                                                             |       | 58,479             |           | 60,184                |       |
| Due from  customers on acceptances                                                                                                                                                                                                                                       |       | 3,887              |           | 5,538                 |       |
| Premiums on  deposits acquired, net                                                                                                                                                                                                                                      |       | 20,065             |           | 21,190                |       |
| Goodwill                                                                                                                                                                                                                                                                 |       | 337,438            |           | 337,438               |       |
| Cash surrender  value of life insurance policies                                                                                                                                                                                                                         |       | 95,665             |           | 94,745                |       |
| Deferred tax  assets                                                                                                                                                                                                                                                     |       | 182,484            |           | 184,588               |       |
| Accrued interest  receivable and other assets                                                                                                                                                                                                                            |       | 139,193            |           | 129,190               |       |
| **TOTAL**                                                                                                                                                                                                                                                                | ** ** | **$**              | **12,564,524** | ** **            | **$**      | **12,422,816** | ** ** |
|                                                                                                                                                                                                                                                                     |       |               |           |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                           |       |               |           |                  |       |
| Customer deposit  accounts:                                                                                                                                                                                                                                              |       |               |           |                  |       |
| Noninterest-bearing                                                                                                                                                                                                                                                      |       | $                  | 1,297,151      |                  | $          | 1,292,997 |   |
| Interest-bearing                                                                                                                                                                                                                                                         |       | 7,156,908          |           | 6,848,962             |       |
| Total customer  deposits                                                                                                                                                                                                                                                 |       | 8,454,059          |           | 8,141,959             |       |
| Federal funds  purchased                                                                                                                                                                                                                                                 |       | 22                 |           | 28,022                |       |
| Federal Home  Loan Bank advances                                                                                                                                                                                                                                         |       | 1,233,269          |           | 1,353,307             |       |
| Securities sold  under repurchase agreements                                                                                                                                                                                                                             |       | 998,061            |           | 998,430               |       |
| Notes payable                                                                                                                                                                                                                                                            |       | 14,597             |           | 16,506                |       |
| Bank acceptances  outstanding                                                                                                                                                                                                                                            |       | 3,887              |           | 5,538                 |       |
| Long-term debt                                                                                                                                                                                                                                                           |       | 235,570            |           | 235,570               |       |
| Accrued interest  payable, accrued expenses and other liabilities                                                                                                                                                                                                        |       | 89,866             |           | 92,718                |       |
| Total  liabilities                                                                                                                                                                                                                                                       |       | 11,029,331         |           | 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 196,505 shares outstanding in 2009 and  2008; Series B, cumulative, 306,546 shares issued and outstanding in  2009 and 2008. |       | 473,340            |           | 472,311               |       |
|                                                                                                                                                                                                                                                                     |       |               |           |                  |       |
| Common stock,  $0.001 par value, 200,000,000 shares authorized; 70,668,285 and 70,377,989  shares issued in 2009 and 2008, respectively; 63,957,813 and 63,745,624  shares outstanding in 2009 and 2008, respectively                                                    |       | 70                 |           | 70                    |       |
| Additional paid  in capital                                                                                                                                                                                                                                              |       | 697,138            |           | 695,521               |       |
| Retained  earnings                                                                                                                                                                                                                                                       |       | 548,144            |           | 572,172               |       |
| Treasury stock,  at cost — 6,710,472 shares in 2009 and 6,632,365 shares in 2008                                                                                                                                                                                    |       | (103,429           | )              | (102,817              | )          |
| Accumulated  other comprehensive loss, net of tax                                                                                                                                                                                                                        |       | (80,070            | )              | (86,491               | )          |
| Total stockholders’  equity                                                                                                                                                                                                                                         |       | 1,535,193          |           | 1,550,766             |       |
| **TOTAL**                                                                                                                                                                                                                                                                | ** ** | **$**              | **12,564,524** | ** **            | **$**      | **12,422,816** | ** ** |

 

See accompanyingnotes to condensed consolidated financial statements. 

 

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EAST WEST BANCORP,INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

*(Inthousands, except per share data)*

*(Unaudited)*

 
| ** **                                                                      | ** ** | **Three Months Ended March 31,** | ** **  |
|---------------------------------------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                                                      | ** ** | **2009**                              | ** **  | **2008** | ** ** |
| **INTEREST  AND DIVIDEND INCOME**                                               |       |                                  |        |   |   |
| Loans  receivable, including fees                                               |       | $                                     | 110,816     |   | $ | 155,434 |   |
| Investment  securities held-to-maturity                                         |       | 6,882                                 |        | — |   |
| Investment  securities available-for-sale                                       |       | 22,493                                |        | 27,050 |   |
| Securities  purchased under resale agreements                                   |       | 1,250                                 |        | 2,553 |   |
| Investment in Federal  Home Loan Bank stock                                     |       | —                                |        | 1,284 |   |
| Investment in  Federal Reserve Bank stock                                       |       | 506                                   |        | 325 |   |
| Short-term  investments                                                         |       | 2,976                                 |        | 538 |   |
| Total interest  and dividend income                                             |       | 144,923                               |        | 187,184 |   |
|                                                                            |       |                                  |        |   |   |
| **INTEREST  EXPENSE**                                                           |       |                                  |        |   |   |
| Customer deposit  accounts                                                      |       | 37,073                                |        | 52,253 |   |
| Federal Home  Loan Bank advances                                                |       | 13,877                                |        | 19,682 |   |
| Securities sold  under repurchase agreements                                    |       | 11,872                                |        | 10,529 |   |
| Long-term debt                                                                  |       | 2,417                                 |        | 3,723 |   |
| Federal funds  purchased                                                        |       | 3                                     |        | 1,378 |   |
| Total interest  expense                                                         |       | 65,242                                |        | 87,565 |   |
|                                                                            |       |                                  |        |   |   |
| NET INTEREST  INCOME BEFORE PROVISION FOR LOAN LOSSES                           |       | 79,681                                |        | 99,619 |   |
| PROVISION FOR  LOAN LOSSES                                                      |       | 78,000                                |        | 55,000 |   |
| NET INTEREST  INCOME AFTER PROVISION FOR LOAN LOSSES                            |       | 1,681                                 |        | 44,619 |   |
|                                                                            |       |                                  |        |   |   |
| **NONINTEREST  INCOME**                                                         |       |                                  |        |   |   |
| Impairment loss  on investment securities                                       |       | (13,380                               | )           | — |   |
| Less: Noncredit-related  impairment loss recorded in other comprehensive income |       | 13,180                                |        | — |   |
| Net impairment  loss on investment securities recognized in earnings            |       | (200                                  | )           | — |   |
|                                                                            |       |                                  |        |   |   |
| Branch fees                                                                     |       | 4,793                                 |        | 4,101 |   |
| Net gain on sale  of investment securities available-for-sale                   |       | 3,521                                 |        | 4,334 |   |
| Ancillary loan  fees                                                            |       | 2,229                                 |        | 1,141 |   |
| Letters of  credit fees and commissions                                         |       | 1,854                                 |        | 2,677 |   |
| Income from life  insurance policies                                            |       | 1,083                                 |        | 1,028 |   |
| Net gain on sale  of loans                                                      |       | 8                                     |        | 1,855 |   |
| Other operating  income                                                         |       | 506                                   |        | 777 |   |
| Total  noninterest income                                                       |       | 13,794                                |        | 15,913 |   |
|                                                                            |       |                                  |        |   |   |
| **NONINTEREST  EXPENSE**                                                        |       |                                  |        |   |   |
| Compensation and  employee benefits                                             |       | 17,108                                |        | 23,268 |   |
| Occupancy and  equipment expense                                                |       | 7,391                                 |        | 7,008 |   |
| Other real  estate owned expense                                                |       | 7,031                                 |        | 889 |   |
| Deposit  insurance premiums and regulatory assessments                          |       | 3,325                                 |        | 1,192 |   |
| Legal expense                                                                   |       | 1,778                                 |        | 1,900 |   |
| Amortization of  investments in affordable housing partnerships                 |       | 1,760                                 |        | 1,715 |   |
| Loan-related  expense                                                           |       | 1,435                                 |        | 1,372 |   |
| Data processing                                                                 |       | 1,142                                 |        | 1,196 |   |
| Amortization and  impairment writedown of premiums on deposits acquired         |       | 1,125                                 |        | 2,737 |   |
| Deposit-related  expenses                                                       |       | 901                                   |        | 948 |   |
| Other operating  expenses                                                       |       | 8,410                                 |        | 10,665 |   |
| Total  noninterest expense                                                      |       | 51,406                                |        | 52,890 |   |
|                                                                            |       |                                  |        |   |   |
| (LOSS) INCOME  BEFORE (BENEFIT) PROVISION FOR INCOME TAXES                      |       | (35,931                               | )           | 7,642 |   |
| (BENEFIT)  PROVISION FOR INCOME TAXES                                           |       | (13,465                               | )           | 2,598 |   |
| **NET  (LOSS) INCOME**                                                          | ** ** | **(22,466**                           | **)**       | **5,044** | ** ** |
| PREFERRED STOCK  DIVIDENDS & AMORTIZATION OF PREFERRED STOCK DISCOUNT  |       | 8,743                                 |        | — |   |
| **NET  (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS**                         | ** ** | **$**                                 | **(31,209** | **)** | **$** | **5,044** | ** ** |
| ** **                                                                      | ** ** | ** **                            | ** **  | ** ** | ** ** |
| **(LOSS)  EARNINGS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS**                 |       |                                  |        |   |   |
| BASIC                                                                           |       | $                                     | (0.50       | ) | $ | 0.08 |   |
| DILUTED                                                                         |       | $                                     | (0.50       | ) | $ | 0.08 |   |
| DIVIDENDS  DECLARED PER COMMON SHARE                                            |       | $                                     | 0.02        |   | $ | 0.10 |   |
|                                                                            |       |                                  |        |   |   |
| **WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING**                              |       |                                  |        |   |   |
| BASIC                                                                           |       | 62,998                                |        | 62,485 |   |
| DILUTED                                                                         |       | 62,998                                |        | 62,949 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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EAST WEST BANCORP,INC. AND SUBSIDIARIES

 CONDENSEDCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

*(Inthousands, except share data)*

*(Unaudited)*

 
| ** **                                                                                                               | ** ** | **Preferred  Stock** | ** ** | **Additional  Paid In  Capital  Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Other  Comprehensive  Loss,  Net of Tax** | ** **  | **Comprehensive  Income (Loss)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|----------------------------------------------------------|-------------|----------------------------------|------------|---------------------------------------|------------|
|                                                                                                                     |       |                 |       |                                               |       |              |       |                             |       |                   |       |                |       |                                                     |        |                             |       |                                  |       |
| **BALANCE,  JANUARY 1, 2008**                                                                                            | ** ** | **$**                | **—** | ** **                                         | **$**      | **—**        | ** ** | **$**                            | **70**     | ** **             | **$**      | **652,297**         | ** ** | **$**                                                    | **657,183** | ** **                       | **$**      | **(98,925**                           | **)**      | **$** | **(38,802** | **)** | ** ** | ** ** | **$** | **1,171,823** | ** ** |
| Comprehensive  income                                                                                                    |       |                 |       |                                               |       |              |       |                             |       |                   |       |                |       |                                                     |        |                             |       |                                  |       |
| Net income for  the period                                                                                               |       |                 |       |                                               |       |              |       |                             |       | 5,044                  |       |                |       |                                                     |        | $                                | 5,044      |                                  | 5,044      |   |
| Net unrealized  loss on investment securities available-for-sale                                                         |       |                 |       |                                               |       |              |       |                             |       |                   |       |                |       | (70,230                                                  | )           | (70,230                          | )          | (70,230                               | )          |
| Total  comprehensive income                                                                                              |       |                 |       |                                               |       |              |       |                             |       |                   |       |                |       |                                                     |        | $                                | (65,186    | )                                     |       |   |
| Cumulative effect  of change in accounting principle pursuant to adoption of EITF 06-4                                   |       |                 |       |                                               |       |              |       |                             |       | (479                   | )          |                |       |                                                     |        |                             |       | (479                                  | )          |
| Stock  compensation costs                                                                                                |       |                 |       |                                               |       |              |       | 1,557                            |       |                   |       |                |       |                                                     |        |                             |       | 1,557                                 |       |
| Tax provision  from stock plans                                                                                          |       |                 |       |                                               |       |              |       | (299                             | )          |                   |       |                |       |                                                     |        |                             |       | (299                                  | )          |
| Issuance of  254,727 shares pursuant to various stock plans and agreements                                               |       |                 |       |                                               |       |              |       | 393                              |       |                   |       |                |       |                                                     |        |                             |       | 393                                   |       |
| Cancellation of  35,453 shares due to forfeitures of issued restricted stock                                             |       |                 |       |                                               |       |              |       | 1,192                            |       |                   |       | (1,192              | )          |                                                     |        |                             |       | —                                |       |
| 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                                    | )          |
| Common stock  dividends                                                                                                  |       |                 |       |                                               |       |              |       |                             |       | (6,315                 | )          |                |       |                                                     |        |                             |       | (6,315                                | )          |
| **BALANCE,  MARCH 31, 2008**                                                                                        | ** ** | **$**                | **—** | ** **                                         | **$**      | **—**        | ** ** | **$**                            | **70**     | ** **             | **$**      | **657,438**         | ** ** | **$**                                                    | **655,433** | ** **                       | **$**      | **(100,125**                          | **)**      | **$** | **(109,032** | **)** | ** ** | ** ** | **$** | **1,103,784** | ** ** |
| ** **                                                                                                               | ** ** | ** **           | ** ** | ** **                                         | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **             | ** ** | ** **          | ** ** | ** **                                               | ** **  | ** **                       | ** ** | ** **                            | ** ** |
| **BALANCE,  JANUARY 1, 2009**                                                                                            | ** ** | **$**                | **—** | ** **                                         | **$**      | **472,311**       | ** ** | **$**                            | **70**     | ** **             | **$**      | **695,521**         | ** ** | **$**                                                    | **572,172** | ** **                       | **$**      | **(102,817**                          | **)**      | **$** | **(86,491** | **)** | ** ** | ** ** | **$** | **1,550,766** | ** ** |
| Comprehensive  loss                                                                                                      |       |                 |       |                                               |       |              |       |                             |       |                   |       |                |       |                                                     |        |                             |       |                                  |       |
| Net loss for the  year                                                                                                   |       |                 |       |                                               |       |              |       |                             |       | (22,466                | )          |                |       |                                                     |        | $                                | (22,466    | )                                     | (22,466    | ) |
| Net unrealized  gain on investment securities available-for-sale                                                         |       |                 |       |                                               |       |              |       |                             |       |                   |       |                |       | 22,175                                                   |        | 22,175                           |       | 22,175                                |       |
| Noncredit-related  impairment loss on investment securities recorded in the current year                                 |       |                 |       |                                               |       |              |       |                             |       |                   |       |                |       | (7,644                                                   | )           | (7,644                           | )          | (7,644                                | )          |
| Cumulative effect  adjustment for reclassification of the previously recognized  noncredit-related impairment writedowns |       |                 |       |                                               |       |              |       |                             |       | 8,110                  |       |                |       | (8,110                                                   | )           | $                                | (8,110     | )                                     | —     |   |
| Total  comprehensive loss                                                                                                |       |                 |       |                                               |       |              |       |                             |       |                   |       |                |       |                                                     |        | $                                | (16,045    | )                                     |       |   |
| Stock  compensation costs                                                                                                |       |                 |       |                                               |       |              |       | 1,428                            |       |                   |       |                |       |                                                     |        |                             |       | 1,428                                 |       |
| Tax provision  from stock plans                                                                                          |       |                 |       |                                               |       |              |       | (403                             | )          |                   |       |                |       |                                                     |        |                             |       | (403                                  | )          |
| Series B  preferred stock issuance cost                                                                             |       |                 |       | (41                                                | )          |              |       |                             |       |                   |       |                |       |                                                     |        |                             |       | (41                                   | )          |
| Issuance of  290,296 shares pursuant to various stock plans and agreements                                               |       |                 |       |                                               |       |              |       | 15                               |       |                   |       |                |       |                                                     |        |                             |       | 15                                    |       |
| Cancellation of  24,134 shares due to forfeitures of issued restricted stock                                             |       |                 |       |                                               |       |              |       | 577                              |       |                   |       | (577                | )          |                                                     |        |                             |       | —                                |       |
| Purchase of 8,882  shares of treasury stock due to the vesting of restricted stock                                       |       |                 |       |                                               |       |              |       |                             |       |                   |       | (35                 | )          |                                                     |        |                             |       | (35                                   | )          |
| Amortization of  Series B preferred stock discount                                                                  |       |                 |       | 1,070                                              |       |              |       |                             |       | (1,070                 | )          |                |       |                                                     |        |                             |       | —                                |       |
| Preferred stock  dividends                                                                                               |       |                 |       |                                               |       |              |       |                             |       | (7,673                 | )          |                |       |                                                     |        |                             |       | (7,673                                | )          |
| Common stock  dividends                                                                                                  |       |                 |       |                                               |       |              |       |                             |       | (929                   | )          |                |       |                                                     |        |                             |       | (929                                  | )          |
| **BALANCE,  MARCH 31, 2009**                                                                                        | ** ** | **$**                | **—** | ** **                                         | **$**      | **473,340**       | ** ** | **$**                            | **70**     | ** **             | **$**      | **697,138**         | ** ** | **$**                                                    | **548,144** | ** **                       | **$**      | **(103,429**                          | **)**      | **$** | **(80,070** | **)** | ** ** | ** ** | **$** | **1,535,193** | ** ** |

 
| ** **                                                                                                                                     | ** **   | **Three  Months Ended March 31,** | ** **   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------------------|--------------|
| ** **                                                                                                                                     | ** **   | **2009**                               | ** **   | **2008** | ** ** |
| *** ***                                                                                                                                   | *** *** | **(In  thousands)**                    | *** *** |
| **Disclosure  of reclassification amounts:**                                                                                                   |         |                                   |         |   |   |
| Unrealized  holding gain(loss) on securities arising during the period, net of tax  (expense) benefit of $(17,453) in 2009 and $49,036 in 2008 |         | $                                      | 24,101       |   | $ | (67,716 | ) |
| Less:  Reclassification adjustment for (gain) included in net income, net of tax  expense of $ 1,395 in 2009 and $1,820 in 2008           |         | (1,926                                 | )            | (2,514 | ) |
| Net unrealized  gain (loss) on securities, net of tax (expense) benefit of $(16,058) in 2009  and $50,856 in 2008                              |         | $                                      | 22,175       |   | $ | (70,230 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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EAST WEST BANCORP,INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

*(Inthousands)*

*(Unaudited)*

 
| ** **                                                                                           | ** ** | **Three Months Ended March 31,** | ** **    |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------|---------------|
| ** **                                                                                           | ** ** | **2009**                              | ** **    | **2008** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                            |       |                                  |          |   |   |
| Net (loss)  income                                                                                   |       | $                                     |  (22,466 | ) | $ |  5,044 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities:            |       |                                  |          |   |   |
| Depreciation and  amortization                                                                       |       | 5,807                                 |          | 6,136 |   |
| Credit-related  impairment writedown on investment securities available-for-sale                     |       | 200                                   |          | — |   |
| Stock  compensation costs                                                                            |       | 1,428                                 |          | 1,557 |   |
| Deferred tax  benefit                                                                                |       | (2,033                                | )             | (13,940 | ) |
| Provision for  loan losses                                                                           |       | 78,000                                |          | 55,000 |   |
| Provision for  loss on other real estate owned                                                       |       | 3,184                                 |          | 690 |   |
| Net gain on  sales of investment securities, loans and other assets                                  |       | (600                                  | )             | (5,718 | ) |
| Federal Home  Loan Bank stock dividends                                                              |       | —                                |          | (1,023 | ) |
| Originations of  loans held for sale                                                                 |       | (12,078                               | )             | (23,733 | ) |
| Proceeds from  sale of loans held for sale                                                           |       | 12,111                                |          | 24,025 |   |
| Tax provision  from stock plans                                                                      |       | 403                                   |          | 299 |   |
| Net change in  accrued interest receivable and other assets                                          |       | (1,408                                | )             | 17,742 |   |
| Net change in  accrued interest payable, accrued expenses and other liabilities                      |       | (22,022                               | )             | 6,911 |   |
| Total  adjustments                                                                                   |       | 62,992                                |          | 67,946 |   |
| Net cash  provided by operating activities                                                           |       | 40,526                                |          | 72,990 |   |
|                                                                                                 |       |                                  |          |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                            |       |                                  |          |   |   |
| Net decrease  (increase) loans                                                                       |       | 100,111                               |          | (178,179 | ) |
| Purchases of:                                                                                        |       |                                  |          |   |   |
| Short-term  investments                                                                              |       | (100,847                              | )             | — |   |
| Investment  securities held-to-maturity                                                              |       | (466,018                              | )             | — |   |
| Investment  securities available-for-sale                                                            |       | (867,221                              | )             | (243,942 | ) |
| Loans receivable                                                                                     |       | (4,511                                | )             | — |   |
| Federal Home  Loan Bank stock                                                                        |       | —                                |          | (9,400 | ) |
| Federal Reserve  Bank stock                                                                          |       | (9,196                                | )             | — |   |
| Premises and  equipment                                                                              |       | (194                                  | )             | (1,522 | ) |
| Proceeds from:                                                                                       |       |                                  |          |   |   |
| Sale of  investment securities available-for-sale                                                    |       | 185,775                               |          | 138,595 |   |
| Sale of  securities purchased under resale agreements                                                |       | —                                |          | 100,000 |   |
| Sale of loans  receivable                                                                            |       | 9,396                                 |          | 135,167 |   |
| Sale of other  real estate owned                                                                     |       | 9,799                                 |          | — |   |
| Repayments,  maturity and redemption of investment securities available-for-sale                     |       | 610,984                               |          | 127,715 |   |
| Acquisitions,  net of cash paid                                                                      |       | —                                |          | 84 |   |
| Net cash (used  in) provided by investing activities                                                 |       | (531,922                              | )             | 68,518 |   |
|                                                                                                 |       |                                  |          |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                            |       |                                  |          |   |   |
| Net proceeds  from (payment for):                                                                    |       |                                  |          |   |   |
| Deposits                                                                                             |       | 312,100                               |          | 272,923 |   |
| Short-term  borrowings                                                                               |       | (28,369                               | )             | (496,816 | ) |
| Proceeds from:                                                                                       |       |                                  |          |   |   |
| Issuance of  long-term borrowings                                                                    |       | —                                |          | 250,000 |   |
| Issuance of  common stock pursuant to various stock plans and agreements                             |       | 15                                    |          | 393 |   |
| Payment for:                                                                                         |       |                                  |          |   |   |
| Repayment of  long-term borrowings                                                                   |       | (119,999                              | )             | (55,000 | ) |
| Repayment of  notes payable on affordable housing investments                                        |       | (1,909                                | )             | (1,714 | ) |
| Repurchase of  treasury shares pursuant to stock repurchase program and vesting of  restricted stock |       | (35                                   | )             | (8 | ) |
| Issuance cost of  Series B preferred stock                                                      |       | (41                                   | )             | — |   |
| Cash dividends  on preferred stocks                                                                  |       | (6,822                                | )             | — |   |
| Cash dividends  on common stocks                                                                     |       | (929                                  | )             | (6,315 | ) |
| Tax provision  from stock plans                                                                      |       | (403                                  | )             | (299 | ) |
| Net cash  provided by (used in) financing activities                                                 |       | 153,608                               |          | (36,836 | ) |
|                                                                                                 |       |                                  |          |   |   |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                                                |       | (337,788                              | )             | 104,672 |   |
| CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD                                                      |       | 878,853                               |          | 160,347 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                            |       | $                                     |  541,066 |   | $ |  265,019 |   |
|                                                                                                 |       |                                  |          |   |   |
| **SUPPLEMENTAL  CASH FLOW INFORMATION:**                                                             |       |                                  |          |   |   |
| Cash paid during  the period for:                                                                    |       |                                  |          |   |   |
| Interest                                                                                             |       | $                                     |  71,370  |   | $ |  87,624 |   |
| Income tax  payments, net of refunds                                                                 |       | 50                                    |          | 19 |   |
| Noncash  investing and financing activities:                                                         |       |                                  |          |   |   |
| Real estate  acquired through foreclosure                                                            |       | 30,561                                |          | 13,393 |   |
| Loans to  facilitate sales of real estate owned                                                      |       | 11,067                                |          | — |   |
| Affordable  housing investment financed through notes payable                                        |       | —                                |          | 3,000 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

# **For theThree Months Ended March 31, 2009 and 2008**

*(Unaudited)*

 

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

 

The condensed consolidated financial statements include the accounts ofEast West Bancorp, Inc. (referred to herein on an unconsolidated basis as “EastWest” and on a consolidated basis as the “Company”) and its wholly-ownedsubsidiaries, East West Bank and subsidiaries (the “Bank”) and East WestInsurance Services, Inc. Intercompany transactions and accounts have been eliminated inconsolidation.  East West also has ninewholly-owned subsidiaries that are statutory business trusts (the “Trusts”).  In accordance with Financial AccountingStandards Board Interpretation No. 46(R), *Consolidationof Variable Interest Entities*, the Trusts are not consolidated intothe accounts of East West Bancorp, Inc.

 

The interim condensed consolidated financial statements, presented inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”), are unaudited and reflect all adjustments which, in theopinion of management, are necessary for a fair statement of financialcondition and results of operations for the interim periods.  All adjustments are of a normal and recurringnature.  Results for the three monthsended March 31, 2009 are not necessarily indicative of results that may beexpected for any other interim period or for the year as a whole.  Certain information and note disclosuresnormally included in annual financial statements prepared in accordance withGAAP have been condensed or omitted.  Theunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and notesincluded in the Company’s Annual 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 February 2008, the FASB issued 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 December 2007,the FASB issued SFAS No. 141(R), *BusinessCombinations* (SFAS 141(R)), which replaces FASB Statement No. 141,*Business Combinations*.  SFAS 141(R) establishes principlesand requirements for how an acquiring company (1) recognizes and measures inits financial statements the identifiable assets acquired, the liabilitiesassumed, and any non-controlling interest in the acquiree, (2) recognizesand measures the goodwill acquired in the business combination or a gain from abargain purchase, and (3) determines what information to disclose toenable users of the financial statements to evaluate the nature and financialeffects of the business combination. SFAS 141(R) is effective for business combinations occurringon or after the beginning of the fiscal year beginning on or after December 15, 2008.** **SFAS 141(R),effective for the Company on January 1, 2009, applies to all 

 

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transactions or other eventsin which 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 SFAS No. 160,*“Noncontrolling Interests in Consolidated FinancialStatements - an Amendment of ARB No. 51”*.  This Statement requires that noncontrollingor minority interests in subsidiaries be presented in the consolidatedstatement of financial position within equity, but separate from the parents’equity, and that the amount of the consolidated net income attributable to theparent and to the noncontrolling interest be clearly identified and presentedon the face of the consolidated statement of income.  SFAS No. 160 is effective for fiscalyears 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 FASB StaffPosition FAS No. 140-3, *Accountingfor Transfers of Financial Assets and Repurchase Financing Transactions*(“FSP No. 140-3”)*,*which provides a consistentframework for the evaluation**of atransfer of a financial asset and subsequent repurchase agreement entered intowith the same**counterparty.  FSP FAS No. 140**-**3 provides guidelines that must be met in order for aninitial transfer and**subsequentrepurchase agreement to not be considered linked for evaluation.  If the transactions do not meet the**specified criteria, they are required tobe accounted for as one transaction. This FSP is effective for fiscal years**beginning after November 15, 2008, and shall be appliedprospectively to initial transfers and repurchase financings**for which the initial transfer isexecuted on or after adoption.  Theadoption of this guidance did not have a material effect on the Company’sfinancial condition, results of operations, or cash flows.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities* (“SFAS 161”).  SFAS 161 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 FSP No. FAS 142-3, *Determinationof the Useful Life of Intangible Assets*.  FSP No. FAS 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used for purposes of determining the useful life of a recognizedintangible asset under SFAS 142, “*Goodwill and OtherIntangible Assets”*(“SFAS 142”).  FSP No. FAS 142-3is intended to improve the consistency between the useful life of a recognizedintangible asset under SFAS 142 and the period of expected cash flows usedto measure the fair value of the asset under SFAS 141(R) and otherGAAP.  FSP FAS 142-3 is effective for fiscal years beginningafter December 15, 2008. Earlier application is not permitted. The adoption of this guidance did not have a material effect on theCompany’s financial condition, results of operations, or cash flows.

