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 THESECURITIES EXCHANGE ACT OF 1934**

** **

**For thequarterly period ended June 30, 2009**

** **

**or**

** **

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).   Yes o No o

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   Yes o No x

 

Numberof shares outstanding of the issuer’s common stock on the latest practicabledate: 91,642,796 shares of common stock as of July 31, 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)                           |   | 8-40 |
|                                     |   |                                                                                        |   |   |
| Item 2.                                  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 40-79 |
|                                     |   |                                                                                        |   |   |
| Item 3.                                  |   | Quantitative  and Qualitative Disclosures of Market Risks                                   |   | 79 |
|                                     |   |                                                                                        |   |   |
| Item 4.                                  |   | Controls and  Procedures                                                                    |   | 80-82 |
|                                     |   |                                                                                        |   |   |
| **PART II  - OTHER INFORMATION**    |   | 81                                                                                          |
| ** **                               |   |                                                                                        |
| Item 1.                                  |   | Legal Proceedings                                                                           |   | 81 |
|                                     |   |                                                                                        |   |   |
| Item 1A.                                 |   | Risk Factors                                                                                |   | 81-83 |
|                                     |   |                                                                                        |   |   |
| Item 2.                                  |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   | 83 |
|                                     |   |                                                                                        |   |   |
| Item 3.                                  |   | Defaults  Upon Senior Securities                                                            |   | 83 |
|                                     |   |                                                                                        |   |   |
| Item 4.                                  |   | Submission  of Matters to a Vote of Security Holders                                        |   | 83-84 |
|                                     |   |                                                                                        |   |   |
| Item 5.                                  |   | Other Information                                                                           |   | 84 |
|                                     |   |                                                                                        |   |   |
| Item  6.                                 |   | Exhibits                                                                                    |   | 84 |
|                                     |   |                                                                                        |   |   |
| **SIGNATURE**                            |   | 85                                                                                          |

 

2

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### **Table of Contents**

 

### **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 thefactors that might cause such differences, see the Company’s 2008 Form 10-Kunder the heading “ITEM 1A. RISK FACTORS.” The Company does not undertake, and specifically disclaims anyobligation to update any forward-looking statements to reflect the occurrenceof events or circumstances after the date of such statements except as requiredby law.

 

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PART I - FINANCIAL INFORMATION

**ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

EAST WEST BANCORP,INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED BALANCE SHEETS

*(Inthousands, except share data)*

*(Unaudited)*

* *
| ** **                                                                                                                                                                                                                                                            | ** ** | **June 30,** | ** **     | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|----------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                            | ** ** | **2009**          | ** **     | **2008**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                            |       |              |           |                  |       |
| Cash  and cash equivalents                                                                                                                                                                                                                                            |       | $                 | 573,114        |                  | $          | 878,853 |   |
| Short-term  investments                                                                                                                                                                                                                                               |       | 554,293           |           | 228,441               |       |
| Securities  purchased under resale agreements                                                                                                                                                                                                                         |       | 75,000            |           | 50,000                |       |
| Investment  securities held-to-maturity, at amortized cost (with fair value of $794,463  at June 30, 2009 and $123,105 at December 31, 2008)                                                                                                                |       | 794,840           |           | 122,317               |       |
| Investment  securities available-for-sale, at fair value (with amortized cost of  $1,450,656 at June 30, 2009 and $2,189,570 at December 31, 2008)                                                                                                          |       | 1,381,810         |           | 2,040,194             |       |
| Loans receivable, net of allowance for loan losses  of $223,700 at June 30, 2009 and $178,027 at December 31, 2008                                                                                                                                          |       | 8,289,229         |           | 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                                                                                                                                                                                                                                         |       | 27,188            |           | 38,302                |       |
| Investment  in affordable housing partnerships                                                                                                                                                                                                                        |       | 48,127            |           | 48,141                |       |
| Premises  and equipment, net                                                                                                                                                                                                                                          |       | 56,775            |           | 60,184                |       |
| Due  from customers on acceptances                                                                                                                                                                                                                                    |       | 7,904             |           | 5,538                 |       |
| Premiums  on deposits acquired, net                                                                                                                                                                                                                                   |       | 18,973            |           | 21,190                |       |
| Goodwill                                                                                                                                                                                                                                                              |       | 337,438           |           | 337,438               |       |
| Cash  surrender value of life insurance policies                                                                                                                                                                                                                      |       | 96,592            |           | 94,745                |       |
| Deferred  tax assets                                                                                                                                                                                                                                                  |       | 163,105           |           | 184,588               |       |
| Accrued  interest receivable and other assets                                                                                                                                                                                                                         |       | 171,613           |           | 129,190               |       |
| **TOTAL**                                                                                                                                                                                                                                                             | ** ** | **$**             | **12,719,515** | ** **            | **$**      | **12,422,816** | ** ** |
|                                                                                                                                                                                                                                                                  |       |              |           |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                         |       |              |           |                  |       |
| Customer  deposit accounts:                                                                                                                                                                                                                                           |       |              |           |                  |       |
| Noninterest-bearing                                                                                                                                                                                                                                                   |       | $                 | 1,326,952      |                  | $          | 1,292,997 |   |
| Interest-bearing                                                                                                                                                                                                                                                      |       | 7,331,866         |           | 6,848,962             |       |
| Total  customer deposits                                                                                                                                                                                                                                              |       | 8,658,818         |           | 8,141,959             |       |
| Federal  funds purchased                                                                                                                                                                                                                                              |       | 22                |           | 28,022                |       |
| Federal  Home Loan Bank advances                                                                                                                                                                                                                                      |       | 1,173,238         |           | 1,353,307             |       |
| Securities  sold under repurchase agreements                                                                                                                                                                                                                          |       | 1,020,080         |           | 998,430               |       |
| Notes  payable                                                                                                                                                                                                                                                        |       | 11,578            |           | 16,506                |       |
| Bank  acceptances outstanding                                                                                                                                                                                                                                         |       | 7,904             |           | 5,538                 |       |
| Long-term  debt                                                                                                                                                                                                                                                       |       | 235,570           |           | 235,570               |       |
| Accrued  interest payable, accrued expenses and other liabilities                                                                                                                                                                                                     |       | 135,537           |           | 92,718                |       |
| Total  liabilities                                                                                                                                                                                                                                                    |       | 11,242,747        |           | 10,872,050            |       |
|                                                                                                                                                                                                                                                                  |       |              |           |                  |       |
| COMMITMENTS  AND CONTINGENCIES (Note 8)                                                                                                                                                                                                                               |       |              |           |                  |       |
|                                                                                                                                                                                                                                                                  |       |              |           |                  |       |
| STOCKHOLDERS’  EQUITY                                                                                                                                                                                                                                            |       |              |           |                  |       |
| Preferred  stock, $0.001 par value, 5,000,000 shares authorized; Series A, non-cumulativeconvertible, 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. |       | 474,425           |           | 472,311               |       |
| Common  stock, $0.001 par value, 200,000,000 shares authorized; 70,763,711 and  70,377,989shares issued  in 2009 and 2008, respectively; 64,032,009 and 63,745,624 shares outstanding  in2009 and 2008,  respectively                                                 |       | 71                |           | 70                    |       |
| Additional  paid in capital                                                                                                                                                                                                                                           |       | 714,274           |           | 695,521               |       |
| Retained  earnings                                                                                                                                                                                                                                                    |       | 431,789           |           | 572,172               |       |
| Treasury  stock, at cost – 6,731,702 shares in 2009 and 6,632,365 shares in 2008                                                                                                                                                                                 |       | (103,939          | )              | (102,817              | )          |
| Accumulated  other comprehensive loss, net of tax                                                                                                                                                                                                                     |       | (39,852           | )              | (86,491               | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                      |       | 1,476,768         |           | 1,550,766             |       |
| **TOTAL**                                                                                                                                                                                                                                                             | ** ** | **$**             | **12,719,515** | ** **            | **$**      | **12,422,816** | ** ** |

 

See accompanyingnotes to condensed consolidated financial statements. 