 

In June 2008, the FASB issued FSP EITF 03-06-1,*Determining Whether Instruments Granted inShare-Based Payment Transactions Are Participating Securities.*  FSP EITF 03-06-1 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 FSP is effective for fiscalyears beginning after December 15, 2008, and interim periods within thosefiscal years.  Early adoption isprohibited.  The adoption of thisguidance did not have a material effect on the Company’s basic and dilutedearnings per share calculation.

 

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InDecember 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “*Disclosures by Public Entities (Enterprises) About Transfers ofFinancial Assets and Interests in Variable Interest Entities”*.  This disclosure-only FSP improves thetransparency of transfers of financial assets and an enterprise’s involvementwith variable interest entities (VIEs), including qualifying special-purposeentities (QSPEs).  The disclosures requiredby this FSP are intended to provide greater transparency to financial statementusers about a transferor’s continuing involvement with transferred financialassets and an enterprise’s involvement with variable interest entities andqualifying SPEs.  This FSP shall beeffective for the first reporting period ending after December 15, 2008,with earlier application encouraged, and shall be applied for each annual andinterim reporting 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.

 

InJanuary 2009, the FASB issued FSP EITF 99-20-1 (“EITF 99-20-1”), *Amendments to the Impairment Guidance of EITF Issue No. 99-20*,which revises the other-than-temporary-impairment (“OTTI”) guidance onbeneficial interests in securitized financial assets that are within the scopeof EITF Issue 99-20, *Recognition of InterestIncome and Impairment on Purchased and Retained Beneficial Interests inSecuritized Financial Assets*. EITF 99-20-1 amends Issue 99-20, to more closely align its OTTI guidancewith paragraph 16 of FASB Statement No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*, by (1) removingthe notion of a “market participant” and (2) inserting a “probable”concept related to the estimation of a beneficial interest’s cash flows.  EITF 99-20-1 is effective prospectively forinterim and annual periods ending after December 15, 2008.  Retrospective application of this FSP isprohibited.  The adoption of thisguidance did not have a material effect on the Company’s financial condition,results of operations, or cash flows.

 

InApril 2009, the FASB issued FSP FAS 115-2 and FAS 124, *Recognition and Presentation of Other-Than-Temporary Impairments*,which makes changes to the timing of loss recognition and earnings for debtand similar investment securities classified as either “available-for-sale” or “held-to-maturity”.  The FSP provides that if an entity intends tosell an impaired debt security prior to recovery of its amortized cost basis,or if it is more likely than not that it will have to sell the security priorto recovery, then the full amount of the impairment is to be classified asother 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 FSP also requires entitiesto initially 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 FSP FAS115-2 and FAS 124, 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 thisFSP, the Company recorded $200 thousand, on a pre-tax basis, of the creditportion of OTTI through earnings and $7.6 million, net of tax, of thenon-credit portion of OTTI in other comprehensive income.

 

InApril 2009, the FASB issued FSP FAS 157-4,*DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly*,which provides additional guidance for estimating fair value in accordance withSFAS 157 when the volume and level of activity for the asset or liability havesignificantly decreased.  FSP FAS 157-4also 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 based on the nature and risks of thesecurity during both interim and annual periods.  Theadoption of this FSP resulted in additional disclosures which are presented inNote 3 of the Company’s condensed consolidated financial statements.

 

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InApril, the FASB issued FSP FAS 107-1 and APB 28-1, *InterimDisclosures about Fair Value of Financial Instruments*, whichincreases the frequency of fair value disclosures from an annual basis only toa quarterly basis.  The FSP will requirepublic entities to disclose in their interim financial statements the fairvalue of all financial instruments within the scope of 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 FSP 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 FSP only if italso elects to early adopt FSP FAS 157-4, FSP FAS 115-2 and FAS 124-2.  This FSP does not require disclosures forearlier periods presented for comparative periods at initial adoption.  In periods after initial adoption, this FSPrequires comparative disclosures only for periods ending after the initialadoption.  The Company will adopt thisFSP for the period ending June 30, 2009 and does not expect the adoptionof this guidance to have a material effect on the Company’s consolidatedfinancial statements.

 

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

 

TheCompany adopted SFAS 157 effective January 1, 2008.  SFAS 157 provides a framework for measuringfair value under GAAP.  This standardapplies to all financial assets and liabilities that are being measured andreported at fair value on a recurring and non-recurring basis.  For the Company, this includes the investmentsecurities available-for-sale (“AFS”) portfolio, equity swap agreements,derivatives payable, mortgage servicing assets,****andimpaired loans**.**

 

TheCompany adopted FSP SFAS 157-2 effective January 1, 2009.  FSP SFAS 157-2 provided for a one-yeardeferral of the implementation of SFAS 157 for other nonfinanical assets andliabilities, effective for fiscal years beginning after November 15,2008.  For the Company, this includesother real estate owned (“OREO”).

 

Uponadoption of FSP SFAS 157-4 effective March 31, 2009, the Company hasprovided additional disclosures relating to fair value measurement inputs andvaluation techniques as well as providing SFAS 157 disclosures for all debt andequity investment securities by major security types rather than by majorsecurity categories that should be based on the nature and risks of thesecurity during both interim and annual periods.

 

Asdefined in SFAS 157, fair value is the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date.  Indetermining fair value, the Company uses various methods including market andincome approaches.  Based on theseapproaches, the Company often utilizes certain assumptions that marketparticipants would use in pricing the asset or liability.  These inputs can be readily observable,market corroborated, or generally unobservable firm inputs.  The Company utilizes valuation techniquesthat maximize the use of observable inputs and minimize the use of unobservableinputs.  Based on the observability ofthe inputs used in the valuation techniques, the Company is required to providethe 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:

 

·                  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.

 

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·                  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, U.S. Government sponsored enterprise preferred 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, retained residual securities insecuritizations, pooled trust preferred securities, and derivatives payable.

 

Indetermining the appropriate hierarchy levels, the Company performs a detailedanalysis of assets and liabilities that are subject to SFAS 157.  The following table presents both financialand non-financial assets and liabilities that are measured at fair value on arecurring and non-recurring basis.  Theseassets and liabilities are reported on the consolidated balance sheets at theirfair values as of March 31, 2009. As required by SFAS 157, financial assets and liabilities are classifiedin their entirety based on the lowest level of input that is significant totheir fair value measurement.

 
| ** **                                                                                              | ** **   | **Assets  (Liabilities) Measured at Fair Value on a Recurring Basis as of  March 31, 2009** | ** **   |
|---------------------------------------------------------------------------------------------------------|--------------|--------------------------------------------------------------------------------------------------|--------------|
| ** **                                                                                              | ** **   | **Fair  Value  Measurements  March 31, 2009**                                               | ** **   | **Quoted  Prices in  Active Markets for  Identifical Assets  (Level 1)** | ** ** | **Significant  Other  Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| *** ***                                                                                            | *** *** | **(In  Thousands)**                                                                              | *** *** |
| Investment  Securities (“AFS”)                                                                | *** *** | *** ***                                                                                     | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| U.S. Treasury  securities                                                                               |         | $                                                                                                | 2,513        |   | $ | 2,513 |   | $ | — |   | $ | — |   |
| U.S. Government  agency securities and U.S. Government sponsored enterprise debt securities             |         | 473,334                                                                                          |         | — |   | 473,334 |   | — |   |
| U.S. Government  agency securities and U.S. Government sponsored enterprise mortgage-backed  securities |         | 873,620                                                                                          |         | — |   | 873,620 |   | — |   |
| Other  mortgage-backed securities                                                                       |         |                                                                                             |         |   |   |   |   |   |   |
| Investment grade                                                                                        |         | 546,520                                                                                          |         | — |   | — |   | 546,520 |   |
| Non-investment  grade                                                                                   |         | 11,325                                                                                           |         | — |   | — |   | 11,325 |   |
| Corporate debt  securities                                                                              |         |                                                                                             |         |   |   |   |   |   |   |
| Investment grade                                                                                        |         | 7,658                                                                                            |         | — |   | 6,352 |   | 1,306 |   |
| Non-investment  grade (1)                                                                               |         | 21,930                                                                                           |         | — |   | — |   | 21,930 |   |
| U.S. Government  sponsored enterprise equity securities                                                 |         | 995                                                                                              |         | — |   | 995 |   | — |   |
| Residual  securities                                                                                    |         | 53,928                                                                                           |         | — |   | — |   | 53,928 |   |
| Other securities                                                                                        |         | 2,580                                                                                            |         | 2,580 |   | — |   | — |   |
| Total Investment  Securities (“AFS”)                                                          |         | 1,994,403                                                                                        |         | 5,093 |   | 1,354,301 |   | 635,009 |   |
|                                                                                                    |         |                                                                                             |         |   |   |   |   |   |   |
| Equity Swap  Agreements                                                                                 |         | 11,374                                                                                           |         | — |   | 11,374 |   | — |   |
| Derivatives  Payable                                                                                    |         | (11,509                                                                                          | )            | — |   | — |   | (11,509 | ) |
|                                                                                                         |              |                                                                                                  |              |  |  |  |  |  |  |  |  |  |  |

 

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(1) Includespooled trust preferred securities with a fair value of $14.9 million that weredowngraded from investment grade to non-investment grade in April 2009.

 

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| ** **                 | ** **   | **Assets Measured at Fair Value on a Non-Recurring Basis as of  March 31, 2009** | ** **   | ** **                                                              | ** **   |
|----------------------------|--------------|---------------------------------------------------------------------------------------|--------------|-------------------------------------------------------------------------|--------------|
| ** **                 | ** **   | **Fair Value  Measurements  March 31, 2009**                                     | ** **   | **Quoted Prices in  Active Markets for  Identifical Assets  (Level 1)** | ** **   | **Significant Other Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Total  Gains  (Losses)** | ** ** |
| *** ***               | *** *** | **(In Thousands)**                                                                    | *** *** | *** ***                                                            | *** *** |
|                       |         |                                                                                  |         |                                                                    |         |   |   |   |   |   |   |
| Mortgage  Servicing Assets |         | $                                                                                     | 16,664       |                                                                    | —       |   | — |   | $ | 16,664 |   | $ | 766 |   |
| Impaired Loans             |         | 106,645                                                                               |         | —                                                                  |         | — |   | 106,645 |   | (389 | ) |
| OREO                       |         | 11,333                                                                                |         | —                                                                  |         | 11,333 |   | — |   | (2,738 | ) |
|                            |              |                                                                                       |              |                                                                         |              |  |  |  |  |  |  |  |  |  |  |

 

Ateach reporting period, all assets and liabilities for which the fair valuemeasurement is based on significant unobservable inputs are classified as Level3.  The following table provides areconciliation of the beginning and ending balances for available-for-saleinvestment securities by major security type and for major asset and liabilitycategories measured at fair value using significant unobservable inputs (Level3) for the three months ended March 31, 2009:

 
| ** **                                                                                                               | ** ** | **Investment  Securities Available-for-Sale** | ** ** | ** **                      | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                               | ** ** | ** **                                    | ** ** | **Mortgage-Backed  Securities** | ** ** | **Corporate  Debt  Securities** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                               | ** ** | **Total**                                     | ** ** | **Investment  Grade**           | ** ** | **Non-  Investment  Grade** | ** ** | **Investment  Grade** | ** ** | **Non-  Investment  Grade** | ** ** | **Residual  Securities** | ** ** | **Derivatives  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                                                                                                    |       | 2,903                                         |       | 168                             |       | 1 |   | 4 |   | (198 | ) | 2,928 |   | 2,633 |   |
| Included in other  comprehensive loss (unrealized) (2)                                                                   |       | 22,452                                        |       | 30,240                          |       | 1,108 |   | 20 |   | (14,794 | ) | 5,878 |   | — |   |
| Purchases,  issuances, sales, settlements (3)                                                                            |       | (14,697                                       | )          | (10,997                         | )          | — |   | (12 | ) | 1,252 |   | (4,940 | ) | — |   |
| Transfers in  and/or out of Level 3 (4)                                                                                  |       | —                                        |       | —                          |       | — |   | — |   | — |   | — |   | — |   |
| Ending balance,  March 31, 2009                                                                                     |       | 635,009                                       |       | 546,520                         |       | 11,325 |   | 1,306 |   | 21,930 |   | 53,928 |   |   | (11,509 | ) |
|                                                                                                                     |       |                                          |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Changes in  unrealized losses included in earnings relating to assets and liabilities  still held at March 31, 2009 |       | $                                             | (2,833     | )                               | $          | — |   | $ | — |   | $ | — |   | $ | (200 | ) | $ | — |   | $ | (2,633 | ) |

 

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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 eitherpurchased, issued, sold, or settled during the period.  The amounts are recorded at their end ofperiod fair values.

 

(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 prices 

 

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obtained from independent external pricing serviceproviders who have experience in valuing these securities.  In obtaining such valuation information fromthird parties, the Company has reviewed the methodologies used to develop theresulting fair values.

 

TheCompany’s Level 3 available-for-sale securities include private labelmortgage-backed securities, pooled trust preferred securities, and residualsecurities that have been retained by the Company in connection with theprivate label loan securitization activities. The fair values of private label mortgage-backed securities and pooledtrust preferred securities have traditionally been based on the average of atleast two quoted market prices obtained from independent external brokers sincebroker quotes in an active market are given the highest priority under SFAS157.  However, as a result of the globalfinancial crisis and illiquidity in the U.S. markets, the market for thesesecurities has become increasingly inactive since mid-2007.  It is the Company’s view that current brokerprices on private label mortgage-backed securities 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.  As such, the fairvalue of the private label mortgage-backed securities and pooled trustpreferred securities have been below cost since the advent of the financialcrisis.  Additionally, most, if not all,of these broker quotes are nonbinding. Commencing in the third quarter of 2008, the Company amended itsvaluation approach by examining the facts and circumstances of each security todetermine 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 oneach private label mortgage-backed and pooled trust preferred security.

 

Duringthe first quarter of 2009, the Company continued to receive broker prices thatwere based on forced liquidation or distressed sales values in very inactivemarkets.  In accordance with FSP SFAS157-4, the Company considered whether to place little, if any, weight ontransactions that are not orderly when estimating fair value.  Although length of time and severity ofimpairment are among the factors to consider when determining whether asecurity that is other than temporarily impaired, the private label mortgagebacked securities and pooled trust preferred securities have only exhibiteddeep declines in value since the credit crisis began.  The Company therefore believes that this isan indicator that the decline in price is solely a result of the lack ofliquidity in the market for these securities and the broker quotes receivedstem from distressed sale transactions. In addition, FSP EITF 99-20-1 states that the objective of an OTTIanalysis is to determine whether it is probable that the Company will realizesome portion of the unrealized loss.  TheCompany may ultimately realize an unrealized loss if it is probable that itcannot collect all contractual or estimated cash flows or if the Company willbe unable to recover the entire amortized cost basis of the security.

 

TheCompany 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 about other thantemporary impairment.  During the firstquarter of 2009, in light of the continued illiquidity and inactivity in themarkets for these types of securities, the Company again deemed it prudent toamend its valuation methodology in deriving the current values of thesesecurities by disregarding broker prices and instead focusing solely on adiscounted cash flow or income approach. In order to determine the appropriatediscount rate used in calculating fair values derived from the income methodfor private label mortgage-backed securities 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 generalchange in market rates, estimated changes in credit quality and liquidity riskpremium, specific non-performance and default experience in the collateralunderlying the securities.

 

Forresidual securities, the valuation methodology used by the Company is based ona discounted cash flow approach utilizing several assumption factors.  Assumptions related to prepayment speeds, 

 

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forwardyield curves, financial characteristics of the underlying assets, delinquencytrends, and other factors are taken into consideration in determining thediscount margin on residual securities. Furthermore, the liquidity of the market for similar securities is alsoincorporated in the valuation analysis to better determine the fair value ofresidual securities.

 

**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 these equity swapagreements is based on the income approach. The fair value is based on the change in the value of the HSCEI and thevolatility of the call option over the life of the individual swapagreement.  The option value is derivedbased on the volatility, the interest rate and the time remaining to maturityof the call option.  The Company’sconsideration of its counterparty’s credit risk resulted in a $245 thousandadjustment to the valuation of the equity swap agreements for the quarter endedMarch 31, 2009.  The valuation ofequity swap agreements falls within Level 2 of the fair value hierarchy due tothe observable nature of the inputs used in deriving the fair value of thesederivative 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 included ininterest-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 $109 thousand adjustment tothe valuation of the derivative liabilities, and a net gain of $154thousand was recognized in noninterest income as the net difference between thevaluation of the equity swap agreements and derivatives payable for the quarterended March 31, 2009.******** The valuation of the derivatives payable fallswithin Level 3 of the fair value hierarchy since the significant inputs used inderiving the fair value of these derivative contracts are not directlyobservable.

 

**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 valueusing an income approach.  The initialfair value of MSAs is determined based on the present value of estimated netfuture cash flows related to contractually specified servicing fees.  The valuation for MSAs falls within Level 3of the fair value hierarchy since there are no quoted prices for MSAs and thesignificant inputs used to determine fair value are not directlyobservable.  The valuation of MSAs isdetermined using a discounted cash flow approach utilizing the appropriateyield curve and several market-derived assumptions including prepayment speeds,servicing cost, delinquency and foreclosure costs and behavior, and floatearnings rate.  Net cash flows arepresent 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 –**In accordance with SFAS No. 114, *Accounting by Creditors for Impairment of a Loan, an Amendment of FASBStatements No. 5 and 15,*the Company’s impaired loans aregenerally measured using the fair value of the underlying collateral, which isdetermined based on the most recent valuation information received, which maybe adjusted based on factors such as the Company’s historical knowledge andchanges in market conditions from the time of valuation.  Impaired loans fall within Level 3 of thefair value hierarchy since they are measured at fair value based on the mostrecent valuation information received of 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 

 

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propertiesare based on third-party appraisals, broker price opinions or accepted writtenoffers.  These valuations are reviewedand approved by the Company’s appraisal department, credit review, or OREOdepartment.  OREO properties areclassified as Level 2 assets in the fair value hierarchy.  The OREO balance of $38.6 million included inthe condensed consolidated balance sheets as of March 31, 2009 is recordednet of estimated disposal costs.

 

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

 

TheCompany issues stock-based compensation to certain employees, officers anddirectors under share-based compensation plans. The adoption of SFAS No. 123(R), *Share-BasedPayment,* 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 toSFAS No. 123R relates only to issued and unvested stock option grants.

 

Duringthe three months ended March 31, 2009 and 2008, total compensation costrecognized in the consolidated statements of operations related to stockoptions and restricted stock awards amounted to $1.4 million and $1.6 million,respectively, with related tax benefits of $600 thousand and $654 thousand,respectively.

 

*StockOptions*

 

TheCompany issues fixed stock options to certain employees, officers, anddirectors.  Stock options are issued atthe current market price on the date of grant with a three-year or four-yearvesting period and contractual terms of 7 years.  Stock options issued prior to July 2002had contractual terms of 10 years.  TheCompany issues new shares upon the exercise of stock options.

 

Asummary of activity for the Company’s stock options as of and for the threemonths ended March 31, 2009 is presented below:

 

 
| ** **                          | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value  (In thousands) (1)** | ** ** |
|-------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| Outstanding at  beginning of period |       | 2,588,968  |       | $                                      | 20.67      |                                                |       |                                                |       |   |
| Granted                             |       | 43,942     |       | 6.83                                   |       |                                                |       |                                                |       |
| Exercised                           |       | (2,200     | )          | 6.34                                   |       |                                                |       |                                                |       |
| Forfeited                           |       | (9,142     | )          | 16.52                                  |       |                                                |       |                                                |       |
| Outstanding at  end of period       |       | 2,621,568  |       | $                                      | 20.47      |                                                | 3.22 years |                                                | $          | 8 |   |
|                                |       |       |       |                                   |       |                                                |       |                                                |       |
| Vested or  expected to vest         |       | 2,553,321  |       | $                                      | 20.41      |                                                | 3.15 years |                                                | $          | 7 |   |
| Exercisable at  end of period       |       | 1,665,027  |       | $                                      | 19.38      |                                                | 1.80 years |                                                | $          | — |   |

 

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(1) Includesin-the-money options only.

 

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

 

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| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------|------------|----------------------------------------|------------|
| ** **                   | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Expected term  (1)           |       | 4 years                                |       | 4 years |   |
| Expected  volatility (2)     |       | 60.5                                   | %          | 27.3 | % |
| Expected  dividend yield (3) |       | 0.6                                    | %          | 1.2 | % |
| Risk-free  interest rate (4) |       | 1.8                                    | %          | 2.3 | % |

 

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

(2)          The expected volatility was based on historicalvolatility for a period equal to the stock option’s expected term.

(3)          The expected dividend yield is based on the Company’sprevailing dividend rate at the time of grant.

(4)          The risk-free rate is based on the U.S. Treasurystrips in effect at the time of grant equal to the stock option’s expectedterm.

 

During the three months ended March 31, 2009 and 2008, informationrelated to stock options is presented as follows:

 
| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                              | ** ** | **2009**                               | ** ** | **2008** | ** ** |
|                                                                    |       |                                   |       |   |   |
| Weighted average  fair value of stock options granted during the period |       | $                                      | 3.00       |   | $ | 4.69 |   |
| Total intrinsic  value of options exercised (in thousands)              |       | $                                      | 1          |   | $ | 167 |   |
| Total fair value  of options vested (in thousands)                      |       | $                                      | 1,351      |   | $ | 1,106 |   |

 

As of March 31, 2009, total unrecognizedcompensation cost related to stock options amounted to $3.4 million.  The cost is expected to be recognized over aweighted average period of 2.6 years.

 

*Restricted Stock*

 

In addition to stock options, the Company alsogrants restricted stock awards to directors, certain officers andemployees.  The restricted shares awardedbecome fully vested after three to five years of continued employment from thedate of grant.  The Company becomes entitledto an income tax deduction in an amount equal to the taxable income reported bythe holders of the restricted shares when the restrictions are released and theshares are issued.  Restricted shares areforfeited if officers and employees terminate prior to the lapsing ofrestrictions.  The Company recordsforfeitures of restricted stock as treasury share repurchases.

 

Asummary of the activity for restricted stock as of March 31, 2009,including changes during the three months then ended, is presented below:

 

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| ** **                          | ** ** | **Shares** | ** ** | **Average  Price** | ** ** |
|-------------------------------------|------------|------------|------------|--------------------|------------|
| Outstanding at  beginning of period |       | 753,165    |       | $                  | 29.35      |   |
| Granted                             |       | 288,096    |       | 7.12               |       |
| Vested                              |       | (28,439    | )          | 37.63              |       |
| Forfeited                           |       | (69,225    | )          | 33.62              |       |
| Outstanding at end  of period       |       | 943,597    |       | $                  | 22.00      |   |

 

The weighted average fair values of restricted stockawards granted during the three months ended March 31, 2009 and 2008 were $7.12 and$20.99, respectively.

 

As of March 31, 2009, total unrecognizedcompensation cost related to restricted stock awards amounted to $12.0million.  This cost is expected to berecognized over a weighted average period of 2.9 years.

 

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

 

Ananalysis of the held-to-maturity and available-for-sale investment securitiesportfolio is presented as follows:

 
| ** **                                                                                              | ** **   | **Amortized  Cost** | ** **   | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
|---------------------------------------------------------------------------------------------------------|--------------|---------------------|--------------|------------------------------|------------|-------------------------------|------------|---------------------------|------------|
| *** ***                                                                                            | *** *** | **(In thousands)**  | *** *** |
| **As of  March 31, 2009**                                                                          |         |                |         |                         |       |                          |       |                      |       |
| **Held-to-maturity**                                                                                    |         |                |         |                         |       |                          |       |                      |       |
| U.S. Government  agency securities and U.S. Government sponsored enterprise debt securities             |         | $                   | 190,345      |                         | $          | 207                           |       | $                         | (795       | ) | $ | 189,757 |   |
| Municipal  securities                                                                                   |         | 31,065              |         | 489                          |       | (445                          | )          | 31,109                    |       |
| Corporate debt  securities                                                                              |         | 402,483             |         | 3,050                        |       | (10,625                       | )          | 394,908                   |       |
| Other  mortgage-backed securities                                                                       |         | 110,906             |         | 277                          |       | (9,291                        | )          | 101,892                   |       |
| **Total  investment securities held-to-maturity**                                                       |         | $                   | 734,799      |                         | $          | 4,023                         |       | $                         | (21,156    | ) | $ | 717,666 |   |
|                                                                                                    |         |                |         |                         |       |                          |       |                      |       |
| **Available-for-sale**                                                                                  |         |                |         |                         |       |                          |       |                      |       |
| U.S. Treasury  securities                                                                               |         | $                   | 2,509        |                         | $          | 4                             |       | $                         | —     |   | $ | 2,513 |   |
| U.S. Government  agency securities and U.S. Government sponsored enterprise debt securities             |         | 467,439             |         | 6,299                        |       | (404                          | )          | 473,334                   |       |
| U.S. Government  agency securities and U.S. Government sponsored enterprise mortgage-backed  securities |         | 865,499             |         | 9,501                        |       | (1,380                        | )          | 873,620                   |       |
| Other  mortgage-backed securities                                                                       |         |                |         |                         |       |                          |       |                      |       |
| Investment grade                                                                                        |         | 621,450             |         | —                       |       | (74,930                       | )          | 546,520                   |       |
| Non-investment  grade                                                                                   |         | 13,661              |         | —                       |       | (2,336                        | )          | 11,325                    |       |
| Corporate debt  securities                                                                              |         |                |         |                         |       |                          |       |                      |       |
| Investment grade                                                                                        |         | 14,316              |         | 35                           |       | (6,693                        | )          | 7,658                     |       |
| Non-investment  grade (1)(2)                                                                            |         | 118,863             |         | —                       |       | (96,933                       | )          | 21,930                    |       |
| U.S. Government  sponsored enterprise equity securities                                                 |         | 3,340               |         |                         |       | (2,345                        | )          | 995                       |       |
| Residual  securities                                                                                    |         | 23,031              |         | 30,897                       |       | —                        |       | 53,928                    |       |
| Other securities                                                                                        |         | 2,578               |         | 2                            |       | —                        |       | 2,580                     |       |
| **Total  investment securities available-for-sale**                                                     |         | $                   | 2,132,686    |                         | $          | 46,738                        |       | $                         | (185,021   | ) | $ | 1,994,403 |   |
|                                                                                                    |         |                |         |                         |       |                          |       |                      |       |
| **Total  investment securities**                                                                        |         | $                   | 2,867,485    |                         | $          | 50,761                        |       | $                         | (206,177   | ) | $ | 2,712,069 |   |
|                                                                                                    |         |                |         |                         |       |                          |       |                      |       |
| **As of  December 31, 2008**                                                                       |         |                |         |                         |       |                          |       |                      |       |
| **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                                                 |         | 3,340               |         | —                       |       | (2,156                        | )          | 1,184                     |       |
| Residual  securities                                                                                    |         | 25,043              |         | 25,019                       |       | —                        |       | 50,062                    |       |
| Other securities                                                                                        |         | 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 of December 31, 2008, the Companyrecorded an OTTI charge of $13.6 million for corporate debt securities, $55.3million for U.S. Government sponsored enterprise equity securities, and $4.3 millionfor Other securities.  Upon adoption ofFSP FAS 115-2 and FAS 124-2, the Company reclassified the noncredit portion ofpreviously recognized OTTI for pooled trust preferred securities totaling $14.0million, on a pre-tax basis, from the opening balance of retained earnings toother comprehensive income as of March 31, 2009.  Additionally, upon implementation of thisFSP, the Company recorded $200 thousand, on a pre-tax basis, of the creditportion of OTTI through earnings and $7.6 million, net of tax, of thenon-credit portion of OTTI for pooled trust preferred securities in othercomprehensive income as of March 31, 2009. 