 

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EAST WEST BANCORP,INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

*(Inthousands, except per share data)*

*(Unaudited)*

* *
| ** **                                                                           | ** ** | **Three  Months Ended June 30,** | ** **   | **Six  Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|--------------|-------------------------------------|------------|
| ** **                                                                           | ** ** | **2009**                              | ** **   | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| **INTEREST AND DIVIDEND INCOME**                                                     |       |                                  |         |                                |       |   |   |   |   |
| Loans  receivable, including fees                                                    |       | $                                     | 111,669      |                                | $          | 137,997 |   | $ | 222,485 |   | $ | 293,431 |   |
| Investment  securities held-to-maturity                                              |       | 12,135                                |         | —                              |       | 19,017 |   | — |   |
| Investment  securities available-for-sale                                            |       | 18,183                                |         | 25,730                              |       | 40,676 |   | 52,780 |   |
| Securities  purchased under resale agreements                                        |       | 1,292                                 |         | 1,264                               |       | 2,542 |   | 3,817 |   |
| Investment  in Federal Home Loan Bank stock                                          |       | —                                |         | 1,479                               |       | — |   | 2,763 |   |
| Investment  in Federal Reserve Bank stock                                            |       | 545                                   |         | 384                                 |       | 1,051 |   | 709 |   |
| Short-term  investments                                                              |       | 2,509                                 |         | 1,051                               |       | 5,485 |   | 1,589 |   |
| Total  interest and dividend income                                                  |       | 146,333                               |         | 167,905                             |       | 291,256 |   | 355,089 |   |
|                                                                                 |       |                                  |         |                                |       |   |   |   |   |
| **INTEREST EXPENSE**                                                                 |       |                                  |         |                                |       |   |   |   |   |
| Customer  deposit accounts                                                           |       | 30,890                                |         | 43,536                              |       | 67,963 |   | 95,789 |   |
| Federal  Home Loan Bank advances                                                     |       | 13,142                                |         | 17,541                              |       | 27,019 |   | 37,223 |   |
| Securities  sold under repurchase agreements                                         |       | 12,004                                |         | 11,290                              |       | 23,876 |   | 21,819 |   |
| Long-term  debt                                                                      |       | 2,034                                 |         | 2,994                               |       | 4,451 |   | 6,717 |   |
| Federal  funds purchased                                                             |       | 3                                     |         | 368                                 |       | 6 |   | 1,746 |   |
| Total  interest expense                                                              |       | 58,073                                |         | 75,729                              |       | 123,315 |   | 163,294 |   |
|                                                                                 |       |                                  |         |                                |       |   |   |   |   |
| NET  INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES                                |       | 88,260                                |         | 92,176                              |       | 167,941 |   | 191,795 |   |
| PROVISION  FOR LOAN LOSSES                                                           |       | 151,422                               |         | 85,000                              |       | 229,422 |   | 140,000 |   |
| NET  INTEREST (LOSS) INCOME AFTER PROVISION FOR LOAN LOSSES                          |       | (63,162                               | )            | 7,176                               |       | (61,481 | ) | 51,795 |   |
|                                                                                 |       |                                  |         |                                |       |   |   |   |   |
| **NONINTEREST (LOSS) INCOME**                                                        |       |                                  |         |                                |       |   |   |   |   |
| Impairment  loss on investment securities                                            |       | (100,753                              | )            | (9,945                              | )          | (100,953 | ) | (9,945 | ) |
| Less:  Noncredit-related impairment loss recorded in other comprehensive income      |       | 63,306                                |         | —                              |       | 63,306 |   | — |   |
| Net  impairment loss on investment securities recognized in earnings                 |       | (37,447                               | )            | (9,945                              | )          | (37,647 | ) | (9,945 | ) |
| Branch  fees                                                                         |       | 4,991                                 |         | 4,339                               |       | 9,784 |   | 8,440 |   |
| Net  gain on sale of investment securities                                           |       | 1,680                                 |         | 3,433                               |       | 5,201 |   | 7,767 |   |
| Letters  of credit fees and commissions                                              |       | 1,930                                 |         | 2,476                               |       | 3,784 |   | 5,153 |   |
| Ancillary  loan fees                                                                 |       | 1,356                                 |         | 984                                 |       | 3,585 |   | 2,125 |   |