(2) Includes pooled trust preferred securitieswith a fair value of $14.9 million that were downgraded from investment gradeto non-investment grade in April 2009.

 

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Thefair values of the investment securities are generally determined by referenceto the average of at least two quoted market prices obtained from independentexternal brokers or prices obtained from independent external pricing serviceproviders who have experience in valuing these securities.  The Company performs a monthly analysis onthe broker quotes received from third parties to ensure that the pricesrepresent a reasonable estimate of the 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 based on spreads,and when available, market indices. As a result of this analysis, if theCompany determines there is a more appropriate fair value based upon theavailable market data, the price received from the third party is adjustedaccordingly.

 

Prices from third party pricing services are oftenunavailable for securities that are rarely traded or are traded only inprivately 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.

 

Asa result of the global financial crisis and illiquidity in the U.S. markets,the Company believes the current broker prices obtained on the private labelmortgage-backed securities and pooled trust preferred securities are based onforced liquidation or distressed sale values in very inactive markets that arenot representative of the economic value of these securities.  The fair values of private labelmortgage-backed securities and pooled trust preferred securities havetraditionally been based on the average of at least two quoted market pricesobtained from independent external brokers since broker quotes in an active marketare given the highest priority under SFAS 157. However, in light of these circumstances, the Company has modified itsapproach in determining the fair values of these securities.  Each of these securities will be individuallyexamined for the appropriate valuation methodology based on a discounted cashflow approach.  In calculating the fairvalue derived from the income approach, the Company made assumptions related tothe implied rate of return, general change in market rates, estimated changesin credit quality and liquidity risk premium, specific non-performance anddefault experience in the collateral underlying the security, as well as brokerdiscount rates.

 

The following table shows the Company’srollforward of the amount related to credit losses:

 
| ** **                                                                                                                                 | ** **   | **Three Months Ended  March 31, 2009** | ** **   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------------|---------------------------------------------|--------------|
| ** **                                                                                                                                 | *** *** | **(In thousands)**                          | *** *** |
| Beginning  balance, January 1, 2009                                                                                                   |         | $                                           | —       |   |
| Addition of OTTI  that was not previously recognized                                                                                       |         | (200                                        | )            |
| Reduction for  securities sold during the period                                                                                           |         | —                                      |         |
| Reduction for  securities with OTTI recognized in earnings because the security might be  sold before recovery of its amortized cost basis |         | —                                      |         |
| Addition of OTTI  that was previously recognized because the security might not be sold before  recovery of its amortized cost basis       |         | —                                      |         |
| Reduction for increases  in cash flows expected to be collected that are recognized over the remaining  life of the security               |         | —                                      |         |
| Ending balance,  March 31, 2009                                                                                                       |         | $                                           | (200         | ) |

 

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The followingtable shows the Company’s investment portfolio’s gross unrealized losses andrelated fair values, aggregated by investment category and length of time thatindividual securities have been in a continuous unrealized loss position, as ofMarch 31, 2009 and December 31, 2008:

 
| ** **                                                                                              | ** ** | **Less  Than 12 Months** | ** ** | **12  Months or More** | ** ** | **Total**       | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------|------------|-----------------|------------|
| **(In  thousands)**                                                                                     | ** ** | **Fair  Value**          | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| **As of  March 31, 2009**                                                                          |       |                     |       |                   |       |            |       |   |   |   |   |   |   |
|                                                                                                    |       |                     |       |                   |       |            |       |   |   |   |   |   |   |
| **Held-to-maturity**                                                                                    |       |                     |       |                   |       |            |       |   |   |   |   |   |   |
| U.S. Government  agency securities and U.S. Government sponsored enterprise debt securities             |       | $                        | 104,205    |                   | $          | (795            | )          | $ | — |   | $ | — |   | $ | 104,205 |   | $ | (795 | ) |
| Municipal  securities                                                                                   |       | 12,312                   |       | (445                   | )          | —          |       | — |   | 12,312 |   | (445 | ) |
| Corporate debt  securities                                                                              |       | 235,313                  |       | (10,625                | )          | —          |       | — |   | 235,313 |   | (10,625 | ) |
| Other  mortgage-backed securities                                                                       |       | 69,048                   |       | (9,291                 | )          |            |       |   |   | 69,048 |   | (9,291 | ) |
| Total temporarily  impaired securities held-to-maturity                                                 |       | $                        | 420,878    |                   | $          | (21,156         | )          | $ | — |   | $ | — |   | $ | 420,878 |   | $ | (21,156 | ) |
| **Available-for-sale**                                                                                  |       |                     |       |                   |       |            |       |   |   |   |   |   |   |
| U.S. Treasury  securities                                                                               |       | $                        | —     |                   | $          | —          |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| U.S. Government  agency securities and U.S. Government sponsored enterprise debt securities             |       | 91,148                   |       | (404                   | )          | —          |       | — |   | 91,148 |   | (404 | ) |
| U.S. Government  agency securities and U.S. Government sponsored enterprise mortgage-backed  securities |       | 254,214                  |       | (1,380                 | )          | —          |       | — |   | 254,214 |   | (1,380 | ) |
| Other  mortgage-backed securities                                                                       |       |                     |       |                   |       |            |       |   |   |   |   |   |   |
| Investment grade                                                                                        |       | —                   |       | —                 |       | 546,520         |       | (74,930 | ) | 546,520 |   | (74,930 | ) |
| Non-investment  grade                                                                                   |       | —                   |       | —                 |       | 11,325          |       | (2,336 | ) | 11,325 |   | (2,336 | ) |
| Corporate debt  securities                                                                              |       |                     |       |                   |       |            |       |   |   |   |   |   |   |
| Investment grade                                                                                        |       | —                   |       | —                 |       | 5,608           |       | (6,693 | ) | 5,608 |   | (6,693 | ) |
| Non-investment  grade                                                                                   |       | 4,307                    |       | (18,590                | )          | 17,622          |       | (78,343 | ) | 21,929 |   | (96,933 | ) |
| U.S. Government  sponsored enterprise equity securities                                                 |       | 995                      |       | (2,345                 | )          | —          |       | — |   | 995 |   | (2,345 | ) |
| Total temporarily  impaired securities available-for-sale                                               |       | $                        | 350,664    |                   | $          | (22,719         | )          | $ | 581,075 |   | $ | (162,302 | ) | $ | 931,739 |   | $ | (185,021 | ) |
|                                                                                                    |       |                     |       |                   |       |            |       |   |   |   |   |   |   |
| Total temporarily  impaired securities                                                                  |       | $                        | 771,542    |                   | $          | (43,875         | )          | $ | 581,075 |   | $ | (162,302 | ) | $ | 1,352,617 |   | $ | (206,177 | ) |
|                                                                                                    |       |                     |       |                   |       |            |       |   |   |   |   |   |   |
| **As of  December 31, 2008**                                                                       |       |                     |       |                   |       |            |       |   |   |   |   |   |   |
|                                                                                                    |       |                     |       |                   |       |            |       |   |   |   |   |   |   |
| Municipal  securities                                                                                   |       | $                        | —     |                   | $          | —          |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| 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. Treasury  securities                                                                               |       | $                        | —     |                   | $          | —          |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| U.S. Government  agency securities and U.S. Government sponsored enterprise debt securities             |       | 143,727                  |       | (1,183                 | )          | —          |       | — |   | 143,727 |   | (1,183 | ) |
| U.S. Government  agency securities and U.S. Government sponsored 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 | ) |

 

*Corporate Debt Securities(Held-to-Maturity)*

 

Asof March 31, 2009, the fair value of the Company’s held-to-maturitycorporate debt securities totaled $394.9 million, of which $235.3 million werein an unrealized loss position for less than 12 months.  Total gross unrealized losses on thesesecurities amounted to $10.6 million, or 3% of the aggregate amortized costbasis of held-to-maturity corporate debt securities.  Thesesecurities mature within 5 years or less and have an investment grade rating ofBBB or better as of March 31, 2009. Due to their relatively short maturity dates, the Company does notintend to sell these securities and it is not more likely than not that theCompany will be required to sell these securities before recovery of their

 

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amortized cost bases.  As such, the Company does not deem thesesecurities to be other-than-temporarily impaired as of March 31, 2009.

 

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

 

Themajority of unrealized losses in the available-for-sale portfolio at March 31,2009 are related to pooled trust preferred debt securities.  As of March 31, 2009, the Company had$23.2 million in pooled trust preferred debt securities available-for-sale,representing 1% of total investment securities available-for-saleportfolio.  In April 2009, all ofthe Company’s pooled trust preferred securities were downgraded, of which onepooled trust preferred security was downgraded to an investment grade rating ofBBB, two pooled trust preferred securities were downgraded to a non-investmentgrade rating of CC, and ten pooled trust preferred securities were downgradedto a non-investment grade rating of C. As of March 31, 2009, these debt instruments had gross unrealizedlosses amounting to $97.7 million, or 81% of the total amortized cost basis ofthese securities, comprised of $83.8 million and $804 thousand that arenon-investment grade and investment grade, respectively.  Included in the $97.7 million in grossunrealized losses, is the reclassification of $14.0 million, or $8.1 million ona net of tax basis, in previously recognized noncredit-related impairmentlosses from the opening balance of retained earnings to other comprehensiveincome.  This reclassification wasrecorded as of March 31, 2009 pursuant to the provisions of FSP FAS 115-2and FAS 124-2.  Additionally, total grossunrealized losses on pooled trust preferred securities as of March 31,2009 also include $13.2 million, or $7.6 million on a net of tax basis, innoncredit-related impairment losses recorded during the first quarter of 2009pursuant to the provisions of FSP FAS 115-2 and FAS 124-2.

 

TheCompany attributes these unrealized losses primarily to the current absence ofliquidity in the credit markets and not due to the deterioration in creditquality.  Almost all of the pooled trustpreferred securities held by the Company have underlying collateral issued bybanks and insurance companies**. **Based on the Company’s cash flowanalysis as of March 31, 2009, the majority of these pooled trustpreferred securities are overcollateralized and have subordination structuresthat management believes will afford sufficient principal and interestprotection.  The Company has performed acash flow sensitivity analysis to estimate the maximum collateral that coulddefault and still provide sufficient cash flows that would enable the Companyto recover its cost.  With the exceptionof one C-rated pooled trust preferred security that experienced a substantialincrease in deferrals and defaults in the pool, the Company has determined,based on the results of the sensitivity analysis, that the cushion, or percentof additional collateral that can be deferred on the remaining securitieswithout causing the realizable value to be less than the Company’s recordedinvestment, ranged from 2% to 45%.

 

Duringthe first quarter of 2009, as a result of the Company’s cash flow analysis, itwas determined that one C-rated trust preferred security that experienced asubstantial increase in deferring and defaulting securities in the pool willnot attain a 100% overcollateralization ratio and that the excess cash flowswill not be sufficient to pay down the outstanding amounts due in thefuture.  Since the Company does not planto sell the security and it is not more likely than not that the Company willbe required to sell the security before the recovery of its amortized costbasis in accordance with FSP FAS 115-2 and FAS 124-2, the Company bifurcatedthe impairment on this security between the credit-related component and thecomponent related to all other factors (i.e. noncredit-related).  In applying the methodology described in SFAS114, **Accounting by Creditors forImpairment of a Loan—an amendment of FASB Statements No. 5 and 15****, the Company determined the amount of credit loss by discounting theexpected future cash flows by the effective yield of the security, and recordedan impairment loss of $13.4 million, of which $200 thousand was a pre-taxcredit loss recorded through earnings. The remaining $13.2 million, or $7.6 million on a net of tax basis, innoncredit-related impairment** loss was recorded in othercomprehensive income as of March 31, 2009.

 

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Inaddition to the cash flow sensitivity analysis, the Company also performed adefault stress test analysis on all bank issuers of the underlying pooled trustpreferred securities to identify issuers that are currently exhibiting signs ofweakness or may be susceptible to potential problems that could lead to thepossibility of future default or deferrals on these securities.  The default stress test includes an analysisof each issuer’s capital ratios, earnings levels, credit quality ratios, andliquidity ratios.  The Company willcontinue to monitor the solvency, liquidity, and credit risk profiles of theseissuers on a quarterly basis.  TheCompany believes that the recent bailout program passed by the U.S. governmentto provide for an injection of capital reduces the risk of default by bankissuers and increases the probability that the liquidity in this market and theprices of the Company’s securities will improve in the future.

 

Basedon the results of the cash flow sensitivity and default stress test analyses,the Company believes that it will be able to collect all amounts due on thesesecurities.  Additionally, the Companydoes not intend to sell these securities and it is not more likely than notthat the Company will be required to sell these securities before recovery oftheir amortized cost bases.  As such, theCompany does not deem these securities, with the exception of the C-ratedsecurity discussed above, to be other-than-temporarily impaired as of March 31,2009.

 

During2008 and 2007, the Company 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 markets.  None of these securities have experienced anycredit-related losses for which OTTI was previously recorded.  As previously mentioned, upon theimplementation of FSP FAS 115-2 and FAS 124, the Company reclassifiedthe combined $14.0 million, or $8.1 million on a net of tax basis, innoncredit-related OTTI impairment losses recognized during 2008 and 2007through other comprehensive income as of March 31, 2009.

 

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

 

As of March 31,2009, the aggregate fair value of the Company’s AAA-rated non-agencyheld-to-maturity mortgage-backed securities amounted to $101.9 million, ofwhich $69.0 million were in an unrealized loss position for less than12 months.  These securities are collateralized by singlefamily loans and secured by the first lien on these residentialproperties.  Total gross unrealizedlosses on these securities amounted to $9.3 million, or 8% of the aggregateamortized cost basis of held-to-maturity mortgage-backed securities. The decline in fair values of these securities is due to widening marketspreads, concerns regarding the downturn in the housing market, and lack ofliquidity in the market.  However, thesesecurities have strong credit support, low loan-to-values, low delinquency, andlow foreclosure/OREO ratios.  The Companydoes not intend to sell these securities and it is not more likely than notthat the Company will be required to sell these securities before recovery oftheir amortized cost bases.  As such, theCompany does not deem these securities to be other-than-temporarily impaired asof March 31, 2009.

 

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

 

As of March 31,2009, the Company’s portfolio of available-for-sale mortgage-backed securitieshad an aggregate fair value of $557.8 million, which includes $528.9 million inAAA-rated and AA-rated private label securities retained in connection with theCompany’s loan securitization activities. Mortgage-backed securities represent 28% of the total available-for-saleinvestment portfolio as of March 31, 2009. The Company’s entire portfolio of private label mortgage-backedsecurities has been in an unrealized loss position for more than twelve monthsas of March 31, 2009.  Grossunrealized losses on private label mortgage-backed securities totaled $71.2million, or 12% of the aggregate amortized cost basis ofthese securities.  These unrealizedlosses are caused by lack of liquidity and widening market spreads resulting from instability in theresidential real estate and credit markets. The underlying loans

 

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are not subprime in nature and were originated by theBank in accordance with our customary underwriting standards.  The securities are supported byovercollateralization as of March 31, 2009.  Additionally, these securities are insured bya monoline insurance provider who was recently rated as Aa2 and A+ by two majorrating agencies.  The Company hasexperienced no credit related losses from these securities and only 0.14% ofthe underlying loan collateral have been charged off.  The Company also has one BB-ratedmortgage-backed security with a fair value of $11.3 million as of March 31,2009.  This security has been in anunrealized loss position for twelve months or longer, with the gross unrealizedloss amounting to $2.3 million, or 17% of its amortized cost basis as of March 31,2009.  This security is supported by overcollateralization asof March 31, 2009.  Under EITF99-20, *Recognition of Interest Income and Impairment onPurchased Beneficial Interests and Beneficial Interests That Continue to BeHeld by a Transferor in Securitized Financial Assets,*the Companydetermined that there were no adverse changes in cash flows related to itsportfolio of available-for-sale investment and non-investment grade mortgagebacked securities.  The Companydoes not intend to sell these securities and it is not more likely than notthat the Company will be required to sell these securities before recovery oftheir amortized cost bases.  As such, theCompany does not deem these securities to be other-than-temporarily impaired asof March 31, 2009.

 

*Government-SponsoredEquity Preferred Stock*

 

InSeptember 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 BBB- to C reflecting thecessation of dividend payments on these securities.  These securities are non-cumulative perpetualpreferred stock in which unpaid dividends do not accumulate.  The purchase agreement between the U.S.Treasury and these government-sponsored entities contains a covenantprohibiting 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 March 31, 2009, thefair value of these preferred stock securities was $995 thousand.  Gross unrealized losses on these securities,all of which is less than twelve months in duration, amounted to $2.3 millionas of March 31, 2009, or 70% of the aggregate amortized cost basis ofthese securities.  The value of thesepreferred securities have been very volatile and in the first quarter of 2009,these securities have traded above their carrying values.  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 March 31,2009.

 

*Residual Securities*

 

TheCompany retains residual securities in securitized mortgage loans in connectionwith certain of its securitization activities. The fair value of residual securities is subject to credit, prepayment,and interest rate risk on the underlying mortgage loans.  Fair value is estimated based on a discountedcash flow analysis.  These cash flows areprojected over the lives of the receivables using prepayment speed, expectedcredit losses, and the forward interest rate environment on the residualsecurities.  As of March 31, 2009,the aggregate fair value of residual securities totaling $53.9 million is based on a weightedaverage remaining life of 8.02years, a weighted average projected prepayment rate of 19%, a weighted average expected credit loss rate of 0.06%, and a weighted average discountrate of 15%.  At December 31,2008, the aggregate fair value of residual securities amounting to $50.1million is based on a weighted average remaining life of 6.64 years, a weightedaverage projected prepayment rate of 21%, a weighted average expected creditloss rate of 0.07%, and a weighted average discount rate of 15%.

 

TheCompany has seventeen individual securities that have been in a continuousunrealized loss position for twelve months or longer as of March 31,2009.  These securities are comprised oftwelve 

 

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corporate debt securitieswith a total fair value of $23.2 million and five mortgage-backed securitieswith a total fair value of $557.8 million. As of March 31, 2009, there were also 115 securities that have beenin 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.  The Company does not intend to sell thesesecurities and it is not more likely than not that the Company will be requiredto sell the investments before recovery of their amortized cost bases.  As such, the Company does not deem thesesecurities to be other-than-temporarily impaired as of March 31, 2009.

 

Thescheduled maturities of investment securities at March 31, 2009 arepresented as follows:

 
| ** **                              | ** ** | **Held-to-maturity** | ** **  | **Available-for-sale**         | ** ** |
|-----------------------------------------|------------|----------------------|-------------|--------------------------------|------------|
| **(In thousands)**                 | ** ** | **Amortized  Cost**  | ** **  | **Estimated  Fair Value** | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
| Due within one  year                    |       | $                    | 207,794     |                           | $          | 206,245 |   | $ | 32,974 |   | $ | 33,227 |   |
| Due after one  year through five years  |       | 317,354              |        | 311,749                        |       | 138,988 |   | 139,955 |   |
| Due after five  years through ten years |       | 55,648               |        | 54,993                         |       | 195,721 |   | 199,824 |   |
| Due after ten  years                    |       | 154,003              |        | 144,679                        |       | 1,761,663 |   | 1,620,402 |   |
| Indeterminate  maturity                 |       | —               |        | —                         |       | 3,340 |   | 995 |   |
| **Total**                               | ** ** | **$**                | **734,799** | ** **                     | **$**      | **717,666** | ** ** | **$** | **2,132,686** | ** ** | **$** | **1,994,403** | ** ** |

 

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

 

The carrying amount of goodwill remained at $337.4 million at March 31, 2009 and December 31,2008.  Goodwill is tested forimpairment on an annual basis, or more frequently as events occur, oras current circumstances and conditions warrant.  The Company records impairment losses ascharges to noninterest expense and adjustments to the carrying value ofgoodwill.  Subsequent reversals ofgoodwill impairment are prohibited.

 

During the first quarter of 2009, both the U.S. and global financialmarkets continued to experience volatility and the effect of such volatilitycontinued to unfavorably impact the market prices of banking stocks, includingthe Company’s.  As of March 31, 2009, the Company’smarket capitalization based on total outstanding common and preferredshares was $609.0 million and its total stockholders’ equity was $1.54billion.  As a result, the Companyperformed an impairment analysis as of March 31, 2009 to 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.

 

Duringthe first quarter of 2009, the Company re-aligned its management reportingstructure and identified three business divisions that meet the criteria of anoperating segment in accordance with SFAS No. 131, *DisclosuresAbout Segments of an Enterprise and Related Information*.  Based on the criteria defined in SFAS No. 131,the Company’s three operating segments are Retail Banking, Commercial Banking,and Other.  In accordance with SFAS No. 142,*Goodwill and Other Intangible Assets*,the Company determined that there were no additional reporting units below eachoperating segment and therefore 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.

 

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In order to determine the fair value of the reporting units, a combinedincome and market approach was used. Under the income approach, the Company provided a net income projectionfor the next 5 years plus a terminal growth rate was used to calculate the discountedcash flows and the present value of the reporting units.  Under the market approach, the fair value wascalculated using the current fair values of comparable peer banks of similarsize, geographic footprint and focus. The market capitalizations and multiples of these peer banks were usedto calculate the market price of the Company and each reporting unit.  The fair value was also subject to a controlpremium adjustment, which is the cost savings that a purchase of the reportingunit could achieve by eliminating duplicative costs.  Under the combined income and marketapproach, the value from each approach was appropriately weighted to determinethe fair value.  As a result of thisanalysis, the Company determined there was no goodwill impairment at March 31,2009 as the fair values of all reporting units exceeded the current carryingamounts of the goodwill.  No assurancecan be given that goodwill will not be written down in future periods.  The Company did not record any goodwill impairment loss during thefirst three months of 2008.

 

The Company alsohas premiums on acquired deposits which represent the intangiblevalue of depositor relationships resulting from deposit liabilities assumedfrom various acquisitions.  Otherintangibles are tested for impairment on an annual basis, or more frequently asevents occur, or as current circumstances and conditions warrant.  The gross carrying amount of deposit premiumstotaled $43.0 million as of March 31, 2009 and December 31, 2008,with related accumulated amortization expense amounting to $22.1 million and$21.0 million, respectively, as of March 31, 2009 and December 31,2008.  During the first quarter of 2008,the Company recorded an $855 thousand impairment loss on deposit premiumsinitially recorded for the Desert Community Bank (“DCB”) acquisition due tohigher than anticipated runoffs in certain deposit categories.  The Company amortizes premiums on acquireddeposits based on the projected useful lives of the related deposits.

 

The following table provides the estimated amortization expense ofpremiums on acquired deposits for 2009 and the succeeding four years asfollows:

 

 

 
| **Estimate For The Year Ending  December 31,** | ** ** | **Amount**              | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                              | ** ** | **(In thousands)** | ** ** |
| 2009                                                                    |       | $                       | 4,369      |   |
| 2010                                                                    |       | 3,858                   |       |
| 2011                                                                    |       | 3,378                   |       |
| 2012                                                                    |       | 2,602                   |       |
| 2013                                                                    |       | 1,707                   |       |
|                                                                         |            |                         |            |  |

 

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

 

The following table summarizes activity in the allowance for loanlosses for the periods indicated:

 

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| ** **                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                                     | ** ** | **(Dollars in thousands)**             | ** ** |
| ** **                                                     | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Allowance  balance, beginning of period                        |       | $                                                | 178,027    |   | $ | 88,407 |   |
| Allowance for  unfunded loan commitments and letters of credit |       | (1,008                                           | )          | (904 | ) |
| Provision for  loan losses                                     |       | 78,000                                           |       | 55,000 |   |
| Chargeoffs:                                                    |       |                                             |       |   |   |
| Single family  real estate                                     |       | 3,853                                            |       | 75 |   |
| Multifamily real  estate                                       |       | 1,746                                            |       | — |   |
| Commercial real  estate                                        |       | 2,796                                            |       | — |   |
| Land                                                           |       | 12,523                                           |       | 5,081 |   |
| Construction                                                   |       | 18,443                                           |       | 8,565 |   |
| Commercial  business                                           |       | 19,459                                           |       | 11,816 |   |
| Automobile                                                     |       | 8                                                |       | 29 |   |
| Other consumer                                                 |       | 1,312                                            |       | 17 |   |
| Total chargeoffs                                               |       | 60,140                                           |       | 25,583 |   |
|                                                           |       |                                             |       |   |   |
| Recoveries:                                                    |       |                                             |       |   |   |
| Single family  real estate                                     |       | 21                                               |       | — |   |
| Multifamily real  estate                                       |       | 122                                              |       | — |   |
| Commercial and  industrial real estate                         |       | 6                                                |       | 3 |   |
| Construction                                                   |       | 119                                              |       | — |   |
| Commercial  business                                           |       | 281                                              |       | 180 |   |
| Automobile                                                     |       | 22                                               |       | 17 |   |
| Total recoveries                                               |       | 571                                              |       | 200 |   |
| Net chargeoffs                                                 |       | 59,569                                           |       | 25,383 |   |
| Allowance  balance, end of period                              |       | $                                                | 195,450    |   | $ | 117,120 |   |
| Average loans  outstanding                                     |       | $                                                | 8,197,173  |   | $ | 8,955,257 |   |
| Total gross  loans outstanding, end of period                  |       | $                                                | 8,064,315  |   | $ | 8,849,201 |   |
| Annualized net  chargeoffs to average loans                    |       | 2.91                                             | %          | 1.13 | % |
| Allowance for  loan losses to total gross loans, end of period |       | 2.42                                             | %          | 1.32 | % |

 

At March 31, 2009, the allowance for loan losses amounted to$195.5 million, or 2.42% of total loans, compared with $178.0 million or 2.16%of total loans, at December 31, 2008, and $117.1 million or 1.32% of totalgross loans as of March 31, 2008. The increase in the allowance for loan losses is primarily due to the$78.0 million in provisions for loan losses recorded during the three monthsended March 31, 2009.  Incomparison, $55.0 million in loss provisions were recorded during same periodin 2008.  During the first quarter of2009, the Company continued to be impacted by the sustained real estatedownturn and recessionary economy in California.  This was evidenced by the increased levels ofnet chargeoffs, nonperforming assets, and delinquent loans.  During the three months ended March 31,2009, the Company recorded $59.6 million in net chargeoffs, compared to $25.4million in net chargeoffs recorded during the first three months of 2008.

 

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

 

*Credit Extensions* - In the normal course of business, theCompany has various outstanding commitments to extend credit that are notreflected in the accompanying condensed consolidated financial statements.  As of March 31, 2009 and December 31,2008, respectively, undisbursed loan commitments amounted to $1.34 billion and$1.47 billion, respectively.  Commercialand standby letters 

 

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of credit amounted to $686.4 million and $696.4 million as of March 31,2009 and December 31, 2008, respectively.

 

*Guarantees*— From time to time, the Company securitizes loanswith recourse in the ordinary course of business.  For loans that have been securitized withrecourse, 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 March 31, 2009, total loans securitized with recourse amounted to$521.9 million and were comprised of $60.7 million in single family loans withfull recourse and $461.2 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 $1.2 million****asof March 31, 2009 and December 31, 2008, and is included in accruedexpenses and other liabilities in the accompanying condensed consolidatedbalance sheets.  Despite the challengingconditions in the real estate market, the Company continues to experiencerelatively minimal losses from the single family and multifamily loanportfolios.

 

The Company also sells or securitizes loans without recourse that mayhave to be subsequently repurchased if a defect that occurred during the loanorigination process results in a violation of a representation or warranty madein connection with the securitization or sale of the loan.  When a loan sold or securitized to aninvestor without recourse fails to perform according to its contractual terms,the investor will typically review the loan file to determine whether defectsin the origination process occurred and if such defects give rise to aviolation of a representation or warranty made to the investor in connectionwith the sale or securitization.  If sucha defect is identified, the Company may be required to either repurchase theloan or indemnify the investor for losses sustained.  If there are no such defects, the Company hasno commitment to repurchase the loan.  Asof March 31, 2009 and December 31, 2008, the amount of loans soldwithout recourse totaled $703.5 million and $693.5 million, respectively.  Total loans securitized without recourseamounted to $1.03 billion and $1.04 billion, respectively, at March 31,2009 and December 31, 2008.  Theloans sold or securitized without recourse represent the unpaid principalbalance of the Company’s loans serviced for others portfolio.

 

*Litigation*— Neither the Company nor the Bank is involved inany material legal proceedings at March 31, 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 issues will not have a material adverse impact on thefinancial position, results of operations, or liquidity of the Company or theBank.

 

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

 

*Series A Preferred Stock Offering* - In April 2008, theCompany issued 200,000 shares of 8% Non-Cumulative Perpetual ConvertiblePreferred Stock, Series A (“Series A preferred shares”), with aliquidation preference of $1,000 per share. The Company received $194.1 million of additional Tier 1 qualifyingcapital, after deducting underwriting discounts, commissions and offeringexpenses.  The holders of the Series Apreferred shares will have the right at any time to convert each share of Series Apreferred shares into 64.9942 shares of the Company’s common stock, plus cashin lieu 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,

 

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2008 of $12.56 per share.  On orafter May 1, 2013, the Company will have the right, under certaincircumstances, to cause the Series A preferred shares to be converted intoshares of the Company’s common stock. Dividends on the Series A preferred shares, if declared, willaccrue and be payable quarterly in arrears at a rate per annum equal to 8% onthe 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.

 

*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 preferred shares”), with a liquidation preference of $1,000 pershare.  The Company received $306.5million of additional Tier 1 qualifying capital from the U.S. Treasury byparticipating in the 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 are redeemable at the option of the Company at 100% ofliquidation preference (plus any accrued and unpaid dividends), provided,however, that the Series B preferred shares may be redeemed prior to thefirst dividend payment date falling after the third anniversary of the ClosingDate (February 15, 2012) only if (i) the Company has raised aggregategross proceeds in one or more Qualified Equity Offerings (as defined in theStock Purchase Agreement) in excess of $76,636,500, and (ii) the aggregateredemption price does not exceed the aggregate net proceeds from such QualifiedEquity Offerings.

 

*Warrants*—**During 2008,in conjunction with the Series B preferred stock offering, the Companyissued warrants with an initial price of $15.15 per share of common stock forwhich the warrant may be exercised, with an allocated fair value of $25.2 million.  The warrant may be exercised at any time onor before December 5, 2018.  TheU.S. Treasury may not transfer a portion of the warrants with respect to morethan one-half of the original number of shares of common stock until theearlier of the successful completion of an offering of replacement Tier 1capital of at least $306.5 million and December 31, 2009.  The warrants, and all rights under thewarrants, are otherwise transferable. As of March 31, 2009, there were3,035,109 warrants remaining.

 

*Stock Repurchase Program*— During 2007, the Company’sBoard of Directors authorized a new stock repurchase program to buy back up to$80.0 million of the Company’s common stock. The Company did not repurchase any shares during the three months ended March 31,2009 in connection with this stock repurchase program.

 

*Quarterly Dividends* — On January 27, 2009,the Company’s Board of Directors declared first quarter preferred stock cashdividends of $20.00 per share on its Series A preferred shares payable onor about February 1, 2009 to shareholders of record on January 15,2009.  On February 17, 2009, theCompany’s Board of Directors declared and paid quarterly preferred cashdividends 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$7.7 million during the three months ended March 31, 2009.

 

On January 27, 2009, the Company’s Board of Directors alsodeclared quarterly common stock cash dividends of $0.02 per share payable on orabout February 24, 2009 to shareholders of record on February 10,2009.  The Board authorized the reductionof the common stock dividend to $0.02 per share for the first quarter of 2009,compared to the $0.10 per share paid in previous quarters, in order to preservecapital.  Cash dividends totaling $929thousand were paid to the Company’s common shareholders during the firstquarter of 2009.

 

*Earnings (Loss) Per Share (“EPS”)* — The actual number ofshares outstanding at March 31, 2009 was 63,951,931.  Basic EPS excludes dilution and is computedby dividing income or loss available 

 

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to common stockholders by the weighted-average number of sharesoutstanding during the period.  DilutedEPS is calculated on the basis of the weighted average number of sharesoutstanding during the period plus restricted stock and shares issuable uponthe assumed exercise of outstanding convertible preferred stock, common stockoptions and warrants, unless they have an antidilutive effect.  In accordance with SFAS No. 128, *Earnings Per Share*, due to the net loss recorded during thethree months ended March 31, 2009, incremental shares resulting from theassumed conversion, exercise, or contingent issuance of securities are notincluded as their effect on earnings or loss per share would be antidilutive.

 

The following table sets forth (loss) earnings per share calculationsfor the three months ended March 31, 2009 and 2008:

 
| ** **                                                                    | ** ** | **Three Months Ended March 31,**                 | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                                                             | ** ** | **2008** | ** ** |
| ** **                                                                    | ** ** | **Net (loss) available to  common stockholders** | ** ** | **Number  of Shares** | ** ** | **Per Share  Amounts** | ** ** | **Net income available to  common stockholders** | ** ** | **Number  of Shares** | ** ** | **Per Share  Amounts** | ** ** |
| ** **                                                                    | * *   | **(In  thousands, except per share data)**                           | * *   |
| Net (loss)  income as reported                                                |       | $                                                                    | (22,466    | ) |   |   |   |   | $ | 5,044 |   |   |   |   |   |
| Less: Preferred  stock dividends and amortization of preferred stock discount |       | (8,743                                                               | )          |   |   |   |   | — |   |   |   |   |   |
| Basic (loss)  earnings per share                                              |       | $                                                                    | (31,209    | ) | 62,998 |   | $ | (0.50 | ) | $ | 5,044 |   | 62,485 |   | $ | 0.08 |   |
|                                                                          |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities:                                               |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Stock options                                                                 |       | —                                                               |       | — |   | — |   | — |   | 356 |   |   |   |
| Restricted stock                                                              |       | —                                                               |       | — |   | — |   | — |   | 108 |   | — |   |
| Stock warrants                                                                |       | —                                                               |       | — |   | — |   | — |   | — |   | — |   |
| Diluted (loss)  earnings per share                                            |       | $                                                                    | (31,209    | ) | 62,998 |   | $ | (0.50 | ) | $ | 5,044 |   | 62,949 |   | $ | 0.08 |   |

 

The following outstanding convertible preferred stock, stock options,and restricted stock for the three months ended March 31, 2009 and 2008,respectively, were excluded from the computation of diluted EPS becauseincluding them would have had an antidilutive effect.

 
| ** **                   | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                                           | ** ** | **2008** | ** ** |
| ** **                   | * *   | **(In  thousands)**                                                | * *   |
| Convertible  preferred stock |       | 12,772                                                             |       | — |   |
| Stock options                |       | 2,570                                                              |       | 908 |   |
| Restricted stock             |       | 779                                                                |       | — |   |

 

**10.****      ****BUSINESSSEGMENTS**

 

TheCompany utilizes an internal reporting system to measure the performance ofvarious operating segments within the Bank and the Company overall.  The Company had previously identified five operatingsegments for purposes of management reporting: retail banking, commerciallending, treasury, residential lending, and other.  The Bank’s strategic focus has been shiftingand evolving over the last several years which has influenced how the chiefoperating decision maker views the Company’s business operations and assessesits economic performance.  Specifically,the Company’s business focus has culminated in a two-segment core businessstructure: Retail Banking and Commercial Banking.  A third segment, which is comprised of acombination of our previous operating segments—Treasury and Other, providesbroad administrative support to these two core segments.  As a result of this evolution in the Company’sstrategic focus, the Company realigned its segment methodology during the firstquarter of 2009, and identified these three business divisions as meeting thecriteria of an operating segment in 

 

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accordancewith SFAS No. 131.  The objective ofcombining certain segments under a new reporting structure was to better alignthe Company’s service structure with its customer base, and to more efficientlymanage the complexities and challenges impacting the Company’s current businessenvironment.

 

Theretail banking segment focuses primarily on retail operations through the Bank’sbranch network.  The commercial bankingsegment, which includes commercial real estate, primarily generates commercialloans through the efforts of the commercial lending offices located in the Bank’snorthern and southern California production offices.  Furthermore, the Company’s commercial lendingsegment also offers a wide variety of international finance and trade servicesand products.  The former residentiallending segment has been combined with the retail banking segment due to theconsumer-centric nature of the products and services offered by these twosegments as well as the synergistic relationship between these two units ingenerating consumer mortgage loans.  Theremaining centralized functions, including the former treasury segment, andeliminations of 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 creditportfolio.  Transfer pricing assumptionsand methodologies 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.

 

The changes in transfer pricing assumptions that theCompany implemented during the first quarter of 2009 have not been reflected inthe segment results for the first quarter of 2008 due to lack of readilyavailable information that is necessary to restate previously reportedresults.  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 impact of these changes was not significant overall andwould have been favorable to the segment pretax profit (loss) results for theretail banking and other segments but unfavorable to the commercial bankingsegment.  Additionally, the changes intransfer pricing assumptions implemented during the first quarter of 2009 wouldnot have altered the conclusion of the Company’s goodwill impairment testperformed as of March 31, 2008, had these assumptions been retroactivelyimplemented during the first quarter of 2008.

 

Theaccounting policies of the segments are the same as those described in thesummary of significant accounting policies described in Note 1 of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008.  Operating segment results are based on theCompany’s internal management reporting process, which reflects assignments andallocations of capital, certain operating and administrative costs and theprovision for loan losses.  Net interestincome is based on the Company’s internal funds transfer pricing system whichassigns a cost of funds or a credit for funds to assets or liabilities based ontheir type, maturity or repricing characteristics.  Noninterest income and noninterest expense,including depreciation and amortization, directly attributable to a segment areassigned to that business.  Indirectcosts, including overhead expense, are allocated to the segments based onseveral factors, including, but not limited to, full-time equivalent employees,loan volume and deposit volume.  Theprovision for credit losses is allocated based on actual chargeoffs for theperiod as well as 

 

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averageloan volume 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 present the operating resultsand other key financial measures for the individual operating segments for thethree months ended March 31, 2009 and 2008:

 
| ** **                                | ** ** | **Three Months Ended March 31, 2009** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                | ** ** | **Retail  Banking**                                            | ** ** | **Commercial  Banking** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **(In thousands)**                                        | ** ** |
| * *                                  | * *   | * *                                                       | * *   | * * | * * | * * | * * | * * | * * |
| Interest income                           |       | $                                                              | 55,010     |   | $ | 63,059 |   | $ | 26,854 |   | $ | 144,923 |   |
| Charge for funds  used                    |       | (15,283                                                        | )          | (15,030 | ) | (56,866 | ) | (87,179 | ) |
| Interest spread  on funds used            |       | 39,727                                                         |       | 48,029 |   | (30,012 | ) | 57,744 |   |
| Interest expense                          |       | (27,008                                                        | )          | (4,696 | ) | (33,538 | ) | (65,242 | ) |
| Credit on funds  provided                 |       | 41,739                                                         |       | 4,600 |   | 40,840 |   | 87,179 |   |
| Interest spread  on funds provided        |       | 14,731                                                         |       | (96 | ) | 7,302 |   | 21,937 |   |
| Net interest  income (expense)            |       | $                                                              | 54,458     |   | $ | 47,933 |   | $ | (22,710 | ) | $ | 79,681 |   |
|                                      |       |                                                           |       |   |   |   |   |   |   |
| Provision for  loan losses                |       | $                                                              | 34,115     |   | $ | 43,885 |   | $ | — |   | $ | 78,000 |   |
| Depreciation,  amortization and accretion |       |                                                           | 1,960      |   |   | 255 |   |   | 3,592 |   |   | 5,807 |   |
| Goodwill                                  |       | 320,566                                                        |       | 16,872 |   | — |   | 337,438 |   |
| Segment pretax  profit (loss)             |       | (11,706                                                        | )          | (6,903 | ) | (17,322 | ) | (35,931 | ) |
| Segment assets                            |       | 6,489,624                                                      |       | 4,864,092 |   | 1,210,808 |   | 12,564,524 |   |

 
| ** **                                | ** ** | **Three Months Ended March 31, 2008** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                | ** ** | **Retail  Banking**                                            | ** ** | **Commercial**

**Banking** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **(In thousands)**                                        | ** ** |
| * *                                  | * *   | * *                                                       | * *   | * * | * * | * * | * * | * * | * * |
| Interest income                           |       | $                                                              | 76,046     |   | $ | 93,048 |   | $ | 18,090 |   | $ | 187,184 |   |
| Charge for funds  used                    |       | (44,970                                                        | )          | (51,797 | ) | (9,862 | ) | (106,629 | ) |
| Interest spread  on funds used            |       | 31,076                                                         |       | 41,251 |   | 8,228 |   | 80,555 |   |
| Interest expense                          |       | (42,003                                                        | )          | (4,095 | ) | (41,467 | ) | (87,565 | ) |
| Credit on funds  provided                 |       | 64,607                                                         |       | 5,644 |   | 36,378 |   | 106,629 |   |
| Interest spread  on funds provided        |       | 22,604                                                         |       | 1,549 |   | (5,089 | ) | 19,064 |   |
| Net interest  income                      |       | $                                                              | 53,680     |   | $ | 42,800 |   | $ | 3,139 |   | $ | 99,619 |   |
|                                      |       |                                                           |       |   |   |   |   |   |   |
| Provision for  loan losses                |       | $                                                              | 31,282     |   | $ | 23,718 |   | $ | — |   | $ | 55,000 |   |
| Depreciation,  amortization and accretion |       |                                                           | 3,259      |   |   | 221 |   |   | 1,799 |   |   | 5,279 |   |
| Goodwill                                  |       | 319,882                                                        |       | 17,694 |   | — |   | 337,576 |   |
| Segment pretax  profit (loss)             |       | (5,095                                                         | )          | 10,523 |   | 2,214 |   | 7,642 |   |
| Segment assets                            |       | 6,606,955                                                      |       | 5,430,389 |   | (277,134 | ) | 11,760,210 |   |

 

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**11.****      ****SUBSEQUENTEVENTS**

** **

On April 27, 2009, the Company’s Board ofDirectors approved the payment of second quarter dividends of $20.00 per shareon the Company’s Series A preferred stock. The dividend is payable on or about May 1, 2009 to shareholders ofrecord as of April 15, 2009.   TheBoard also authorized the payment of second quarter dividends on the Company’s Series Bpreferred stock to be paid on May 15, 2009.

 

The Board also declared a dividend of $0.01 per shareon the Company’s common stock payable on or about May 26, 2009 toshareholders of record as of May 18, 2009. This represents a reduction from the previous quarterly dividend rate of$0.02 per share paid to common shareholders during the first quarter of2009.  The Board-authorized reduction incommon stock dividends is consistent with the Company’s continuing efforts topreserve capital.

** **

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

** **

The following discussion provides information aboutthe results of operations, financial condition, liquidity, and capitalresources of East West Bancorp, Inc. and its subsidiaries.  This information is intended to facilitatethe understanding and assessment of significant changes and trends related toour financial condition and the results of our operations.  This discussion and analysis should be readin conjunction with our Annual Report on Form 10-K for the year ended December 31,2008, and the condensed consolidated financial statements and accompanyingnotes presented elsewhere in this report.

 

**Critical Accounting Policies**

** **

Ourfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America and general practices withinthe banking industry.  The financial informationcontained within these statements is, to a significant extent, financialinformation that is based on approximate measures of the financial effects oftransactions and events that have already occurred.  Various elements of our accounting policies,by their nature, are inherently subject to estimation techniques, valuationassumptions and other subjective assessments. In addition, certain accounting policies require significant judgment inapplying complex accounting principles to individual transactions to determinethe most appropriate treatment.  We haveestablished procedures and processes to facilitate making the judgmentsnecessary to prepare financial statements.

 

Thefollowing is a summary of the areas which require more judgmental and complexaccounting estimates and principles.  Ineach area, we have identified the variables most important in the estimationprocess.  We have used the bestinformation available to make the estimations necessary to value the relatedassets and liabilities.  Actualperformance that differs from our estimates and future changes in the keyvariables could change future valuations and impact net income.

 

·                  fair valuation of financialinstruments;

·                  investment securities;

·                  allowance for loan losses;

·                  other real estate owned;

·                  loan sales;

·                  goodwill impairment; and

·                  share-based compensation

 

Oursignificant accounting policies are described in greater detail in our 2008Annual Report on Form 10-K in the “Critical Accounting Policies” sectionof Management’s Discussion and Analysis and in Note 1 to the ConsolidatedFinancial Statements—“Significant Accounting Policies” which are essential tounderstanding Management’s Discussion and Analysis of Financial Condition andResults of Operations.

 

**Overview**

** **

During the first quarter of2009, we continued to face credit challenges brought about by the downturn inthe real estate market and the recessionary economy in California as evidencedby elevated levels of net chargeoffs, nonperforming loans, and delinquent loans. Although we continued to face challengeson the credit front as anticipated, our core profitability, as well as ourliquidity, capital and loan loss allowance positions remain strong.  During the first quarter of 2009, wecontinued to build on 

 

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measures and initiativesthat we undertook throughout 2008 to strengthen our balance sheet and toprovide a solid foundation for strong earnings and growth when the marketturns.

 

During the first quarter of2009, we experienced strong deposit growth with total deposits increasing to arecord $8.45 billion as of March 31, 2009, representing a 4% or $312.1million, increase over year-end 2008. This increase in total deposits was predominantly due to a 14% or $467.8million increase in our core deposit base as of March 31, 2009 relative toDecember 31, 2008.  Since mid-2008,we have experienced strong deposit momentum through both our retail branchnetwork and our commercial deposit platforms despite volatile and challengingmarket conditions.  As a result of thisincrease in core deposits, we were able to pay down higher cost FHLB advanceswhich decreased $120.0 million or 9% to $1.23 billion as of March 31,2009.  We intend to pay down higher costFHLB advances totaling $510.0 million throughout the remainder of 2009.  Both our cost of deposits and cost of fundsdecreased 33 basis points during the first quarter of 2009, relative toyear-end 2008.  Our cost of depositsdecreased to 1.81% for the first quarter of 2009, compared to 2.14% for thefourth quarter of 2008, while our cost of funds decreased to 2.44% for thefirst quarter of 2009, from 2.77% for the fourth quarter of 2008.  Our ongoing efforts to deleverage our balancesheet have resulted in a lower loan to deposit ratio of 95% at March 31,2009, compared to 101% at December 31, 2008 and 110% at September 30,2008.

 

Our total borrowing capacityand holdings of cash and cash equivalents increased to $3.55 billion as of March 31,2009, compared to $3.34 billion as of December 31, 2008.  As of March 31, 2009, we had $541.1million in cash and cash equivalents and approximately $3.01 billion inavailable borrowing capacity from various sources including the Federal HomeLoan Bank (“FHLB”), the Federal Reserve Bank (“FRB”) and federal fundsfacilities with several financial institutions. We believe that our liquidity position is more than sufficient to meetour operating expenses, borrowing needs and other obligations.

 

Our capital position alsoremains strong.  We raised a total $506.5million in capital during 2008 through the issuance of $200.0 million ofconvertible preferred stock in April 2008 and the issuance of $306.5million of preferred equity in December 2008 as a participant in the TARPCPP.  These issuances of preferred stockhave bolstered our capital ratios well above regulatory minimums and “well-capitalized”thresholds for banks.  As of March 31,2009, our total risk-based capital ratio was 15.65% or $583.3 million more thanthe 10.00% regulatory requirement for well-capitalized banks.  Our Tier 1 risk-based capital ratio of 13.67%and our Tier 1 leverage ratio of 11.47% as of March 31, 2009 alsosignificantly exceeded regulatory guidelines for well-capitalized banks.

 

Nonperforming assets totaled$303.8 million representing 2.42% of total assets at March 31, 2009.  This compares to $263.9 million or 2.12% oftotal assets at December 31, 2008. Nonperforming assets as of March 31, 2009 are comprised ofnonaccrual loans totaling $248.0 million, other real estate owned (“OREO”)totaling $38.6 million, and loans modified or restructured amounting to $17.2million.  Included in nonaccrual loans asof March 31, 2009 are loans totaling $69.3 million which were not 90 dayspast due as of March 31, 2009, but have been classified as nonaccrual dueto concerns surrounding collateral values and future collectibility.  Nonaccrual loans experienced the largestincrease from commercial real estate loans, which increased to $55.2 million asof March 31, 2009 from $24.7 million as of December 31, 2008,primarily due to one lending relationship comprised of several loans where theborrower filed for bankruptcy towards the end of the first quarter of2009.  The net book value of total loansfor this lending relationship amounted to $49.2 million as of March 31,2009, which was collateralized by 23 different properties comprised of land,residential and income producing commercial real estate located in the downtownLos Angeles region.  Although interestpayments of all of these loans were current or under 90 days delinquent, theseloans were classified nonaccrual loans as of March 31, 2009.

 

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We continue to proactivelyidentify, quantify, and reduce our exposure to problem loans.  We believe that the early identification ofproblem loans and potential future problem loans has enabled us to resolvecredit issues with substantially less risk and ultimate losses.  At March 31, 2009, the allowance forloan losses amounted to $195.5 million or 2.42% of total gross loans, comparedto $178.0 million or 2.16% as of December 31, 2008.  We recorded $78.0 million in loan lossprovisions during the first quarter of 2009, compared to $43.0 million and$55.0 million recorded during the fourth and first quarters of 2008,respectively.  Total net chargeoffs amountedto $59.6 million during the first quarter of 2009, compared to $41.5 millionduring the fourth quarter of 2008 and $25.6 million during the first quarter of2008.  These elevated chargeoff levelsthat we experienced during 2008 and the first quarter of 2009 reflect theproactive actions that we have taken to identify and manage our problem loansand reduce our ultimate loss exposures as we wrote down loans that we believedto be impaired in accordance with SFAS 114, *Accounting by Creditorsfor Impairment of a Loan*, as amended.

 

Despite a sizeable loss provision recorded duringthe first quarter of 2009, our core operating earnings remained profitable during the period.  The $22.5 million, or $(0.50) per share, netloss we recorded during the first quarter of 2009 includes $78.0 million inloan loss provisions.  Excluding loanloss provisions, our core pretax operating income was $42.3 million for thefirst quarter of 2009.  This compares to$41.4 million and $62.6 million in core pretax operating earnings during thefourth quarter of 2008 and first quarter of 2008, respectively.

 

Netinterest income decreased to $79.7 million during the quarter ended March 31,2009, compared with $99.6 million during the first quarter in 2008.  During the first quarter of 2009, our netinterest margin increased 2 basis points, compared with 2.72% during the fourthquarter of 2008 and decreased 89 basis points, compared with the first quarterof 2008.  Relative to the first quarterof 2008, our net interest margin during the quarter ended March 31, 2009decreased as a result of the sharp decline in interest rates prompted byseveral consecutive Federal Reserve rate cuts, the reversal of interest fromnonaccrual loans, and the reinvestment of loan payoffs into lower yieldingTreasury securities and other short-term investments.  We anticipate our net interest margin toincrease during the remainder of 2009, relative to first quarter of 2009, as wecontinue to increase our core deposit base and pay down higher cost FHLB advances.

 

Totalnoninterest income decreased 13% to $13.8 million during the first quarter of2009, compared with $15.9 million for the corresponding quarter in 2008.  The decrease in noninterest income isprimarily due to lower letters of credit fees and commissions and lower netgains on sales of loans and available-for-sale investment securities.  These decreases were partially offset byhigher branch-related revenues and ancillary loan fees during the first quarterof 2009.  Core noninterest income increasedto $10.4 million during the first quarter of 2009, compared to $9.6 millionduring the same period in 2008, which excludes the impact of non-cash OTTIcharges of $200 thousand during the first quarter of 2009 and none during thefirst quarter of 2008, as well as net gains on sales of investment securitiesof $3.5 million and $4.3 million during the first quarter of 2009 and firstquarter of 2008, respectively, and loans and other assets of $33 thousand and$1.9 million during the first quarter of 2009 and first quarter of 2008,respectively.  We believe that corenoninterest income is a strong indicator of our stable core earnings.

 

Total noninterestexpense decreased 3% to $51.4 million during the first quarter of 2009, compared with $52.9 million for thesame period in 2008.  The decrease intotal noninterest expense during the first quarter of 2009, relative to the same quarter in 2008,can be attributed predominantly to lower staffing levels and a reduction inrelated benefits and incentive program expenses.  These decreases were partially offset byrising OREO expenses and credit cycle related expenses as well as higherdeposit insurance premiums and regulatory assessments.  Our efficiency ratio, which representsnoninterest expense (excluding amortization and impairment losses on intangibleassets and amortization of investments in affordable housing partnerships)divided by the aggregate of net interest income before provision for loanlosses and noninterest income, was 51.80% during the first quarterof 2009 compared

 

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with 41.93% during the same quarter of 2008.  We will continue to focus on cost management throughoutthe remainder of 2009.

 

Totalconsolidated assets at March 31, 2009 increased to $12.56 billion,compared with $12.42 billion at December 31, 2008.  The net increase in total assets is comprisedpredominantly of increases of held-to-maturity investment securities of $612.5million and short-term investments of $100.8 million.  These increases were partially offset bydecreases in cash and cash equivalents of $337.8 million, net loans receivableof $203.5 million, and available-for-sale investment securities of $45.8million.  Total liabilities increased 1%to $11.03 billion as of March 31, 2009, compared to $10.87 billion as of December 31,2008.  The net increase in liabilities isprimarily due to an increase in total deposits of $312.1 million, partiallyoffset by decreases in FHLB advances of $120.0 million and federal fundspurchased of $28.0 million.

 

Totalaverage assets increased 6% to $12.50 billion during the first quarter of 2009,compared to $11.79 billion for the first quarter of 2008, due primarily togrowth in average short-term investments, and average held-to-maturity andavailable-for-sale investment securities. Total short-term investments rose 856% to $731.6 million during thefirst quarter of 2009, compared to $76.5 million during the first quarter of2008.  Similarly, total averageinvestment securities increased 47% to $2.70 billion during the quarter ended March 31,2009 from $1.84 billion during the first quarter of 2008.  The increases in both average short-terminvestments and average investment securities can be attributed to proceedsreceived in conjunction with our issuance of Series B preferred stockduring December 2008, the notable increase in our deposit base during thefirst quarter of 2009, as well as the reinvestment of a portion of our loanpayoffs into short-term securities and investment securities.  Total average deposits rose 13% during thefirst quarter of 2009 to $8.31 billion, compared to $7.33 billion for the samequarter in 2008, with the largest increases coming from money market accountsand time deposits.

 

Asof March 31, 2009, we updated our goodwill impairment analysis todetermine whether and to what extent our goodwill asset was impaired.  As a result of this updated analysis, wedetermined that there was no goodwill impairment at March 31, 2009.

 

On April 27, 2009,the Board of Directors authorized a further reduction in our common stockdividend to $0.01 per share commencing in the second quarter of 2009, ascompared with $0.02 per share paid during the first quarter of 2009 and the$0.10 per share paid in quarters previous to 2009.  Despite our strong capital position, webelieve the reduction in our common stock dividend payout to be both aresponsible and prudent decision to preserve capital during this period ofprolonged economic uncertainty.

 

**Resultsof Operations**

 

Netloss for the first quarter of 2009 totaled $22.5 million, compared with netincome of $5.0 million for the first quarter of 2008.  On a per diluted share basis, net (loss)income was ($0.50) and $0.08 for the first quarter of 2009 and first quarter of2008, respectively.  During the firstquarter of 2009, our operating results were significantly impacted by $78.0million in loan loss provisions, partially offset by a higher benefit forincome taxes.  Our annualized return onaverage total assets decreased to (0.72%) for the quarter ended March 31,2009, from 0.17% for the same period in 2008. The annualized return on average stockholders’ equity decreased to(11.69%) for the first quarter of 2009, compared with 1.74% for the firstquarter of 2008.

 

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## *Components of Net (Loss) Income*

 
| ** **                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **(In millions)**                           | ** ** |
| Net interest  income                        |       | $                                                | 79.7       |   | $ | 99.6 |   |
| Provision for  loan losses                  |       | (78.0                                            | )          | (55.0 | ) |
| Noninterest  income                         |       | 13.8                                             |       | 15.9 |   |
| Noninterest  expense                        |       | (51.4                                            | )          | (52.9 | ) |
| Benefit  (provision) for income taxes       |       | 13.4                                             |       | (2.6 | ) |
| Net (loss)  income                          |       | $                                                | (22.5      | ) | $ | 5.0 |   |
|                                        |       |                                             |       |   |   |
| Annualized  return on average total assets  |       | -0.72                                            | %          | 0.17 | % |
| Annualized  return on average total equity  |       | -5.83                                            | %          | 1.74 | % |
| Annualized  return on average common equity |       | -11.69                                           | %          | 1.74 | % |

 

#### **Net Interest Income**

#### ** **

Our primary source ofrevenue is net interest income, which is the difference between interest earnedon loans, investment securities and other earning assets less the interestexpense on deposits, borrowings and other interest-bearing liabilities.  Net interest income for the first quarter of2009 totaled $79.7 million, a 20% decrease over net interest income of $99.6 million same period in 2008.

 

Netinterest margin, defined as net interest income divided by average earningassets, decreased 89 basis points to 2.74% during the quarter ended March 31,2009, from 3.63% during the first quarter of 2008.  The decline in the net interest marginreflects the steep decrease in the federal funds target rate during 2008, thesignificant increase in our overall level of nonaccrual loans, and thereinvestment of net loan payoffs into lower yielding investment securities andother short-term investments.

 

The following table presents the net interest spread, net interestmargin, average balances, interest income and expense, and the average yieldsand rates by asset and liability component for the three months ended March 31,2009 and 2008:

 

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| ** **                                       | ** **   | **Three  Months Ended March 31,** | ** **   |
|--------------------------------------------------|--------------|----------------------------------------|--------------|
| ** **                                       | ** **   | **2009**                               | ** **   | **2008** | ** ** |
| ** **                                       | ** **   | **Average  Volume**                    | ** **   | **Interest** | ** ** | **Average  Yield/  Rate (1)** | ** ** | **Average  Volume** | ** ** | **Interest** | ** ** | **Average  Yield/  Rate (1)** | ** ** |
| *** ***                                     | *** *** | **(Dollars  in thousands)**            | *** *** |
| **ASSETS**                                       |         |                                   |         |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                        |         |                                   |         |   |   |   |   |   |   |   |   |   |   |
| Short-term  investments                          |         | $                                      | 731,573      |   | $ | 2,976 |   | 1.65 | % | $ | 76,540 |   | $ | 538 |   | 2.82 | % |
| Securities  purchased under resale agreements    |         | 50,000                                 |         | 1,250 |   | 10.00 | % | 64,286 |   | 2,553 |   | 15.93 | % |
| Investment  securities (2)                       |         |                                   |         |   |   |   |   |   |   |   |   |   |   |
| Held-to-maturity                                 |         |                                   |         |   |   |   |   |   |   |   |   |   |   |
| Taxable                                          |         | 405,851                                |         | 6,695 |   | 6.60 | % | — |   | — |   | — |   |
| Tax-exempt (4)(5)                                |         | 16,642                                 |         | 277 |   | 6.66 | % | — |   | — |   | — |   |
| Available-for-sale  (3)(4)(5)                    |         | 2,280,766                              |         | 22,493 |   | 4.00 | % | 1,839,080 |   | 27,445 |   | 5.99 | % |
| Loans receivable  (2)(6)                         |         | 8,197,173                              |         | 110,816 |   | 5.48 | % | 8,955,257 |   | 155,434 |   | 6.96 | % |
| FHLB and FRB  stock                              |         | 120,040                                |         | 506 |   | 1.69 | % | 115,646 |   | 1,609 |   | 5.58 | % |
| Total  interest-earning assets                   |         | 11,802,045                             |         | 145,013 |   | 4.98 | % | 11,050,809 |   | 187,579 |   | 6.81 | % |
|                                             |         |                                   |         |   |   |   |   |   |   |   |   |   |   |
| Noninterest-earning  assets:                     |         |                                   |         |   |   |   |   |   |   |   |   |   |   |
| Cash and due from  banks                         |         | 122,899                                |         |   |   |   |   | 150,469 |   |   |   |   |   |
| Allowance for  loan losses                       |         | (186,058                               | )            |   |   |   |   | (90,086 | ) |   |   |   |   |
| Other assets                                     |         | 759,363                                |         |   |   |   |   | 677,699 |   |   |   |   |   |
| Total assets                                     |         | $                                      | 12,498,249   |   |   |   |   |   | $ | 11,788,891 |   |   |   |   |   |
|                                             |         |                                   |         |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**   |         |                                   |         |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |         |                                   |         |   |   |   |   |   |   |   |   |   |   |
| Checking accounts                                |         | $                                      | 361,569      |   | $ | 393 |   | 0.44 | % | $ | 437,804 |   | $ | 1,367 |   | 1.25 | % |
| Money market  accounts                           |         | 1,487,178                              |         | 5,694 |   | 1.55 | % | 1,094,698 |   | 8,464 |   | 3.10 | % |
| Savings deposits                                 |         | 410,232                                |         | 702 |   | 0.69 | % | 471,437 |   | 1,454 |   | 1.24 | % |
| Time deposits  less than $100,000                |         | 1,332,944                              |         | 9,618 |   | 2.93 | % | 938,282 |   | 8,841 |   | 3.78 | % |
| Time deposits  $100,000 or greater               |         | 3,482,074                              |         | 20,666 |   | 2.41 | % | 3,027,580 |   | 32,127 |   | 4.26 | % |
| Federal funds  purchased                         |         | 2,445                                  |         | 3 |   | 0.49 | % | 165,686 |   | 1,378 |   | 3.34 | % |
| FHLB advances                                    |         | 1,285,070                              |         | 13,877 |   | 4.38 | % | 1,747,313 |   | 19,682 |   | 4.52 | % |
| Securities sold  under repurchase agreements     |         | 998,583                                |         | 11,872 |   | 4.76 | % | 1,001,186 |   | 10,529 |   | 4.22 | % |
| Long-term debt                                   |         | 235,570                                |         | 2,417 |   | 4.10 | % | 235,570 |   | 3,723 |   | 6.34 | % |
| Total  interest-bearing liabilities              |         | 9,595,665                              |         | 65,242 |   | 2.76 | % | 9,119,556 |   | 87,565 |   | 3.85 | % |
|                                             |         |                                   |         |   |   |   |   |   |   |   |   |   |   |
| **Noninterest-bearing  liabilities:**            |         |                                   |         |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |         | 1,238,551                              |         |   |   |   |   | 1,359,837 |   |   |   |   |   |
| Other liabilities                                |         | 123,085                                |         |   |   |   |   | 152,338 |   |   |   |   |   |
| Stockholders’  equity                       |         | 1,540,948                              |         |   |   |   |   | 1,157,160 |   |   |   |   |   |
| Total liabilities  and stockholders’ equity |         | $                                      | 12,498,249   |   |   |   |   |   | $ | 11,788,891 |   |   |   |   |   |
| Interest rate  spread                            |         |                                   |         |   |   | 2.22 | % |   |   |   |   | 2.96 | % |
| Net interest  income and net interest margin     |         |                                   |         | $ | 79,771 |   | 2.74 | % |   |   | $ | 100,014 |   | 3.63 | % |

 

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(1) Annualized.

(2) Includesamortization of premium and accretion of discounts on investment securities andloans receivable totaling $(832)

thousand and $(347) thousandfor the three months ended March 31, 2009 and 2008, respectively.  Also includes the amortization

of deferred loan feestotaling $(1.2 million) and $975 thousand for the three months ended March 31,2009 and 2008, respectively.

(3) Average balancesexclude unrealized gains or losses on available for sales securities.

(4) Total interestincome and average yield rate on an unadjusted basis for tax-exempt investmentsecurities held-to-maturity is $187 thousand and 4.49% for three months ended March 31,2009, respectively, and none for the three months ended March 31, 2008.There is no total interest income and average yield rate on an unadjusted basisfor tax-exempt investment securities available-for-sale for the three monthsended March 31, 2009. Total interest income and average yield rate on anunadjusted basis for tax-exempt investment securities available-for-sale is$1.0 million and 6.20% for the three months ended March 31, 2008,respectively.

(5) Amounts calculatedon a fully taxable equivalent basis using the current statutory federal taxrate.

(6) Average balancesinclude nonperforming loans.

 

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### **Analysis of Changes in Net Interest 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 March 31,  2009 vs. 2008** | ** **   |
|-----------------------------------------------|--------------|------------------------------------------------------|--------------|
| ** **                                    | ** **   | **Total**                                            | ** **   | **Changes Due to** | ** ** |
| ** **                                    | ** **   | **Change**                                           | ** **   | **Volume (1)** | ** ** | **Rates (1)** | ** ** |
| *** ***                                  | *** *** | **(In thousands)**                                   | *** *** |
| **INTEREST-EARNING  ASSETS:**                 |         |                                                 |         |   |   |   |   |
| Short-term  investments                       |         | $                                                    | 2,438        |   | $ | 2,756 |   | $ | (318 | ) |
| Securities  purchased under resale agreements |         | (1,303                                               | )            | (489 | ) | (814 | ) |
| Investment  securities held-to-maturity       |         |                                                 |         |   |   |   |   |
| Taxable                                       |         | 6,695                                                |         | — |   | — |   |
| Tax-exempt (2)                                |         | 277                                                  |         | — |   | — |   |
| Investment  securities available-for-sale (2) |         | (4,952                                               | )            | 5,591 |   | (10,543 | ) |
| Loans receivable                              |         | (44,618                                              | )            | (12,352 | ) | (32,266 | ) |
| FHLB and FRB  stock                           |         | (1,103                                               | )            | 59 |   | (1,162 | ) |
| Total interest  and dividend income           |         | $                                                    | (42,566      | ) | $ | (4,435 | ) | $ | (45,103 | ) |
|                                          |         |                                                 |         |   |   |   |   |
| **INTEREST-BEARING  LIABILITIES**             |         |                                                 |         |   |   |   |   |
| Checking  accounts                            |         | $                                                    | (974         | ) | $ | (205 | ) | $ | (769 | ) |
| Money market  accounts                        |         | (2,770                                               | )            | 2,398 |   | (5,168 | ) |
| Savings deposits                              |         | (752                                                 | )            | (170 | ) | (582 | ) |
| Time deposits  less than $100,000             |         | 777                                                  |         | 3,159 |   | (2,382 | ) |
| Time deposits  $100,000 or greater            |         | (11,461                                              | )            | 4,283 |   | (15,744 | ) |
| Federal funds  purchased                      |         | (1,375                                               | )            | (737 | ) | (638 | ) |
| FHLB advances                                 |         | (5,805                                               | )            | (5,021 | ) | (784 | ) |
| Securities sold  under resale agreements      |         | 1,343                                                |         | (27 | ) | 1,370 |   |
| Long-term debt                                |         | (1,306                                               | )            | — |   | (1,306 | ) |
| Total interest  expense                       |         | (22,323                                              | )            | 3,680 |   | (26,003 | ) |
| **CHANGE  IN NET INTEREST INCOME**            |         | $                                                    | (20,243      | ) | $ | (8,115 | ) | $ | (19,100 | ) |

 

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(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 $187 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 March 31,2009 vs. 2008. Total change on an unadjusted basis for tax-exempt investmentsecurities available-for-sale is $(1.0) million, and total changes due tovolume and rates on an unadjusted basis for tax-exempt investment securitiesavailable-for-sale is $(510) thousand and $(536) thousand for the three monthsended March 31, 2009 vs. 2008, respectively.

 

**Provision for Loan Losses**

 

We recorded $78.0 million in provisions for loan losses during thefirst quarter of 2009.  In comparison, werecorded $55.0 million in provision for loan losses during the first quarter of2008.  The significant increase in loanloss provisions recorded during the first three months of 2009 reflects ourincreased chargeoff levels as well as our higher volume of classified andnonperforming loans caused by challenging conditions in the real estate housingmarket, turmoil in the financial markets, as well as the

 

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prolonged downturn in the overall economy.  We continued to sustain higher chargeoffactivity and increased loan loss provisions for our land and residentialconstruction loans during the first quarter of 2009 that were caused by thesustained weakness in the real estate market. The Company recorded $59.6 million in net chargeoffs during the firstthree months of 2009, compared to $25.4 million in net chargeoffs recordedduring the first three months of 2008. We believe that credit challenges will continue throughout 2009,particularly for our residential construction and land loan portfolios.  We continue to aggressively monitordelinquencies and proactively review the credit risk exposure of our loanportfolio to minimize and mitigate potential losses.  Throughout the course of 2008 and the firstquarter of 2009, we have actively reduced exposure to land and constructionloans, reducing both outstanding loan balances as well as total commitments.

 

Provisions for loan losses are charged to income to bring the allowancefor credit losses as well as the allowance for unfunded loan commitments,off-balance sheet credit exposures, and recourse provisions to a level deemedappropriate by the Company based on the factors discussed under the “Allowancefor Loan Losses” section of this report.

 

### **Noninterest Income**

### ** **

*Components of Noninterest Income*

 
| ** **                                            | ** **   | **Three Months Ended  March 31,** | ** **   |
|-------------------------------------------------------|--------------|----------------------------------------|--------------|
| ** **                                            | ** **   | **2009**                               | ** **   | **2008** | ** ** |
| *** ***                                          | *** *** | **(In millions)**                      | *** *** |
| Impairment loss  on investment securities             |         | $                                      | (0.20        | ) | $ | — |   |
| Branch fees                                           |         | 4.79                                   |         | 4.10 |   |
| Net gain on  investment securities available-for-sale |         | 3.52                                   |         | 4.33 |   |
| Ancillary loan  fees                                  |         | 2.23                                   |         | 1.14 |   |
| Letters of  credit fees and commissions               |         | 1.85                                   |         | 2.68 |   |
| Income from life  insurance policies                  |         | 1.08                                   |         | 1.03 |   |
| Net gain on sale  of loans                            |         | 0.01                                   |         | 1.85 |   |
| Other operating  income                               |         | 0.51                                   |         | 0.78 |   |
| Total                                                 |         | $                                      | 13.79        |   | $ | 15.91 |   |

 

Noninterest incomeincludes revenues earned from sources other than interest income.  These sources include service charges andfees on deposit accounts, fees and commissions generated from trade financeactivities and the issuance of letters of credit, ancillary fees on loans, netgains on sales of loans, investment securities available-for-sale, and otherassets, impairment losses on investment securities and other assets, and othernoninterest-related revenues.

 

Noninterestincome decreased 13% to $13.8 million during the three months ended March 31,2009 from $15.9 million for the same quarter in 2008.  The decrease in noninterest income for thequarter ended March 31, 2009, as compared to the same period in 2008, isprimarily attributable to lower net gain on sales of loans andavailable-for-sale securities, partially offset by higher branch fees andancillary loan fees earned during the first quarter of 2009.

 

Includedin noninterest income recorded during the first quarter 2009 is a $200 thousandcredit-related impairment loss on investment securities pursuant to theprovisions of FSP FAS 115-2 and FAS 124-2 which the Company implemented duringthe first quarter of 2009.  There were noimpairment losses recorded on investment securities during the first quarter of2008.

 

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Branchfees, which represent revenues derived from branch operations, increased 17% to$4.8 million in the first quarter of 2009, from $4.1 million for the samequarter in 2008.  The increase inbranch-related fees can be attributed primarily to higher revenues from serviceand transaction charges on deposit accounts.

 

Ancillary loan fees consist of revenues earned from the servicing ofmortgages, fees related to the monitoring and disbursement of construction loanproceeds, and other miscellaneous loan income. Ancillary loan fees increased 95% to $2.2 million during the firstquarter of 2009, compared to $1.1 million recorded during the same period in2008.

 

Letters of creditfees and commissions, which represent revenues from trade finance operations aswell as fees related to the issuance and maintenance of standby letters ofcredit, decreased 31% to $1.9 million during the first three months of 2009, from $2.7 million during the sameperiod in 2008.  The decrease in letters of credit fees andcommissions is primarily due to the decline in the volume of standby letters ofcredit during 2009 relative to the prior year as well as a decrease incommissions generated from trade finance activities due to the downturn in theeconomy.

 

Duringthe first quarter of 2009, net gain on sales of loans decreased to $8 thousand,compared to $1.9 million recorded during the first quarter of 2008.   The net gain on sales of loans recordedduring the first quarter of 2008 is primarily due to sales of single familyloans to Fannie Mae as well as bulk sales of commercial real estate loans tovarious third parties consummated during the period.  We had minimal loan sale activity during thefirst quarter of 2009.

 

**Noninterest Expense**

 

*Components of Noninterest Expense*

 
| ** **                                                               | ** **   | **Three Months Ended  March 31,** | ** **   |
|--------------------------------------------------------------------------|--------------|----------------------------------------|--------------|
| ** **                                                               | ** **   | **2009**                               | ** **   | **2008** | ** ** |
| *** ***                                                             | *** *** | **(In millions)**                      | *** *** |
| Compensation and  employee benefits                                      |         | $                                      | 17.11        |   | $ | 23.27 |   |
| Occupancy and  equipment expense                                         |         | 7.39                                   |         | 7.01 |   |
| Other real  estate owned expense                                         |         | 7.03                                   |         | 0.89 |   |
| Deposit  insurance premiums and regulatory assessments                   |         | 3.33                                   |         | 1.19 |   |
| Legal expense                                                            |         | 1.78                                   |         | 1.90 |   |
| Amortization of  investments in affordable housing partnerships          |         | 1.76                                   |         | 1.72 |   |
| Loan related  expense                                                    |         | 1.44                                   |         | 1.37 |   |
| Data processing                                                          |         | 1.14                                   |         | 1.20 |   |
| Amortization and  impairment writedowns of premiums on deposits acquired |         | 1.13                                   |         | 2.74 |   |
| Deposit-related  expenses                                                |         | 0.90                                   |         | 0.95 |   |
| Other operating  expenses                                                |         | 8.40                                   |         | 10.65 |   |
| Total  noninterest expense                                               |         | $                                      | 51.41        |   | $ | 52.89 |   |
| Efficiency Ratio  (1)                                                    |         | 51.80                                  | %            | 41.93 | % |

 

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(1)  Representsnoninterest expense, excluding the amortization of intangibles, amortizationand impairment writedowns of premiums on deposits acquired, impairmentwritedown on goodwill, and amortization of investments in affordable housingpartnerships, divided by the aggregate of net interest income before provisionfor loan losses and noninterest income, excluding impairment losses oninvestment securities.

 

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Noninterest expense, which is comprised primarily of compensation andemployee benefits, occupancy and other operating expenses decreased 3% to $51.4million during the first quarter of 2009, from $52.9 million for the samequarter in 2008.

 

Compensation and employee benefits decreased 26% to $17.1 million duringthe first quarter of 2009, compared to $23.3 million for the first quarter of2008.  The decrease in compensation andemployee benefit expenses during the first quarter of 2009 is due to the impactof initiatives undertaken by the Company throughout the past year to reduceoverall staffing levels and lower compensation-related incentives and expenses.

 

We recorded OREOexpenses, net of OREO revenues and gains, totaling $7.0 million during the quarterended March 31, 2009, compared with $889 thousand during the same period in 2008. The $7.0   million in total OREOexpenses incurred during the first three months of 2009 is comprised of $1.3million in various operating and maintenance expenses related to our highervolume of OREO properties, $2.7 million in valuation losses, and $3.0 millionin net losses from the sale of 22 OREO properties consummated during the firstquarter of 2009.  As of March 31,2009, total OREO, netamounted to $38.6 million, compared to $14.9 million as of March 31, 2008.

 

Deposit insurancepremiums and regulatory assessments increased 179% to $3.3 million during the quarterended March 31, 2009, compared with $1.2 million during the same period in 2008. The increase in deposit insurance premiums and regulatory assessments isprimarily due to the recent increases in the FDIC deposit assessment rate anddue to the full utilization of the one-time FDIC assessment credit in2008.  Pursuant to the FederalDeposit Insurance Reform Act of 2005, the Bank was eligible to share in a one-timeassessment credit pool of approximately $4.7 billion.  The Bank’s pro rata share of this one-timeassessment credit was approximately $3.4 million, of which $2.8 million wasapplied to reduce deposit insurance assessments in 2007.  The remaining credit of $628 thousand****was fully utilized during the first quarter of 2008.  In addition, the enactment of the EmergencyEconomic Stabilization Act in October 2008 temporarily raised the basiclimit of federal deposit insurance coverage from $100,000 to $250,000 perdepositor and fully insured all non-interest bearing deposit accounts until December 31,2009.  Effective April 1, 2009, theFederal Deposit Insurance Corporation (“FDIC”) issued an interim rule imposinga special emergency assessment on all insured institutions of 20 basispoints.  The special assessment ispayable on September 30, 2009.  Weanticipate the 20 basis point assessment, estimated at $16.5 million, to impactour pretax earnings during the second quarter of 2009.  The interim rule would also permit theFDIC to impose an emergency special assessment after June 30, 2009, of upto 10 basis points if necessary to maintain public confidence in the federaldeposit insurance system.  As a result ofthese regulations, we anticipate our deposit insurance premiums to furtherincrease throughout the remainder of 2009.

 

Amortization expense and impairment losses on premiums on depositsacquired decreased 59% to $1.1 million during the quarter ended March 31,2009, compared with $2.7 million during the same period in 2008.  During the first quarter of 2008, werecognized an $855 thousand impairment loss on deposit premiums initiallyrecorded for the Desert Community Bank acquisition due to higher thananticipated runoffs in certain deposit categories.  Additionally, the amortization expense ondeposit premiums related to the United National Bank and Standard Bankacquisitions decreased during the first quarter of 2009, relative to the firstquarter of 2008.  This is due to lowerrunoff or decay rates incorporated into our core deposit amortization modelafter three years following the consummation of each acquisition.  The projected deposit runoff ratesincorporated into the core deposit amortization models simulate the decay ratesused in the Company’s current asset liability model.  Premiums on acquired deposits are amortizedover their estimated useful lives.

 

Other operatingexpenses include advertising and public relations, telephone and postage,stationery and supplies, bank and item processing charges, insurance expenses,and other professional

 

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fees, andcharitable contributions.  Otheroperating expenses decreased 21% to $8.4 million during the quarterended March 31, 2009, compared with $10.7 million during the same period in2008, primarily due to various cost-cutting measures and initiatives that weundertook throughout 2008 and the first quarter of 2009.

 

Our efficiencyratio increased to 51.80% for the quarter ended March 31, 2009, compared to 41.93% for thecorresponding period in 2008.  The increase in our efficiencyratio during the first quarter of 2009 can be attributed largely to higherdeposit insurance premiums and higher credit cycle related expenses associatedwith OREO/foreclosure transactions as well as lower net interest income beforethe provision for loan losses.

 

**Income Taxes**

 

The income tax benefittotaled $13.5 million for the first quarter of 2009, representing an effectivetax benefit rate of 37.5%.  Incomparison, the provision for income taxes of $2.6 million represented aneffective tax rate of 34.0% for the first quarter of 2008.   The income tax benefit recognized during thefirst quarter of 2009 and 2008 both reflect the utilization of $1.6 million intax credits generated from our investments in affordable housing partnerships.

 

**Operating Segment Results**

 

Wehad previously identified five operating segments for purposes of managementreporting: retail banking, commercial lending, treasury, residential lending,and other.  Our strategic focus has beenshifting and evolving over the last several years which has influenced how ourchief operating decision maker views the Company’s business operations andassesses its economic performance. Specifically, our business focus has culminated in a two-segment corebusiness structure: Retail Banking and Commercial Banking.  A third segment, which is comprised of acombination of our previous operating segments—Treasury and Other, providesbroad 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 in accordance with SFAS No. 131.  The objective of combining certain segmentsunder a new reporting structure was to better align our service structure withour customer base, and to more efficiently manage the complexities andchallenges impacting our current business environment.

 

Theretail banking segment focuses primarily on retail operations through the Bank’sbranch network.  The commercial bankingsegment, which includes commercial real estate, primarily generates commercialloans through the efforts of the commercial lending offices located in the Bank’snorthern and southern California production offices.  Furthermore, the commercial lending segmentalso offers a wide variety of international finance and trade services andproducts.  The former residential lendingsegment has been combined with the retail banking segment due to theconsumer-centric nature of the products and services offered by these twosegments as well as the synergistic relationship between these two units ingenerating consumer mortgage loans.  Theremaining centralized functions, including the former treasury segment, andeliminations of intersegment amounts have been aggregated and included in “Other.”

 

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’s

 

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strategic goal of growing core deposits and originating profitable,good credit quality loans.  Changes toour funds transfer pricing assumptions were made with the intent to promotecore deposit growth and, given our recent credit experience, to better reflectthe current risk profiles of various loan categories within our creditportfolio.  Our transfer pricing assumptionsand methodologies 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 the first quarter of 2008 due to lack of readily availableinformation that is necessary to restate previously reported results.  We have, however, performed a high levelassessment of the impact of these transfer pricing assumption changes to thevarious operating segments.  Based onthis assessment, we determined that the impact of these changes was notsignificant overall, and would have been favorable to the segment pretax profit(loss) results for the retail banking and other segments but unfavorable to thecommercial banking segment. Additionally, the changes in transfer pricing assumptions implementedduring the first quarter of 2009 would not have altered the conclusion of ourgoodwill impairment test performed as of March 31, 2008, had theseassumptions been retroactively implemented during the first quarter of 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.

 

*Retail Banking*

 

The retail bankingsegment reported an $11.7 million pretax loss for the three months ended March 31,2009, compared to a $5.1 million pretax loss for the same quarter in 2008.  The increase in pretax loss for this segmentduring the first quarter of 2009 is comprised of a $2.8 million increase inloan loss provision and a $4.7 million decrease in noninterest income,partially offset by a $777 thousand increase in net interest income and a $543thousand decrease in noninterest expense.

 

The increase in netinterest income during the first quarter of 2009 is attributable to theinterest rate floors placed on new variable loans, which partially offsets thesteep 225 basis point decrease in interest rates since March 2008.  The increase in loan loss provisions for thissegment during the first quarter of 2009, relative to the same period in 2008,was due to increased chargeoff activity, as well as higher levels ofnonperforming and classified assets resulting from the downturn in the realestate housing market.  Loan lossprovisions are also impacted by average loan balances for each reportingsegment.

 

Noninterest income forthis segment decreased 39%, to $7.3 million for the quarter ended March 31,2009, from $11.9 million recorded during the same period in 2008.  The decrease in noninterest income for thefirst quarter of 2009 is primarily due to lower loan fee income resulting froma notable decrease in our loan origination activities and lower net gain onsale of loans, partially offset by an increase in branch-related fees,specifically service and transaction charges on deposit accounts.  Additionally, noninterest income during thefirst quarter of 2008 reflects the $3.3 million gain on sale of investmentsecurities from loans originated by this segment that have been securitized aspart of the Company’s securitization activities.

 

Noninterestexpense for this segment decreased 2% to $30.8 million during the first quarterof 2009, compared with $31.4 million recorded during the first quarter of2008.  The decrease in noninterest

 

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expense for thefirst quarter of 2009 is primarily due to a decrease in compensation andemployee benefits and amortization and impairment losses on premiums ondeposits acquired, partially offset by a higher OREO expenses and FDICinsurance premiums.

 

*Commercial Banking*

 

The commercial bankingsegment reported a pretax loss of $6.9 million during the quarter ended March 31,2009, or a 166% decrease, compared with pretax income of $10.5 million for thesame period in 2008.  The primary driverof the decrease in pretax income for this segment is due to a significantincrease in loan loss provisions resulting from increased chargeoff activity aswell as higher levels of nonperforming and classified assets, partially offsetby an increase in net interest income. Loan loss provisions increased 85% to $43.9 million during the firstquarter of 2009, compared with $23.7 million for the same period in 2008.

 

Net interest income forthis segment increased 12% to $47.9 million during the quarter ended March 31,2009, compared to $42.8 million for the same period in 2008.  The increase in net interest income 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.

 

Noninterest income forthis segment decreased 33% to $5.3 million during the first quarter of 2009,compared with $7.9 million recorded in the same quarter of 2008.  The decrease in noninterest income is primarilydue to a decrease in net gain on sale of loans as well as a decrease in lettersof credit fees and commissions driven by a decline in the volume of standbyletters of credit and commissions generated from trade finance activities dueto the downturn in the economy.

 

Noninterest expense forthis segment slightly decreased to $13.1 million during the first quarter of2009, compared with $14.0 million recorded during the same quarter in2008.  The decrease in noninterestexpense is due to a decrease in compensation and employee benefits and legalexpenses for this segment, partially offset by an increase in OREO expenses.

 

*Other*

 

This segment reported apretax loss of $17.3 million during the quarter ended March 31, 2009,compared with a pretax income of $2.2 million recorded in the same quarter of2008.  The increase in the pretax loss isprimarily due to a $25.8 million increase in net interest expense, partiallyoffset by a $5.2 million increase in noninterest income and an $87 thousanddecrease in noninterest expense.

 

Net interest expense forthis segment increased to $22.7 million during the quarter ended March 31,2009, compared to net interest income of $3.1 million recorded in the samequarter of 2008.  Since this segment nowincludes the treasury function, which is responsible for liquidity and interestrate risk management, it bears the cost of adverse movements in interest ratesaffecting our net interest margin and supports the retail and commercialbanking segments through funds transfer pricing.

 

Noninterest income forthis segment increased 133% to $1.3 million, compared with $3.9 millionnoninterest loss recorded in the same quarter of 2008.  The increase in noninterest income during thefirst quarter of 2009 is due to higher net gain on sale of investmentsecurities allocated to the treasury division, partially offset by the $200thousand credit-related impairment loss recorded on investment securitiesduring the first quarter of 2009.

 

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Noninterestexpense for this segment slightly decreased 1% to $7.5 million, compared with$7.6 million recorded during the same quarter in 2008.

 

### **Balance Sheet Analysis**

### ** **

Total assetsincreased $141.7 million, or 1%, to $12.56 billion as of March 31,2009.  The increase is comprisedpredominantly of increases in short-term investments amounting to$100.8 million and held-to-maturity investment securities totaling $612.5million, partiallyoffset by decreases in cash and cash equivalents totaling $337.8 million, netloans receivable amounting to $203.5 million and available-for-sale investmentsecurities totaling $45.8 million.  The netincrease in total assets was funded by deposit growth of $312.1 million, partiallyoffset by decreases in federal funds purchased of $28.0 million and FHLBadvances of $120.0 million.

 

**SFAS 157, *Fair Value Measurement*,and SFAS 159, *Fair Value Option***

 

SFAS157 and SFAS 159 became effective on January 1, 2008.  We adopted SFAS 157 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-recurring basis.  For the Company, this includes the investmentsecurities available-for-sale portfolio, equity swap agreements, derivativespayable, mortgage servicing assets and impaired loans.  The adoption of SFAS 157 did not have anyimpact on our financial condition, results of operations, or cash flows.

 

Weadopted FSP SFAS 157-2 effective January 1, 2009.  FSP SFAS 157-2 provided for a one-yeardeferral of the implementation of SFAS 157 for other nonfinanical assets andliabilities, effective for fiscal years beginning after November 15,2008.  As a result of adopting FSP SFAS157-2, we are now providing fair value disclosures related to our OREOproperties.  See Note 3 to our condensedconsolidated financial statements presented elsewhere in this report.

 

Wedid not elect to adopt the fair value option as permitted under SFAS 159, butto continue recording the financial instruments in accordance with currentpractice.

 

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

** **

Wepurchase securities under resale agreements (“resale agreements”) with termsthat range from one day to several years. Total resale agreements remained at $50.0 million as of March 31,2009 and December 31, 2008, representing one resale agreement with an original term of fifteenyears.  The interest rate is initiallyfixed for the first two years and thereafter becomes floating.  There is no interest payment on thisagreement if certain swap yield curves are inverted.  The collateral for this resale agreementconsists of U.S. Government agency and/or U.S. Government sponsored enterprisedebt and mortgage-backed securities held in safekeeping by a third partycustodian.

 

Purchases of securities under resale agreements are overcollateralizedto ensure against unfavorable market price movements.  We monitor the market value of the underlyingsecurities which collateralize the related receivable on resale agreements,including accrued interest.  In the eventthat the fair market value of the securities decreases below the carryingamount of the related repurchase agreement, our counterparty is required todesignate an equivalent value of additional securities.  The counterparty to these agreements arenationally recognized investment banking firms that meet credit eligibilitycriteria and with whom a master repurchase agreement has been duly executed.

 

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**Investment Securities**

 

Income frominvesting activities provides a significant portion of our total income.  We aim to maintain an investment portfoliowith an adequate mix of fixed-rate and adjustable-rate securities withrelatively short maturities 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 debt securities,residual securities, and U.S. Government sponsored enterprise equitysecurities.  We classify certaininvestment securities as held-to-maturity, and accordingly, these securitiesare recorded based on their amortized cost. We also classify certain investments as available-for-sale, andaccordingly, these securities are carried at their estimated fair values withthe corresponding changes in fair values recorded in accumulated othercomprehensive income, as a component of stockholders’ equity.

 

Investment securitiesheld-to-maturity totaled $734.8 million and $122.3 million at March 31,2009 and December 31, 2008, respectively, representing U.S. Governmentagency and U.S. Government sponsored enterprise debt securities, municipalsecurities, corporate debt securities and private label mortgagebacked-securities purchased during the first quarter of 2009 and fourth quarterof 2008.  The increase in investmentsecurities was funded by deposit growth and capital raised during 2008.

 

Total investment securitiesavailable-for-sale decreased 2% to $1.99 billion as of March 31, 2009,compared with $2.04 billion at December 31, 2008.  Total repayments/maturities and proceeds fromsales of available-for-sale securities amounted to $611.0 million and $185.8million, respectively, during the first quarter of 2009.  We recorded net gains totaling $3.5 millionand $4.3 million on sales of available-for-sale securities during the firstquarters of 2009 and 2008, respectively.

 

Aportion of the proceeds from repayments, maturities, sales, and redemptions ofinvestment securities were applied towards additional investment securitiespurchases totaling $1.33 billion.

 

AtMarch 31, 2009, investment securities held to maturity with an aggregatepar value of $614.9 million and available-for-sale securities with an aggregatepar value of $1.22 billion were pledged to secure public deposits, repurchaseagreements, the FRB discount window, and other purposes required or permittedby law.

 

We perform regularimpairment analyses on our portfolio of investment securities.  If we determine that a decline in fair valueis other-than-temporary, a credit-related impairment loss is recognized incurrent earnings and non-credit-related impairment is charged to othercomprehensive 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 on holding thesecurities until the fair values recover.

 

Thefair values of the investment securities are generally determined by referenceto the average of at least two quoted market prices obtained from independentexternal brokers or prices obtained from independent external pricing serviceproviders who have experience in valuing these securities.  We perform a monthly analysis on the brokerquotes received from third parties to ensure that the prices represent areasonable estimate of the fair value. Our procedures include, but are not limited to, initial and ongoingreview of third party pricing methodologies, review of pricing trends, and monitoringof trading volumes.  We ensure thatprices received from independent brokers represent a reasonable estimate offair value through the use of internal and external cash flow models developedbased on spreads, and when available, market indices. As a result of thisanalysis, if we determine that there is a

 

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moreappropriate fair value based upon the available market data, the price receivedfrom the third party is adjusted accordingly.

 

Prices from third party pricing services are oftenunavailable for securities that are rarely traded or are traded only inprivately 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.

 

Asa result of the global financial crisis and illiquidity in the U.S. markets, webelieve that the current broker prices obtained on the private labelmortgage-backed securities and pooled trust preferred securities are based onforced liquidation or distressed sale values in very inactive markets that arenot representative of the economic value of these securities.  The fair values of private labelmortgage-backed securities and pooled trust preferred securities havetraditionally been based on the average of at least two quoted market pricesobtained from independent external brokers since broker quotes in an activemarket are given the highest priority under SFAS 157.  However, in light of these circumstances, wemodified our approach in determining the fair values of these securities.  Each of these securities will be individuallyexamined for the appropriate valuation methodology based on a discounted cashflow approach.  In calculating the fairvalue derived 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.

* *

*Corporate Debt Securities(Held-to-Maturity)*

* *

Asof March 31, 2009, the fair value of our held-to-maturity corporate debtsecurities totaled $394.9 million, of which $235.3 million were in anunrealized loss position for less than 12 months.  Total gross unrealized losses on thesesecurities amounted to $10.6 million, or 3% of the aggregate amortized costbasis of held-to-maturity corporate debt securities.  Thesesecurities mature within 5 years or less and have an investment grade rating ofBBB or better as of March 31, 2009. Due to their relatively short maturity dates, 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 March 31, 2009.

 

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

* *

Themajority of unrealized losses in the available-for-sale portfolio at March 31,2009 are related to pooled trust preferred debt securities.  As of March 31, 2009, we had $23.2million in pooled trust preferred debt securities available-for-sale,representing 1% of total investment securities available-for-saleportfolio.  In April 2009, all ofour pooled trust preferred securities were downgraded.  Specifically, one pooled trust preferredsecurity was downgraded to an investment grade rating of BBB, two pooled trustpreferred securities were downgraded to a non-investment grade rating of CC,and ten pooled trust preferred securities were downgraded to a non-investmentgrade rating of C.  As of March 31,2009, these debt instruments had gross unrealized losses amounting to $97.7million, or 81% of the total amortized cost basis of these securities,comprised of $83.8 million and $804 thousand that are non-investment grade andinvestment grade, respectively.  Includedin the $97.7 million in gross unrealized losses, is the reclassification of$14.0 million, or $8.1 million on a net of tax basis, in previously recognizednoncredit-related impairment losses from the opening balance of retainedearnings to other comprehensive income. This reclassification was recorded as of March 31, 2009 pursuant tothe provisions of FSP FAS 115-2 and FAS 124-2. Additionally, total gross unrealized losses on pooled trust preferredsecurities as of March 31, 2009 also include $13.2 million, or $7.6million on a net of tax basis, in noncredit-related impairment losses recordedduring the first quarter of 2009 pursuant to the provisions of FSP FAS 115-2and FAS 124-2.

 

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Weattribute these unrealized losses primarily to the current absence of liquidityin the credit markets and not due to the deterioration in credit quality.  Almost all of our pooled trust preferredsecurities have underlying collateral issued by banks and insurance companies**. **Based on our cashflow analysis as of March 31, 2009, the majority of these pooled trustpreferred securities are overcollateralized and have subordination structuresthat we believe will afford sufficient principal and interest protection.  We performed a cash flow sensitivity analysisto estimate the maximum collateral that could default and still provide sufficientcash flows that would enable us to recover our cost.  With the exception of one C-rated pooledtrust preferred security that experienced a substantial increase in deferralsand defaults in the pool, we have determined, based on the results of our sensitivityanalysis, that the cushion, or percent of additional collateral that can bedeferred on the remaining securities without causing the realizable value to beless than our recorded investment, ranged from 2% to 45%.

 

Duringthe first quarter of 2009, as a result of our cash flow analysis, we determinedthat one C-rated trust preferred security that experienced a substantialincrease in deferring and defaulting securities in the pool will not attain a100% overcollateralization ratio and that the excess cash flows will not besufficient to pay down the outstanding amounts due in the future.  Since we do not plan to sell the security andit is not more likely than not that we will be required to sell the securitybefore the recovery of our amortized cost basis in accordance with FSP FAS 115-2and FAS 124-2, we bifurcated the impairment on this security between thecredit-related component and the component related to all other factors (i.e.noncredit-related).  In applying themethodology described in SFAS 114, **Accountingby Creditors for Impairment of a Loan—an amendment of FASB Statements No. 5and 15****, we determined the amountof credit loss by discounting the expected future cash flows by the effectiveyield of the security, and recorded an impairment loss of $13.4 million, ofwhich $200 thousand was a pre-tax credit loss recorded through earnings.  The remaining $13.2 million, or $7.6 millionon a net of tax basis, in noncredit-related impairment** loss wasrecorded in other comprehensive income as of March 31, 2009.

 

Inaddition to the cash flow sensitivity analysis, we also performed a defaultstress test analysis on all bank issuers of the underlying pooled trustpreferred securities to identify issuers that are currently exhibiting signs ofweakness or may be susceptible to potential problems that could lead to thepossibility of future default or deferrals on these securities.  The default stress test includes an analysisof each issuer’s capital ratios, earnings levels, credit quality ratios, andliquidity ratios.  We will continue tomonitor the solvency, liquidity, and credit risk profiles of these issuers on aquarterly basis.  We believe that therecent bailout program passed by the U.S. government to provide for aninjection of capital reduces the risk of default by bank issuers and increasesthe probability that the liquidity in this market and the prices of oursecurities will improve in the future.

 

Basedon the results of our cash flow sensitivity and default stress test analyses,we believe that we will be able to collect all amounts due on thesesecurities.  Additionally, we do notintend to sell these securities and it is not more likely than not that we willbe required to sell these securities before recovery of our amortized costbases.  As such, we do not deem thesesecurities, with the exception of the C-rated security discussed above, to beother-than-temporarily impaired as of March 31, 2009.

 

During2008 and 2007, we recorded $13.6 million and $405 thousand, respectively, innon-credit related impairment losses on three pooled trust preferred securitiesdue to rating downgrades caused by increases in market spreads, concerns regarding thehousing market, and lack of liquidity in the markets.  None of these securities have experienced anycredit-related losses for which OTTI was previously recorded.  As previously mentioned, upon theimplementation of FSP FAS 115-2 and FAS 124, we reclassified thecombined $14.0 million, or $8.1 million on a net of tax basis, innoncredit-related OTTI impairment losses recognized during 2008 and 2007through other comprehensive income as of March 31, 2009.

 

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

* *

As of March 31,2009, the aggregate fair value of our AAA-rated non-agency held-to-maturitymortgage-backed securities amounted to $101.9 million, of which $69.0 million were in anunrealized loss position for less than 12 months.  Thesesecurities are collateralized by single family loans and secured by the firstlien on these residential properties.  Total grossunrealized losses on these securities amounted to $9.3 million, or 8% of theaggregate amortized cost basis of held-to-maturity mortgage-backed securities. The decline in fair values of these securities is due to widening marketspreads, concerns regarding the downturn in the housing market, and lack ofliquidity in the market.  However, thesesecurities have strong credit support, low loan-to-values, low delinquency, andlow OREO ratios.  We do notintend to sell these securities and it is not more likely than not that theCompany will be required to sell these securities before recovery of theiramortized cost bases.  As such, we do notdeem these securities to be other-than-temporarily impaired as of March 31,2009.

 

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

* *

As of March 31,2009, our portfolio of available-for-sale mortgage-backed securities had anaggregate fair value of $557.8 million, which includes $528.9 million inAAA-rated and AA-rated private label securities retained in connection with ourloan securitization activities. Mortgage-backed securities represent 28% of the total available-for-saleinvestment portfolio as of March 31, 2009. Our entire portfolio of private label mortgage-backed securities hasbeen in an unrealized loss position for more than twelve months as of March 31,2009.  Gross unrealized losses on privatelabel mortgage-backed securities totaled $71.2 million, or 12% of the aggregateamortized cost basis of these securities.  These unrealized losses are caused by lack ofliquidity and widening market spreads resulting from instability in the residential realestate and credit markets.  Theunderlying loans are not subprime in nature and were originated by the Bank inaccordance with our customary underwriting standards.  The securities are supported byovercollateralization as of March 31, 2009.  Additionally, these securities are insured bya monoline insurance provider who was recently rated as Aa2 and A+ by two majorrating agencies.  We have experienced nocredit related losses from these securities and only 0.14% of the underlyingloan collateral has been charged off.  Wealso have one BB-rated mortgage-backed security with a fair value of $11.3million as of March 31, 2009.  Thissecurity has been in an unrealized loss position for twelve months or longer,with the gross unrealized loss amounting to $2.3 million, or 17% of itsamortized cost basis as of March 31, 2009.  This security is supported by overcollateralization asof March 31, 2009.  Under EITF99-20, *Recognition of Interest Income and Impairment onPurchased Beneficial Interests and Beneficial Interests That Continue to BeHeld by a Transferor in Securitized Financial Assets,*we determinedthat there were no adverse changes in cash flows related to our portfolio ofavailable-for-sale investment and non-investment grade mortgage backedsecurities.  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 March 31, 2009.

 

*Government-SponsoredEquity Preferred Stock*

* *

InSeptember 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 BBB- to C reflecting thecessation of dividend payments on these securities.  These securities are non-cumulative perpetualpreferred stock in which unpaid dividends do not accumulate.  The purchase agreement between the U.S.Treasury and these government-sponsored entities contains a covenantprohibiting 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

 

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securities in 2008.  As of March 31, 2009, the fair value ofthese preferred stock securities was $995 thousand.  Gross unrealized losses on these securities,all of which is less than twelve months in duration, amounted to $2.3 millionas of March 31, 2009, or 70% of the aggregate amortized cost basis ofthese securities.  The value of thesepreferred securities have been very volatile and in the first quarter of 2009,these securities have traded above their carrying values.  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 our amortized cost bases.  As such, we do not deem these remainingsecurities to be other-than-temporarily impaired as of March 31, 2009.

 

*Residual Securities*

* *

Weretain residual securities in securitized mortgage loans in connection withcertain of our securitization activities. The fair value of residual securities is subject to credit, prepayment,and interest rate risk on the underlying mortgage loans.  Fair value is estimated based on a discountedcash flow analysis.  These cash flows areprojected over the lives of the receivables using prepayment speed, expectedcredit losses, and the forward interest rate environment on the residualsecurities.  As of March 31, 2009,the aggregate fair value of residual securities totaling $53.9 million is based on a weightedaverage remaining life of 8.02years, a weighted average projected prepayment rate of 19%, a weighted average expected credit loss rate of 0.06%, and a weighted average discountrate of 15%.  At December 31,2008, the aggregate fair value of residual securities amounting to $50.1million is based on a weighted average remaining life of 6.64 years, a weightedaverage projected prepayment rate of 21%, a weighted average expected creditloss rate of 0.07%, and a weighted average discount rate of 15%.

 

Wehave seventeen individual securities that have been in a continuous unrealizedloss position for twelve months or longer as of March 31, 2009.  These securities are comprised of twelvecorporate debt securities with a total fair value of $23.2 million and fivemortgage-backed securities with a total fair value of $557.8 million.  As of March 31, 2009, there were also115 securities that have been in a continuous unrealized loss position for lessthan twelve months.  The unrealizedlosses on these securities are primarily attributed to changes in interestrates as well as the liquidity crisis that has impacted all financialindustries.  The issuers of thesesecurities have not, to our knowledge, established any cause for default onthese securities.  These securities havefluctuated in value since their purchase dates as market interest rates havefluctuated.  We do not intend to sell thesesecurities and it is not more likely than not that we will be required to sellthe investments before recovery of our amortized cost bases.  As such, we do not deem these securities tobe other-than-temporarily impaired as of March 31, 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 March 31, 2009 and December 31,2008:

 

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| ** **                                                                                              | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------------|------------|
| * *                                                                                                | * *   | **(In  thousands)** | * *   |
| **As of  March 31, 2009**                                                                          |       |                |       |                         |       |                          |       |                      |       |
| **Held-to-maturity**                                                                                    |       |                |       |                         |       |                          |       |                      |       |
| U.S. Government  agency securities and U.S. Government sponsored enterprise debt securities             |       | $                   | 190,345    |                         | $          | 207                           |       | $                         | (795       | ) | $ | 189,757 |   |
| Municipal  securities                                                                                   |       | 31,065              |       | 489                          |       | (445                          | )          | 31,109                    |       |
| Corporate debt  securities                                                                              |       | 402,483             |       | 3,050                        |       | (10,625                       | )          | 394,908                   |       |
| Other  mortgage-backed securities                                                                       |       | 110,906             |       | 277                          |       | (9,291                        | )          | 101,892                   |       |
| **Total  investment securities held-to-maturity**                                                       |       | $                   | 734,799    |                         | $          | 4,023                         |       | $                         | (21,156    | ) | $ | 717,666 |   |
|                                                                                                    |       |                |       |                         |       |                          |       |                      |       |
| **Available-for-sale**                                                                                  |       |                |       |                         |       |                          |       |                      |       |
| U.S. Treasury  securities                                                                               |       | $                   | 2,509      |                         | $          | 4                             |       | $                         | —     |   | $ | 2,513 |   |
| U.S. Government  agency securities and U.S. Government sponsored enterprise debt securities             |       | 467,439             |       | 6,299                        |       | (404                          | )          | 473,334                   |       |
| U.S. Government  agency securities and U.S. Government sponsored enterprise mortgage-backed  securities |       | 865,499             |       | 9,501                        |       | (1,380                        | )          | 873,620                   |       |
| Other  mortgage-backed securities                                                                       |       |                |       |                         |       |                          |       |                      |       |
| Investment grade                                                                                        |       | 621,450             |       | —                       |       | (74,930                       | )          | 546,520                   |       |
| Non-investment  grade                                                                                   |       | 13,661              |       | —                       |       | (2,336                        | )          | 11,325                    |       |
| Corporate debt  securities                                                                              |       |                |       |                         |       |                          |       |                      |       |
| Investment grade                                                                                        |       | 14,316              |       | 35                           |       | (6,693                        | )          | 7,658                     |       |
| Non-investment  grade (1)(2)                                                                            |       | 118,863             |       | —                       |       | (96,933                       | )          | 21,930                    |       |
| U.S. Government  sponsored enterprise equity securities                                                 |       | 3,340               |       |                         |       | (2,345                        | )          | 995                       |       |
| Residual  securities                                                                                    |       | 23,031              |       | 30,897                       |       | —                        |       | 53,928                    |       |
| Other securities                                                                                        |       | 2,578               |       | 2                            |       | —                        |       | 2,580                     |       |
| **Total  investment securities available-for-sale**                                                     |       | $                   | 2,132,686  |                         | $          | 46,738                        |       | $                         | (185,021   | ) | $ | 1,994,403 |   |
|                                                                                                    |       |                |       |                         |       |                          |       |                      |       |
| **Total  investment securities**                                                                        |       | $                   | 2,867,485  |                         | $          | 50,761                        |       | $                         | (206,177   | ) | $ | 2,712,069 |   |
|                                                                                                    |       |                |       |                         |       |                          |       |                      |       |
| **As of  December 31, 2008**                                                                       |       |                |       |                         |       |                          |       |                      |       |
| **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                                                 |       | 3,340               |       | —                       |       | (2,156                        | )          | 1,184                     |       |
| Residual  securities                                                                                    |       | 25,043              |       | 25,019                       |       | —                        |       | 50,062                    |       |
| Other securities                                                                                        |       | 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 Companyrecorded an OTTI charge of $13.6 million for corporate debt securities, $55.3million for U.S. Government sponsored enterprise equity securities, and $4.3million for Other securities.  Uponadoption of FSP FAS 115-2 and FAS 124-2, the Company reclassified the noncreditportion of previously recognized OTTI for pooled trust preferred securitiestotaling $14.0 million, on a pre-tax basis, from the opening balance ofretained earnings to other comprehensive income as of March 31, 2009.  Additionally, upon implementation of thisFSP, the Company recorded $200 thousand, on a pre-tax basis, of the creditportion of OTTI through earnings and $7.6 million, net of tax, of thenon-credit portion of OTTI for pooled trust preferred securities in other comprehensiveincome as of March 31, 2009.

(2) Includes pooled trust preferred securitieswith a fair value of $14.9 million that were downgraded from investment gradeto non-investment grade in April 2009.

 

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The followingtable sets forth certain information regarding the amortized cost of ourinvestment securities held-to-maturity and fair values of our investmentsecurities available-for-sale, as well as the weighted average yields, andcontractual maturity distribution, excluding periodic principal payments, ofour investment securities held-to-maturity and available-for-sale portfolio at March 31,2009.  Securities with no stated maturitydates, such as equity securities, are included in the “indeterminate maturity”category.

 
| ** **                                                                                  | ** **   | **Within  One Year**        | ** **   | **After  One  But Within  Five Years** | ** ** | **After  Five  But Within  Ten Years** | ** ** | **After  Ten Years** | ** ** | **Indeterminate  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            |         | $                           | 125,000      |                                   | 4.30       | %                                      | $          | —               |       | —                      |       | $         | —     |   | — |   | $ | 65,345 |   | 6.13 | % | $ | — |   | — |   | $ | 190,345 |   | 4.93 | % |
| Municipal  securities                                                                       |         | —                      |         | —                                 |       | 13,713                                 |       | 5.63                 | %          | 12,569                      |       | 6.63      | %          | 4,783 |   | 6.74 | % | — |   | — |   | 31,065 |   | 6.21 | % |
| Corporate debt  securities                                                                  |         | 82,794                      |         | 6.03                                   | %          | 303,641                                |       | 5.88                 | %          | 16,048                      |       | 4.96      | %          | — |   | — |   | — |   | — |   | 402,483 |   | 5.88 | % |
| Other  mortgage-backed securities                                                           |         | —                      |         | —                                 |       | —                                 |       | —               |       | 27,031                      |       | 5.33      | %          | 83,875 |   | 6.28 | % | — |   | — |   | 110,906 |   | 6.05 | % |
| Total investment  securities held-to-maturity                                               |         | $                           | 207,794      |                                   | 4.99       | %                                      | $          | 317,354              |       | 5.87                        | %          | $         | 55,648     |   | 5.52 | % | $ | 154,003 |   | 6.23 | % | $ | — |   | 0.00 | % | $ | 734,799 |   | 5.67 | % |
|                                                                                        |         |                        |         |                                   |       |                                   |       |                 |       |                        |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale                                                                          |         |                        |         |                                   |       |                                   |       |                 |       |                        |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasury  securities                                                                   |         | $                           | 2,513        |                                   | 0.64       | %                                      | $          | —               |       | —                      |       | $         | —     |   | — |   | $ | — |   | 0.00 | % | $ | — |   | — |   | $ | 2,513 |   | 0.64 | % |
| U.S. Government  agency and U.S. Government sponsored enterprise debt securities            |         | 25,235                      |         | 5.56                                   | %          | 135,508                                |       | 3.88                 | %          | 148,667                     |       | 4.09      | %          | 163,924 |   | 5.05 | % | — |   | — |   | 473,334 |   | 4.44 | % |
| U.S. Government  agency and U.S. Government sponsored enterprise mortgage-backed securities |         | 2,899                       |         | 9.49                                   | %          | 2,397                                  |       | 6.77                 | %          | 51,157                      |       | 4.67      | %          | 817,167 |   | 5.17 | % | — |   | — |   | 873,620 |   | 5.15 | % |
| Other mortgage-backed  securities                                                           |         |                        |         |                                   |       |                                   |       |                 |       |                        |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment grade                                                                            |         | —                      |         | —                                 |       | —                                 |       | —               |       | —                      |       | —    |       | 546,520 |   | 0.94 | % | — |   | — |   | 546,520 |   | 0.94 | % |
| Non-investment  grade                                                                       |         | —                      |         | —                                 |       | —                                 |       | —               |       | —                      |       | —    |       | 11,325 |   | 2.06 | % | — |   | — |   | 11,325 |   | 2.06 | % |
| Corporate debt  securities                                                                  |         |                        |         |                                   |       |                                   |       |                 |       |                        |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment grade                                                                            |         | —                      |         | —                                 |       | 2,050                                  |       | 4.85                 | %          | —                      |       | —    |       | 5,608 |   | 1.88 | % | — |   | — |   | 7,658 |   | 2.30 | % |
| Non-investment  grade                                                                       |         | —                      |         | —                                 |       | —                                 |       | —               |       | —                      |       | —    |       | 21,930 |   | 4.21 | % | — |   | — |   | 21,930 |   | 4.21 | % |
| U.S. Government  sponsored enterprise equity securities                                     |         | —                      |         | —                                 |       | —                                 |       | —               |       | —                      |       | —    |       | — |   | — |   | 995 |   | 0.00 | % | 995 |   | 0.00 | % |
| Residual  securities                                                                        |         | —                      |         | —                                 |       | —                                 |       | —               |       | —                      |       | —    |       | 53,928 |   | 48.41 | % | — |   | — |   | 53,928 |   | 48.41 | % |
| Other securities                                                                            |         | 2,580                       |         | 1.29                                   | %          | —                                 |       | —               |       | —                      |       | —    |       | — |   | — |   | — |   | — |   | 2,580 |   | 1.29 | % |
| Total investment  securities available-for-sale                                             |         | $                           | 33,227       |                                   | 5.06       | %                                      | $          | 139,955              |       | 3.94                        | %          | $         | 199,824    |   | 4.24 | % | $ | 1,620,402 |   | 4.12 | % | $ | 995 |   | 0.00 | % | $ | 1,994,403 |   | 4.13 | % |
|                                                                                        |         |                        |         |                                   |       |                                   |       |                 |       |                        |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total investment  securities                                                                |         | $                           | 241,021      |                                   | 5.00       | %                                      | $          | 457,309              |       | 5.28                        | %          | $         | 255,472    |   | 4.52 | % | $ | 1,774,405 |   | 4.30 | % | $ | 995 |   | 0.00 | % | $ | 2,729,202 |   | 4.52 | % |

 

**Loans**

 

Weoffer a broad range of products designed to meet the credit needs of ourborrowers.  Our lending activitiesconsist of residential single family loans, residential multifamily loans,commercial real estate loans, land loans, construction loans, commercialbusiness loans, trade finance loans, and consumer loans.  Net loans receivable decreased $203.5million, or 3%, to $7.87 billion at March 31, 2009.

 

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

 

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| ** **                                  | ** **   | **March 31, 2009**    | ** **   | **December 31, 2008** | ** ** |
|---------------------------------------------|--------------|----------------------------|--------------|----------------------------|------------|
| ** **                                  | ** **   | **Amount**                 | ** **   | **Percent**                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| *** ***                                | *** *** | **(Dollars in thousands)** | *** *** |
| Real estate  loans:                         |         |                       |         |                       |       |   |   |   |   |
| Residential,  single family                 |         | $                          | 517,844      |                       | 6.4        | % | $ | 491,315 |   | 6.0 | % |
| Residential,  multifamily                   |         | 689,728                    |         | 8.6                        | %          | 677,989 |   | 8.2 | % |
| Commercial real  estate                     |         | 3,510,749                  |         | 43.5                       | %          | 3,472,000 |   | 42.1 | % |
| Land                                        |         | 544,892                    |         | 6.8                        | %          | 576,564 |   | 7.0 | % |
| Construction                                |         | 1,154,782                  |         | 14.3                       | %          | 1,260,724 |   | 15.3 | % |
| Total real  estate loans                    |         | 6,417,995                  |         | 79.6                       | %          | 6,478,592 |   | 78.6 | % |
|                                        |         |                       |         |                       |       |   |   |   |   |
| Other loans:                                |         |                       |         |                       |       |   |   |   |   |
| Commercial  business                        |         | 1,128,903                  |         | 14.0                       | %          | 1,210,260 |   | 14.6 | % |
| Trade finance                               |         | 292,816                    |         | 3.6                        | %          | 343,959 |   | 4.2 | % |
| Automobile                                  |         | 8,921                      |         | 0.1                        | %          | 9,870 |   | 0.1 | % |
| Other consumer                              |         | 215,680                    |         | 2.7                        | %          | 206,772 |   | 2.5 | % |
| Total other  loans                          |         | 1,646,320                  |         | 20.4                       | %          | 1,770,861 |   | 21.4 | % |
| Total gross  loans                          |         | 8,064,315                  |         | 100.0                      | %          | 8,249,453 |   | 100.0 | % |
|                                        |         |                       |         |                       |       |   |   |   |   |
| Unearned fees,  premiums and discounts, net |         | (2,940                     | )            |                       |       | (2,049 | ) |   |   |
| Allowance for  loan losses                  |         | (195,450                   | )            |                       |       | (178,027 | ) |   |   |
| Loan receivable,  net                       |         | $                          | 7,865,925    |                       |       |   | $ | 8,069,377 |   |   |   |

 

### **Nonperforming Assets**

### ** **

Nonperforming assets are comprised of nonaccrualloans, loans past due 90 days or more but not on nonaccrual, restructured loansand other real estate owned, net.  Nonperformingassets totaled $303.8  million or 2.42% of total assets at March 31,2009 and $263.9 million or 2.12% of total assets at December 31,2008.  Nonaccrual loans amounted to$248.0million at March 31,2009, compared with $214.6 million at year-end 2008.  Loans totaling $177.3million were placed onnonaccrual status during the first quarter of 2009.  As a part of our comprehensive loan review,loans totaling $69.3million whichwere not 90 days past due as of March 31, 2009, were classified as nonaccrualloans due to concerns regarding collateral values and futurecollectibility.  Additions to nonaccrualloans were offset by $39.5million in net chargeoffs, $18.5 million in payoffs and principalpaydowns, $29.9 million in loans that were transferred to other real estateowned, and $56.0million inloans brought current.  The additions tononaccrual loans during the first quarter of 2009 were comprised of $13.8million in single family loans, $11.8 million in multifamily loans, $61.2million in commercial real estate loans, $35.0 million in land loans, $36.5million in construction loans, $18.4 million in commercial business loansincluding SBA loans, $177 thousand in trade finance loans, and $300 thousand inautomobile and other consumer loans.

 

Loans that were past due 90days or more were on nonaccrual status as of March 31, 2009 and December 31,2008.

 

We had $17.2million and $11.0 million in restructured loans as of March 31,2009 and December 31,2008, respectively.  As of March 31,2009, restructuredloans were comprised of $2.8 million in single family loans, $4.5 million inmultifamily loans, $3.3 million in commercial real estate loans, and $6.6million in commercial business loans.

 

Other real estateowned includes properties acquired through foreclosure or through full orpartial satisfaction of loans.  We had 57OREO properties as of March 31, 2009 with a combined aggregate carrying value of $38.6million. The majority of these properties were related to our land and singlefamily residential loan portfolios. Approximately 68% of OREO properties as of March 31, 2009

 

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were located in the Greater Los Angeles area and Inland Empire regionof Southern California.  As of December 31,2008, we had 41 OREO properties with a carrying value of $38.3 million.  During the first quarter of 2009, weforeclosed on 35 properties with an aggregate carrying value of $31.1 millionas of the foreclosure date.  During thefirst quarter of 2009, we sold 22 OREO properties with a carrying value of$24.3 million resulting in a total net loss on sale of $3.0 million.  There were no OREO sales during the firstquarter of 2008.

 

The following table setsforth information regarding nonaccrual loans, loans past due 90 days or morebut not on nonaccrual, restructured loans and other real estate owned as of thedates indicated:

 
| ** **                                            | ** **   | **March 31,  2009**   | ** **   | **December 31,  2008** | ** ** |
|-------------------------------------------------------|--------------|----------------------------|--------------|-----------------------------|------------|
| *** ***                                          | *** *** | **(Dollars in thousands)** | *** *** |
| ** **                                            | ** **   | ** **                 | ** **   | ** **                  | ** ** |
| Nonaccrual loans                                      |         | $                          | 248,015      |                        | $          | 214,607 |   |
| Loans past due  90 days or more but not on nonaccrual |         | —                     |         | —                      |       |
| Total  nonperforming loans                            |         | 248,015                    |         | 214,607                     |       |
|                                                  |         |                       |         |                        |       |
| Restructured  loans                                   |         | 17,146                     |         | 10,992                      |       |
| Other real  estate owned, net                         |         | 38,634                     |         | 38,302                      |       |
| Total  nonperforming assets                           |         | $                          | 303,795      |                        | $          | 263,901 |   |
|                                                  |         |                       |         |                        |       |
| Total  nonperforming assets to total assets           |         | 2.42                       | %            | 2.12                        | %          |
| Allowance for  loan losses to nonperforming loans     |         | 78.81                      | %            | 82.95                       | %          |
| Nonperforming  loans to total gross loans             |         | 3.08                       | %            | 2.60                        | %          |

 

We evaluate loanimpairment according to the provisions of SFAS No. 114.  Under SFAS No. 114, loans are consideredimpaired when it is probable that we will be unable to collect all amounts dueaccording to the contractual terms of the loan agreement, including scheduledinterest payments.  Impaired loans aremeasured based on the present value of expected future cash flows discounted atthe loan’s effective interest rate or, as an expedient, at the loan’sobservable market price or the fair value of the collateral if the loan iscollateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investmentin the loan, the deficiency will be charged off against the allowance for loanlosses or, alternatively, a specific allocation will be established.  Also, in accordance with SFAS No. 114,loans that are considered impaired are specifically excluded from the quarterlymigration analysis when determining the amount of the allowance for loan andlease losses required for the period.

 

At March 31,2009, our totalrecorded investment in impaired loans was $267.1million, compared with $232.1 million at December 31, 2008.  The increase in impairedloans is largely due to an increase in nonaccrual commercial real estate loansprimarily as a result of one lending relationship comprised of several loanswith a total net book value of $49.2 million, where the borrower filed forbankruptcy during the first quarter of 2009.  All nonaccrualand doubtful loans are included in impaired loans.  Impaired loans at March 31, 2009 are comprised of single family loanstotaling $19.1 million, multifamily loans totaling $9.9 million, commercialreal estate loans totaling $55.2 million, land totaling $69.3 million, constructionloans totaling $71.2million,commercial business loans totaling $40.7million, trade finance loans amounting to $177thousand,SBA loanstotaling $194 thousand, and automobile and other consumer loans totaling $1.3million.

 

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Specific reserves on impaired loans amounted to $23.0 million and $23.4million at March 31, 2009 and December 31, 2008, respectively.  Our average recorded investment in impairedloans for the three months ended March 31, 2009 and 2008 were $281.8million and $184.0 million, respectively. During the three months ended March 31, 2009 and 2008, grossinterest income that would have been recorded on impaired loans had theyperformed in accordance with their original terms, totaled $4.8 million and$3.6 million, respectively.  Of thisamount, actual interest recognized on impaired loans, on a cash basis, was $1.1million and $2.6 million, for the three months ended March 31, 2009 and2008, 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 thatwhile our borrowers may continue to pay as agreed in accordance with theircontractual terms and/or even though loans may not have reached a significantstage of delinquency, the existence of certain warning signs indicatingpossible collectibility issues warranted a more careful scrutiny of these loansfor potential impairment.  Specifically,we reviewed loans that exhibited 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 more delinquent and thereforestill accruing interest, we have classified them as impaired as of March 31,2009 because they exhibit one or more of the characteristics described above.

 

**Allowance for Loan Losses**

 

We are committedto maintaining the allowance for loan losses at a level that is commensuratewith estimated and known risks in the loan portfolio.  In addition to regular quarterly reviews ofthe adequacy of the allowance for loan losses, we perform an ongoing assessmentof the risks inherent in the loan portfolio. While we believe that the allowance for loan losses is adequate at March 31,2009, future additions to the allowance will be subject to a continuingevaluation of estimated and known, as well as inherent, risks in the loanportfolio.

 

The allowance forloan losses is increased by the provision for loan losses which is chargedagainst current period operating results, and is increased or decreased by theamount of net recoveries or chargeoffs, respectively, during the period. At March 31, 2009, the allowance for loan losses amounted to $195.5million, or 2.42% of total loans, compared with $178.0 million, or 2.16% oftotal loans, at December 31, 2008, and $117.1 million, or 1.32% of totalloans, at March 31, 2008.  The $17.5million increase in the allowance for loan losses at March 31, 2009, fromyear-end 2008, reflects $78.0 million in additional loss provisions, less $59.6million in net chargeoffs recorded during the quarter.  The allowance for unfunded loan commitments,off-balance-sheet credit exposures, and recourse provisions is included inaccrued expenses and other liabilities and amounted to $7.3 million at March 31,2009, compared to $6.3 million at December 31, 2008.

 

We recorded $78.0 millionin loan loss provisionsduring the first quarter of 2009, as compared to $55.0 million in lossprovisions recorded for the same period in 2008.  The increase in loss provisions

 

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recorded during the firstquarter of 2009 wasbrought on by the sustained downturn in the real estate market and continuedinstability in the overall economy. During the first quarter of 2009, we recorded $59.6 million in net chargeoffs representing2.91% of average loans outstanding during the quarter.  In comparison, we recorded net chargeoffstotaling $25.4 million, or 1.13% of average loans outstanding for the sameperiod in 2008.  We believe that overall market conditionswill continue to remain challenging in 2009 and we expect to record additionalloan loss provisions during the remainder of 2009.

 

The following tablesummarizes activity in the allowance for loan losses for the three months endedMarch 31, 2009 and 2008:

 
| ** **                                                     | ** **   | **Three Months Ended  March 31,** | ** **   |
|----------------------------------------------------------------|--------------|----------------------------------------|--------------|
| ** **                                                     | ** **   | **2009**                               | ** **   | **2008** | ** ** |
| *** ***                                                   | *** *** | **(Dollars in thousands)**             | *** *** |
| ** **                                                     | ** **   | ** **                             | ** **   | ** ** | ** ** |
| Allowance  balance, beginning of period                        |         | $                                      | 178,027      |   | $ | 88,407 |   |
| Allowance for  unfunded loan commitments and letters of credit |         | (1,008                                 | )            | (904 | ) |
| Provision for  loan losses                                     |         | 78,000                                 |         | 55,000 |   |
| Chargeoffs:                                                    |         |                                   |         |   |   |
| Single family  real estate                                     |         | 3,853                                  |         | 75 |   |
| Multifamily real  estate                                       |         | 1,746                                  |         | — |   |
| Commercial real  estate                                        |         | 2,796                                  |         | — |   |
| Land                                                           |         | 12,523                                 |         | 5,081 |   |
| Construction                                                   |         | 18,443                                 |         | 8,565 |   |
| Commercial  business                                           |         | 19,459                                 |         | 11,816 |   |
| Automobile                                                     |         | 8                                      |         | 29 |   |
| Other consumer                                                 |         | 1,312                                  |         | 17 |   |
| Total chargeoffs                                               |         | 60,140                                 |         | 25,583 |   |
|                                                           |         |                                   |         |   |   |
| Recoveries:                                                    |         |                                   |         |   |   |
| Single family  real estate                                     |         | 21                                     |         | — |   |
| Multifamily real  estate                                       |         | 122                                    |         | — |   |
| Commercial and  industrial real estate                         |         | 6                                      |         | 3 |   |
| Construction                                                   |         | 119                                    |         | — |   |
| Commercial  business                                           |         | 281                                    |         | 180 |   |
| Automobile                                                     |         | 22                                     |         | 17 |   |
| Total recoveries                                               |         | 571                                    |         | 200 |   |
| Net chargeoffs                                                 |         | 59,569                                 |         | 25,383 |   |
| Allowance  balance, end of period                              |         | $                                      | 195,450      |   | $ | 117,120 |   |
| Average loans  outstanding                                     |         | $                                      | 8,197,173    |   | $ | 8,955,257 |   |
| Total gross  loans outstanding, end of period                  |         | $                                      | 8,064,315    |   | $ | 8,849,201 |   |
| Annualized net  chargeoffs to average loans                    |         | 2.91                                   | %            | 1.13 | % |
| Allowance for  loan losses to total gross loans, end of period |         | 2.42                                   | %            | 1.32 | % |

 

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 of loans.  Loss rates derived by the migration model arebased predominantly on historical loss trends that may not be indicative of theactual or inherent loss potential for loan categories.  As such, we utilize qualitative andenvironmental factors as adjusting mechanisms to supplement the historicalresults of the classification migration model.

 

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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 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 sixteen 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 sixteen heterogeneous loan categories, ourclassification migration model also utilizes three homogeneous loan categorieswhich 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:

 
| ** **                  | ** **   | **March 31, 2009**    | ** **    | **December 31, 2008** | ** ** |
|-----------------------------|--------------|----------------------------|---------------|----------------------------|------------|
| ** **                  | ** **   | **Amount**                 | ** **    | **%**                      | ** ** | **Amount** | ** ** | **%** | ** ** |
| *** ***                | *** *** | **(Dollars in thousands)** | *** ***  |
| Residential,  single family |         | $                          |  7,825   |                       | 6.4        | % | $ |  6,178 |   | 5.9 | % |
| Residential,  multifamily   |         | 3,464                      |          | 8.6                        | %          | 6,811 |   | 8.2 | % |
| Commercial real  estate     |         | 19,520                     |          | 43.5                       | %          | 19,169 |   | 42.1 | % |
| Land                        |         | 43,756                     |          | 6.8                        | %          | 30,398 |   | 7.0 | % |
| Construction                |         | 62,222                     |          | 14.3                       | %          | 60,478 |   | 15.3 | % |
| Commercial  business        |         | 48,612                     |          | 14.0                       | %          | 40,843 |   | 14.7 | % |
| Trade finance               |         | 8,224                      |          | 3.6                        | %          | 12,721 |   | 4.2 | % |
| Automobile                  |         | 88                         |          | 0.1                        | %          | 282 |   | 0.1 | % |
| Other consumer              |         | 1,739                      |          | 2.7                        | %          | 1,147 |   | 2.5 | % |
| Total                       |         | $                          |  195,450 |                       | 100.0      | % | $ |  178,027 |   | 100.0 | % |

 

**Deposits**

 

Deposits increased 4% to$8.45 billion at March 31, 2009, from $8.14 billion at December 31,2008.  The net increase in depositsprimarily came from money market accounts which rose $483.6 million or37%.  These were offset by decreases intime deposits of 3% or $155.7 million, interest-bearing checking accounts of$11.0 million or 3%, and savings accounts of $9.0 million or 2%.

 

As a result of theturbulence in the banking sector, we experienced a notable growth in depositproducts that afford greater deposit insurance coverage to deposit customerscommencing in mid-2008.

 

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As of March 31, 2009,time deposits within the Certificate of Deposit Account Registry Service (“CDARS”)program increased to $970.7 million, compared to $946.8 million at December 31,2008.  Included in the $970.7 million and$946.8 million CDARS balance at March 31, 2009 and December 31, 2008,respectively, is the Bank’s reciprocal CDARS balance of $412.8 million and$417.4 million at March 31, 2009 and December 31, 2008,respectively.  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 CDARSprogram.  The Bank acts as custodian forthe depositor with respect to certificates issued to the depositor byparticipating institutions.  Inreciprocal CDARS transactions, the Bank, in turn, issues certificates todepositors for funds originally deposited at other participatinginstitutions.  Additionally, during thethird quarter of 2008, we partnered with another financial institution toimplement a new retail sweep product for non-time deposit accounts to provideadded deposit insurance coverage for deposits in excess of FDIC-insuredlimits.  Deposits gathered through theseprograms have been considered brokered deposits under regulatory reportingguidelines.  Beginning in the firstquarter of 2009, however, the FDIC ruled to exclude CDARs reciprocal balancesas a brokered deposit for regulatory reporting purposes.

 

Thefollowing table sets forth the composition of the deposit portfolio as of thedates indicated:

 
| ** **                  | ** **   | **March 31,** | ** **      | **December 31,** | ** ** |
|-----------------------------|--------------|--------------------|-----------------|-----------------------|------------|
| ** **                  | ** **   | **2009**           | ** **      | **2008**              | ** ** |
| *** ***                | *** *** | **(In thousands)** | ** **      |
|                        |         |               |            |                  |       |
| Noninterest-bearing  demand |         | $                  |  1,297,151 |                  | $          |  1,292,997 |   |
| Interest-bearing  checking  |         | 352,334            |            | 363,285               |       |
| Money market                |         | 1,806,985          |            | 1,323,402             |       |
| Savings                     |         | 411,104            |            | 420,133               |       |
| Total core  deposits        |         | 3,867,574          |            | 3,399,817             |       |
| Time deposits:              |         |               |            |                  |       |
| Less than  $100,000         |         | 1,211,480          |            | 1,521,988             |       |
| $100,000 or  greater        |         | 3,375,005          |            | 3,220,154             |       |
| Total time  deposits        |         | 4,586,485          |            | 4,742,142             |       |
| Total deposits              |         | $                  |  8,454,059 |                  | $          |  8,141,959 |   |

 

### **Borrowings**

### ** **

We utilize a combination of short-term andlong-term borrowings to manage our liquidity position.  Federal funds purchased generally maturewithin one business day to six months from the transaction date.  At March 31, 2009, federal fundspurchased decreased to $22 thousand from the $28.0 million balance at December 31,2008.  FHLB advances decreased 9% to $1.23billion as of March 31,2009, compared to $1.35 billion at December 31, 2008.  The decrease in federal funds purchased andFHLB advances is consistent with our overall strategy to deleverage our balancesheet.  During 2009, a portion of theproceeds from the maturities and sales of investment securities and redemptionof our money-market mutual funds were used to pay down our borrowings.  During the first quarter of 2009, four FHLBadvances totaling $120.0 million matured and were paid off.  As of March 31, 2009 and December 31,2008, we had no overnight FHLB advances.

 

Inaddition to federal funds purchased and FHLB advances, we also utilizesecurities sold under repurchase agreements (“repurchase agreements”) to manageour liquidity position.  Repurchaseagreements totaled $998.1 million and $998.4 million as of March 31, 2009and December 31, 2008, respectively. Included in this balance is $3.1 million in overnight repurchaseagreements with customers

 

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thatthe Company assumed in conjunction with the DCB acquisition.  The interest rates on these customer repurchaseagreements ranged from 0.50% to 0.75% as of March 31, 2009.  All of the other repurchase agreements arelong-term with ten year maturity terms. Repurchase agreements are accounted for as collateralized financingtransactions and recorded at the amounts at which the securities weresold.  The collateral for theseagreements consist of U.S. Government agency and U.S. Government sponsoredenterprise debt and mortgage-backed securities. All of these repurchase agreements have an original term of ten years.  The rates were generally initially 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 $235.6 million at**March 31, 2009 andDecember 31, 2008.  Long-term debt is comprised of subordinateddebt which qualifies as Tier II capital and junior subordinated debt issued inconnection with our various trust preferred securities offerings which qualifyas Tier I capital for regulatory purposes.

** **

### **Off-Balance Sheet Arrangements and Aggregate Contractual Obligations**

### ** **

Thefollowing table presents, as of March 31, 2009, the Company’ssignificant fixed and determinable contractual obligations, within thecategories described below, by payment date. With the exception of operating lease obligations, these contractual obligations are includedin the consolidated balance sheets.  Thepayment amounts represent the amounts and interest contractually due to therecipient.

 
| ** **                                   | ** **   | **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                                     |         | $                         | 4,529,215    |   | $ | 98,263 |   | $ | 33,312 |   | $ | 6,968 |   | $ | 3,976,284 |   | $ | 8,644,042 |   |
| Federal funds  purchased                     |         | 22                        |         | — |   | — |   | — |   | — |   | 22 |   |
| FHLB advances                                |         | 898,108                   |         | 374,727 |   | 5,302 |   | 3,157 |   | — |   | 1,281,294 |   |
| Securities sold  under repurchase agreements |         | 50,642                    |         | 95,163 |   | 95,163 |   | 1,103,773 |   | — |   | 1,344,741 |   |
| Notes payable                                |         | —                    |         | — |   | — |   | — |   | 14,597 |   | 14,597 |   |
| Long-term debt  obligations                  |         | 8,285                     |         | 16,570 |   | 16,570 |   | 368,604 |   | — |   | 410,029 |   |
| Operating lease  obligations                 |         | 11,682                    |         | 25,027 |   | 25,613 |   | 66,707 |   | — |   | 129,029 |   |
| Unrecognized tax  benefits                   |         | —                    |         | — |   | — |   | — |   | 7,392 |   | 7,392 |   |
| Postretirement  benefit payments             |         | 4,144                     |         | 11,156 |   | 1,732 |   | 2,316 |   | — |   | 19,348 |   |
| Total  contractual obligations               |         | $                         | 5,502,098    |   | $ | 620,906 |   | $ | 177,692 |   | $ | 1,551,525 |   | $ | 3,998,273 |   | $ | 11,850,494 |   |

 

Asa financial service provider, we routinely enter into commitments to extendcredit to customers, such as loan commitments, commercial letters of credit forforeign and domestic trade, standby letters of credit, and financialguarantees.  Many of these commitments toextend 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 March 31, 2009****isas follows:

 

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| ** **                    | ** ** | **Commitments**    | ** ** |
|-------------------------------|------------|--------------------|------------|
| ** **                    | ** ** | **Outstanding**    | ** ** |
| * *                      | * *   | **(In thousands)** | * *   |
| Undisbursed loan  commitments |       | $                  | 1,339,604  |   |
| Standby letters  of credit    |       | 646,692            |       |
| Commercial  letters of credit |       | 39,725             |       |
|                               |            |                    |            |  |

 

### **Capital Resources**

### ** **

Our primary source of capital is the retention of netafter tax earnings.  At March 31,2009, stockholders’equity totaled $1.54billion, a 1% decrease from the year-end 2008 balance of $1.55 billion.  The decrease is comprised of the following: (1) netloss of $22.5 million recorded during 2009; (2) a noncredit-relatedimpairment loss on investment securities recorded in the current year of $7.6million, net of tax; (3) Series B preferred stock issuance cost of$41 thousand; (4) tax provision of $403 thousand from various stock plans;(5) purchase of treasury shares related to vested restricted stockamounting to $35 thousand, representing 8,882 shares; and (6) accrual andpayment of quarterly cash dividends on common and preferred stock totaling $8.6million during the first quarter of 2009. These transactions were offset by:  (1) netunrealized gain on investment securities available-for-sale of $22.2 million; (2) stockcompensation costs amounting to $1.4 million related to grants of restrictedstock and stock options; and (3) net issuance of common stock totaling $15thousand, representing 290,296 shares, pursuant to various stock plans andagreements.

 

*Series A Preferred Stock Offering*

 

We raised $194.1 million in additional capital, net ofunderwriting discounts, commissions and offering expenses, during April 2008through the issuance of 200,000 shares of non-cumulative, perpetual convertiblepreferred stock.  The proceeds from thisoffering were used to reduce our borrowings, enhance our liquidity position,and boost our already strong capital levels. For a further discussion on this preferred stock offering, see Note 9 tothe condensed consolidated financial statements presented elsewhere in thisreport.

 

*Series B Preferred Stock 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 thisreport.

 

***Risk-Based Capital***

*** ***

**Weare committed to maintaining capital at a level sufficient to assure ourshareholders, our customers and our regulators that our company and our banksubsidiary are financially sound.  We aresubject to risk-based capital regulations and capital adequacy guidelinesadopted by the federal banking regulators. These guidelines are used to evaluate capital adequacy and are based onan institution’s asset risk profile and off-balance sheet exposures.  According to these guidelines, institutionswhose Tier I and total capital ratios meet or exceed 6.0% and 10.0%,respectively, may be deemed “well-capitalized.” At**March 31, 2009, the Bank’s Tier Iand total capital ratios were 13.5% and 15.5%, respectively,compared to 13.6% and 15.6%, respectively, at December 31,2008.

** **

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** **

The following table compares East West Bancorp, Inc.’sand East West Bank’s actual capital ratios at March 31, 2009, to those required by regulatoryagencies for capital adequacy and well-capitalized classification purposes:

 
| ** **                                | ** ** | ** **    | ** ** | ** **    | ** ** | **Minimum**      | ** ** | **Well**         | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                | ** ** | **East West** | ** ** | **East West** | ** ** | **Regulatory**   | ** ** | **Capitalized**  | ** ** |
| ** **                                | ** ** | **Bancorp**   | ** ** | **Bank**      | ** ** | **Requirements** | ** ** | **Requirements** | ** ** |
| Total Capital  (to Risk-Weighted Assets)  |       | 15.7          | %          | 15.5          | %          | 8.0              | %          | 10.0             | %          |
| Tier 1 Capital  (to Risk-Weighted Assets) |       | 13.7          | %          | 13.5          | %          | 4.0              | %          | 6.0              | %          |
| Tier 1 Capital  (to Average Assets)       |       | 11.5          | %          | 11.3          | %          | 4.0              | %          | 5.0              | %          |

 

**ASSETLIABILITY 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 quarter of 2009, we experienced net cash inflows from operating activities of $40.5million, compared to net cash inflowsof $73.0 million for the first quarter of 2008.  Net cashinflows from operating activities reflects the $78.0 million and $55.0 millionloan loss provision recorded during the first quarter of 2009 and 2008,respectively.

 

Netcash outflows from investing activities totaled $531.9million for the first quarter of2009 compared with net inflows from investing activities of $68.5 million forthe first quarter 2008.  Net cash outflows from investing activities for the firstquarter of 2009 weredue primarily to purchases of short-term investments and investmentsecurities.  These factors were partiallyoffset by the proceeds from the sale of investment securities, as well asrepayments, maturities and redemptions of investment securities, and a decreasein loans receivable due to the higher level of chargeoffs during the firstquarter of 2009.  Net cashinflows from investing activities for the first quarter of 2008 were dueprimarily to the proceeds from sale of investment securities and loans, earlytermination of a resale agreement, and repayments, maturity and redemption ofinvestment securities.  These factorswere partially offset by the growth in our loan portfolio and purchases ofinvestment securities.

 

We experienced net cashinflows from financing activities of $153.6 million for the first quarter of2009, primarily due to the net increase in deposits.  As a result of the turbulence in the bankingsector, we experienced a notable growth in deposit products that afford greaterdeposit insurance coverage to deposit customers during the second half of2008.  Since mid-2008, we have focused onattracting new

 

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customers and growingdeposits through our retail branch and commercial deposit platforms.  We have successfully introduced new coredeposit products and increased money market deposits during the first quarterof 2009.  Cash from financing activitieswere partially offset by net decreases in federal funds purchased and FHLBadvances, as well as $7.8 million of existing cash and cash equivalents to paycash dividends to our stockholders.  Weexperienced net cash outflows from financing activities of $36.8 million forthe first quarter of 2008, primarily due to the repayment of federal fundspurchased and FHLB advances.  Thesefactors were partially offset by deposit growth.

 

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 withvarious correspondent banks, and several master repurchase agreements withmajor brokerage companies.  As of March 31,2009, ourtotal borrowing capacity and holdings of cash and cash equivalents increased to$3.55 billion, compared to $3.34 billion as of December 31, 2008.  We believe our liquidity sources tobe stable and adequate to meet our day-to-day cash flow requirements.

 

The liquidity of East West Bancorp, Inc. isprimarily dependent on the payment of cash dividends by its subsidiary, EastWest Bank, 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 threemonths ended March 31, 2009 and 2008, total dividends paid by the Bank toEast West Bancorp, Inc. amounted to $10.1 million and $6.3 million, respectively.   The increase in dividend payment for thethree months ended March 31, 2009 reflects the additional dividends paid bythe Bank to permit the Bancorp to, in turn, make the dividend payment on the Series Aand B preferred stock issued in April 2008 and December 2008,respectively, which was partially offset by the common stock dividend reductionto $0.02 from $0.10 during the first quarter of 2009 and 2008, respectively.

 

The Company’s Board of Directors approved thedeclaration of second quarter 2009 dividends on April 27, 2009 on ourcommon stock and Series A preferred stock. Additionally, our Board of Directors also approved the payment of secondquarter dividends on our Series B preferred stock payable on May 15,2009.  The dividend of $0.01 per share onour common stock payable on or about May 26, 2009 to shareholders ofrecord as of May 18, 2009 represents a reduction from the previousquarterly dividend rate of $0.02 per share paid to common shareholders duringthe first quarter of 2009.  TheBoard-authorized reduction in common stock dividends is consistent with ourcontinuing efforts to preserve capital. Future dividend payments from Bank to Bancorp and to our common andpreferred shareholders will continue to be reviewed quarterly in light of thebusiness conditions we are operating in, current and projected earnings anddesired capital levels.

 

#### **Interest Rate 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 those

 

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attributable tohedging transactions, if any), purchase and securitization activity, andmaturities 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 estimated impact of changes in interest rates on net interestincome and market value of equity as of March 31, 2009 and December 31,2008, assuming a non-parallel shift of 100 and 200 basis points in bothdirections:

 
| ** **                   | ** ** | **Net Interest Income** | ** ** | **Net Portfolio Value** | ** ** |
|------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                   | ** ** | **Volatility (1)**      | ** ** | **Volatility (2)**      | ** ** |
| **Change in Interest Rates** | ** ** | **March 31,**      | ** ** | **December 31,**   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| **(Basis Points)**           | ** ** | **2009**                | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| +200                         |       | 10.7                    | %          | 11.6                    | %          | (1.0 | )% | 8.8 | % |
| +100                         |       | 4.7                     | %          | 5.4                     | %          | (0.9 | )% | 4.4 | % |
| -100                         |       | (0.9                    | )%         | (1.6                    | )%         | 2.0 | % | (4.5 | )% |
| -200                         |       | (1.1                    | )%         | (1.4                    | )%         | 1.8 | % | (9.7 | )% |

 

----

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

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

 

All interest-earning assets, interest-bearingliabilities and related derivative contracts are included in the interest ratesensitivity analysis at March 31, 2009 and December 31, 2008.  At March 31, 2009 and December 31,2008, our estimated changes in net interest income and net portfolio value werewithin the ranges established by the Board of 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 interest rates.  As an enhancement to the primary simulationmodel, prepayment assumptions and market rates of interest provided byindependent 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 ourincreased ability to control rates offered on deposit products in comparison toour ability 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 March 31, 2009.  Theinformation presented below is based on the repricing date for variable rateinstruments and the expected maturity date for fixed rate instruments.

 

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| ** **                                                    | ** **   | **Expected  Maturity or Repricing Date by Year** | ** **   | **Fair  Value at  March 31,** | ** ** |
|---------------------------------------------------------------|--------------|--------------------------------------------------|--------------|------------------------------------|------------|
| ** **                                                    | ** **   | **Year 1**                                       | ** **   | **Year 2**                         | ** ** | **Year 3** | ** ** | **Year 4** | ** ** | **Year 5** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **2009** | ** ** |
| *** ***                                                  | *** *** | **(Dollars  in thousands)**                      | *** *** |
| **Assets:**                                                   |         |                                             |         |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| CD investments                                                |         | $                                                | 329,288      |                               |       |   |   |   |   |   |   |   |   |   | $ | 329,288 |   | $ | 329,511 |   |
| average yield  (fixed rate)                                   |         | 1.94                                             | %            |                               |       |   |   |   |   |   |   |   |   | 1.94 | % |   |   |
| Short-term  investments                                       |         | 394,302                                          |         |                               |       |   |   |   |   |   |   |   |   | $ | 394,302 |   | $ | 394,302 |   |
| Weighted average  rate                                        |         | 1.02                                             | %            |                               |       |   |   |   |   |   |   |   |   | 1.02 | % |   |   |
| Securities  purchased under resale agreements                 |         | 50,000                                           |         |                               |       |   |   |   |   |   |   |   |   | $ | 50,000 |   | $ | 50,594 |   |
| Weighted average  rate                                        |         | 10.00                                            | %            |                               |       |   |   |   |   |   |   |   |   | 10.00 | % |   |   |
| Investment  securities held-to-maturity (fixed rate)          |         | $                                                | 82,402       |                               | $          | 72,250 |   | $ | 45,199 |   | $ | 36,318 |   | $ | 128,481 |   | $ | 77,985 |   | $ | 442,635 |   | $ | 433,792 |   |
| Weighted average  rate                                        |         | 6.10                                             | %            | 6.38                               | %          | 5.96 | % | 5.64 | % | 5.51 | % | 5.20 | % | 5.76 | % |   |   |
| Investment  securities held-to-maturity (variable rate)       |         | $                                                | 154,666      |                               | $          | 32,314 |   | $ | 99,806 |   | $ | 3,986 |   | $ | 1,392 |   |   |   | $ | 292,164 |   | $ | 283,874 |   |
| Weighted average  rate                                        |         | 2.44                                             | %            | 4.32                               | %          | 4.42 | % | 5.19 | % | 5.10 | % |   |   | 3.37 | % |   |   |
| Investment  securities available-for-sale (fixed rate)        |         | $                                                | 274,449      |                               | $          | 143,932 |   | $ | 110,487 |   | $ | 99,694 |   | $ | 47,406 |   | $ | 256,562 |   | $ | 932,530 |   | $ | 939,686 |   |
| Weighted average  rate                                        |         | 5.72                                             | %            | 5.70                               | %          | 4.48 | % | 4.59 | % | 5.08 | % | 5.09 | % | 5.24 | % |   |   |
| Investment  securities available-for-sale (variable rate) (1) |         | $                                                | 1,015,468    |                               | $          | 110,881 |   | $ | 44,012 |   | $ | 20,826 |   | $ | 8,196 |   | $ | 773 |   | $ | 1,200,156 |   | $ | 1,054,717 |   |
| Weighted average  rate                                        |         | 3.29                                             | %            | 5.39                               | %          | 5.50 | % | 5.88 | % | 4.96 | % | 4.74 | % | 3.62 | % |   |   |
| Total gross loans                                             |         | $                                                | 6,543,441    |                               | $          | 841,683 |   | $ | 380,638 |   | $ | 164,295 |   | $ | 79,015 |   | $ | 55,243 |   | $ | 8,064,315 |   | $ | 8,041,084 |   |
| Weighted average  rate                                        |         | 5.36                                             | %            | 6.94                               | %          | 6.78 | % | 6.76 | % | 6.53 | % | 4.34 | % | 5.62 | % |   |   |
|                                                          |         |                                             |         |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities:**                                              |         |                                             |         |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Checking accounts                                             |         | $                                                | 352,334      |                               |       |   |   |   |   |   |   |   |   |   | $ | 352,334 |   | $ | 299,710 |   |
| Weighted average  rate                                        |         | 0.38                                             | %            |                               |       |   |   |   |   |   |   |   |   | 0.38 | % |   |   |
| Money market  accounts                                        |         | $                                                | 1,806,985    |                               |       |   |   |   |   |   |   |   |   |   | $ | 1,806,985 |   | $ | 1,774,315 |   |
| Weighted average  rate                                        |         | 1.38                                             | %            |                               |       |   |   |   |   |   |   |   |   | 1.38 | % |   |   |
| Savings deposits                                              |         | $                                                | 411,104      |                               |       |   |   |   |   |   |   |   |   |   | $ | 411,104 |   | $ | 357,097 |   |
| Weighted average  rate                                        |         | 0.65                                             | %            |                               |       |   |   |   |   |   |   |   |   | 0.65 | % |   |   |
| Time deposits                                                 |         | $                                                | 4,467,796    |                               | $          | 82,555 |   | $ | 8,461 |   | $ | 26,756 |   | $ | 861 |   | $ | 56 |   | $ | 4,586,485 |   | $ | 4,597,577 |   |
| Weighted average  rate                                        |         | 2.26                                             | %            | 2.88                               | %          | 4.39 | % | 4.12 | % | 4.07 | % | 2.18 | % | 2.29 | % |   |   |
| Federal funds  purchased                                      |         | $                                                | 22           |                               |       |   |   |   |   |   |   |   |   |   | $ | 22 |   | $ | 22 |   |
| Weighted average  rate                                        |         | 0.31                                             | %            |                               |       |   |   |   |   |   |   |   |   | 0.31 | % |   |   |
| FHLB advances  (term)                                         |         | $                                                | 860,269      |                               | $          | 310,000 |   | $ | 55,000 |   | $ | 5,000 |   |   |   | $ | 3,000 |   | $ | 1,233,269 |   | $ | 1,267,754 |   |
| Weighted average  rate                                        |         | 4.44                                             | %            | 4.07                               | %          | 5.20 | % | 4.46 | % |   |   | 4.44 | % | 4.38 | % |   |   |
| Customer  repurchase agreements                               |         | $                                                | 3,061        |                               |       |   |   |   |   |   |   |   |   |   | $ | 3,061 |   | $ | 3,061 |   |
| Weighted average  rate                                        |         | 0.66                                             | %            |                               |       |   |   |   |   |   |   |   |   | 0.66 | % |   |   |
| Securities sold  under repurchase agreements (fixed rate)     |         |                                             |         |                               |       |   |   |   |   |   |   | $ | 945,000 |   | $ | 945,000 |   | $ | 1,157,634 |   |
| Weighted average  rate                                        |         |                                             |         |                               |       |   |   |   |   |   |   | 4.82 | % | 4.82 | % |   |   |
| Securities sold  under repurchase agreements (variable rate)  |         | $                                                | 50,000       |                               |       |   |   |   |   |   |   |   |   |   | $ | 50,000 |   | $ | 55,789 |   |
| Weighted average  rate                                        |         | 4.15                                             | %            |                               |       |   |   |   |   |   |   |   |   | 4.15 | % |   |   |
| Subordinated debt                                             |         | $                                                | 75,000       |                               |       |   |   |   |   |   |   |   |   |   | $ | 75,000 |   | $ | 48,076 |   |
| Weighted average  rate                                        |         | 2.29                                             | %            |                               |       |   |   |   |   |   |   |   |   | 2.29 | % |   |   |
| Junior  subordinated debt (fixed rate)                        |         |                                             |         |                               |       |   |   |   |   |   |   | $ | 21,392 |   | $ | 21,392 |   | $ | 22,754 |   |
| Weighted average  rate                                        |         |                                             |         |                               |       |   |   |   |   |   |   | 10.91 | % | 10.91 | % |   |   |
| Junior  subordinated debt (variable rate)                     |         | $                                                | 139,178      |                               |       | ` |   |   |   |   |   |   |   |   | $ | 139,178 |   | $ | 33,306 |   |
| Weighted average  rate                                        |         | 3.04                                             | %            |                               |       |   |   |   |   |   |   |   |   | 3.04 | % |   |   |

 

----

(1) Includeshybrid securities that have fixed interest rates for the first three or fiveyears. Thereafter, interest rates become adjustable based on a predeterminedindex.

 

Expected maturities of assets are contractual maturities adjusted forprojected payment based on contractual amortization and unscheduled prepaymentsof principal as well as repricing frequency. Expected maturities for deposits are based on contractual maturitiesadjusted for projected rollover rates for deposits with no stated maturity dates.  We utilize assumptions supported bydocumented analyses for the expected maturities of our loans and repricing ofour deposits.  We also use prepaymentprojections

 

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for amortizing securities.  The actual maturities of these instrumentscould vary significantly if future prepayments and repricing frequencies differfrom our expectations based on historical experience.

 

The fair values of short-term investments approximate their book valuesdue to their short maturities.  Forsecurities purchased under resale agreements, fair values are calculated bydiscounting future cash flows based on expected maturities or repricing datesutilizing estimated market discount rates. The fair values of the investment securities are generally determined byreference to the average of at least two quoted market prices obtained fromindependent external brokers or prices obtained from independent externalpricing service providers who have experience in valuing these securities.  In obtaining such valuation information fromthird parties, the Company has reviewed the methodologies used to develop theresulting fair values.  For private labelmortgage-backed securities and pooled trust preferred securities, fair valuesare derived based on a discounted cash flow analyses.  The fair value of loans is determined basedon the discounted cash flow approach. The discount rate is derived from the associated yield curve plusspreads, and reflects the offering rates in the market for loans with similarfinancial characteristics.

 

Thefair value of deposits is determined based on the discounted cash flowapproach.  The discount rate is derivedfrom the associated yield curve, plus spread, if any.  For core deposits, the cash outflows are projectedby the decay rate based on the Bank’s core deposit premium study.  Cash flows for all non-time deposits arediscounted using the LIBOR yield curve. For time deposits, the cash flows are based on the contractual runoffand are discounted by the Bank’s current offering rates, plus spread.  For federal funds purchased, fair valueapproximates book value due to their short maturities.  The fair value of FHLB term advances is estimatedby discounting the cash flows through maturity or the next repricing date basedon 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 discount ratesand 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 authorized to utilize a wide varietyof off-balance sheet financial techniques to assist in the management ofinterest rate risk.  We may elect to usederivative financial instruments as part of our asset and liability managementstrategy, with the overall goal of minimizing the impact of interest ratefluctuations on our net interest margin and stockholders’ equity.  Currently, derivative instruments do not havematerial effect on our operating results or 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 March 31, 2009, the combined notional amounts of the equityswap agreements total $15.6 million with termination dates similar to thestated maturity date on the underlying certificate of deposit hostcontracts.  For the equity swapagreements, we agreed to pay interest based on the one-month Libor minus aspread on a monthly basis and receive any increase in the HSCEI at swaptermination date.  Under SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*, a certificate of deposit that pays interest based onchanges in an equity index is a hybrid instrument with an embedded derivative(i.e., equity call option) that must be accounted for separately from the hostcontract (i.e., the certificate of deposit). In accordance with SFAS No. 133, both the embedded equity calloptions on the certificates of deposit and the freestanding equity swap

 

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agreements are marked-to-market every month with resulting changes infair value recorded in the consolidated statements of income**.**

 

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 payinginterest based 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.  The totalamount 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 March 31, 2009, thecombined notional amounts of these new equity swap agreements totaled $23.3million and have termination dates similar to the stated maturities of theunderlying certificate of deposit host contracts.  On December 3, 2007, we prepaid $4.5 millionfor the option cost based on the current market value of the cash streams.

 

The fair values of the equity swap agreements andembedded derivative liability for these six derivative contracts amounted to$11.4 million and $11.5 million as of March 31, 2009, respectively,compared to $13.9 million as of December 31, 2008.  The 19% decrease in fair value of thederivative contracts as of March 31, 2009 relative to December 31,2008 is primarily due to a 14% reduction in the HSCEI volatility, partially offsetby a 2% increase of the HSCEI index.

 

The embedded derivative liability is 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 and qualitative disclosuresregarding market risks in our portfolio, see, “Management’s Discussion andAnalysis of Consolidated Financial Condition and Results of Operations — AssetLiability and Market Risk Management.”

 

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**ITEM 4:  CONTROLS AND PROCEDURES**

 

*Disclosure Controls andProcedures*

 

As of March 31, 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 March 31, 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 andforms.  Our disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by us in the reports that wefile under the Exchange Act is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.

 

*InternalControls*

 

Duringour most recent fiscal quarter, there have been no changes in our internalcontrol over financial reporting that has materially affected or is reasonablylikely to materially affect our internal control over financial reporting.

 

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# **PART II - OTHERINFORMATION**

# ** **

**ITEM 1.  LEGAL PROCEEDINGS**

 

Neither theCompany 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.”  There are no materialchanges to our risk factors as presented in the Company’s 2008 Form 10-Kunder the heading “Item 1A. Risk Factors.”

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

There were no unregistered sales of equitysecurities during the three months ended March 31, 2009. The followingsummarizes share repurchase activities during the first 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)**            | ** ** |
| January 31,  2009  |       | —            |       | $              | —     |                      | —     |                            | $          | 26.2 |   |
| February 28,  2009 |       | —            |       | —         |       | —                    |       | 26.2                            |       |
| March 31,  2009    |       | —            |       | —         |       | —                    |       | 26.2                            |       |
| Total                   |       | —            |       | $              | —     |                      | —     |                            | $          | 26.2 |   |

 

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(1)          Excludes 33,016 in repurchased shares totaling $612 thousand due to forfeitures and vestingof restricted stock awards pursuant to the Company’s 1998 Stock Incentive Plan.

 

(2)          During the first quarter of 2007, the Company’s Boardof Directors announced a repurchase program authorizing the repurchase of up to$80.0 million of its common stock.  Thisrepurchase program has no expiration date and, to date, 1,392,176 sharestotaling $53.8 million have been purchased under this program.

 

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES**

 

Not applicable.

 

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

 

Notapplicable.

 

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**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 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 which is required to befiled as an exhibit hereto has previously been submitted.

 

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**SIGNATURE**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

Dated:  May 11, 2009

 

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

 

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