| Income  from life insurance policies                                                 |       | 1,096                                 |         | 1,024                               |       | 2,179 |   | 2,052 |   |
| Net  gain on sale of loans                                                           |       | 3                                     |         | 273                                 |       | 11 |   | 2,128 |   |
| Other  operating income                                                              |       | 192                                   |         | 854                                 |       | 698 |   | 1,631 |   |
| Total  noninterest (loss) income                                                     |       | (26,199                               | )            | 3,438                               |       | (12,405 | ) | 19,351 |   |
|                                                                                 |       |                                  |         |                                |       |   |   |   |   |
| **NONINTEREST EXPENSE**                                                              |       |                                  |         |                                |       |   |   |   |   |
| Compensation  and employee benefits                                                  |       | 16,509                                |         | 25,790                              |       | 33,617 |   | 49,058 |   |
| Other  real estate owned expense                                                     |       | 8,682                                 |         | 508                                 |       | 15,713 |   | 1,397 |   |
| Deposit  insurance premiums and regulatory assessments                               |       | 9,568                                 |         | 2,321                               |       | 12,893 |   | 3,513 |   |
| Occupancy  and equipment expense                                                     |       | 6,297                                 |         | 6,539                               |       | 13,688 |   | 13,547 |   |
| Legal  expense                                                                       |       | 1,755                                 |         | 1,135                               |       | 3,533 |   | 3,035 |   |
| Amortization  of investments in affordable housing partnerships                      |       | 1,652                                 |         | 1,920                               |       | 3,412 |   | 3,635 |   |
| Loan-related  expense                                                                |       | 1,642                                 |         | 2,245                               |       | 3,077 |   | 3,617 |   |
| Data  processing                                                                     |       | 1,141                                 |         | 1,135                               |       | 2,283 |   | 2,331 |   |
| Amortization  and impairment loss on premiums on deposits acquired                   |       | 1,092                                 |         | 1,827                               |       | 2,217 |   | 4,564 |   |
| Deposit-related  expenses                                                            |       | 1,014                                 |         | 1,237                               |       | 1,915 |   | 2,185 |   |
| Impairment  loss on goodwill                                                         |       | —                                |         | 586                                 |       | — |   | 586 |   |
| Other  operating expenses                                                            |       | 8,560                                 |         | 10,412                              |       | 16,970 |   | 21,077 |   |
| Total  noninterest expense                                                           |       | 57,912                                |         | 55,655                              |       | 109,318 |   | 108,545 |   |
|                                                                                 |       |                                  |         |                                |       |   |   |   |   |
| LOSS  BEFORE BENEFIT FROM INCOME TAXES                                               |       | (147,273                              | )            | (45,041                             | )          | (183,204 | ) | (37,399 | ) |
| BENEFIT  FROM INCOME TAXES                                                           |       | (60,548                               | )            | (19,154                             | )          | (74,013 | ) | (16,556 | ) |
|                                                                                 |       |                                  |         |                                |       |   |   |   |   |
| Net  loss before extraordinary item                                                  |       | (86,725                               | )            | (25,887                             | )          | (109,191 | ) | (20,843 | ) |
|                                                                                 |       |                                  |         |                                |       |   |   |   |   |
| Impact  of desecuritization (Note 7)                                                 |       | 5,366                                 |         | —                              |       | 5,366 |   | — |   |
| **NET LOSS AFTER EXTRAORDINARY ITEM**                                                | ** ** | **(92,091**                           | **)**        | **(25,887**                         | **)**      | **(114,557** | **)** | **(20,843** | **)** |
| PREFERRED  STOCK DIVIDENDS, INDUCEMENT, AND AMORTIZATION OF PREFERRED STOCK DISCOUNT |       | (23,623                               | )            | —                              |       | (32,366 | ) |   |   |
| **NET LOSS AVAILABLE TO COMMON STOCKHOLDERS**                                        | ** ** | **$**                                 | **(115,714** | **)**                               | **$**      | **(25,887** | **)** | **$** | **(146,923** | **)** | **$** | **(20,843** | **)** |
|                                                                                 | ** ** | ** **                            | ** **   | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **LOSS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS**                                  |       |                                  |         |                                |       |   |   |   |   |
| BASIC                                                                                |       | $                                     | (1.83        | )                                   | $          | (0.41 | ) | $ | (2.33 | ) | $ | (0.33 | ) |
| DILUTED                                                                              |       | $                                     | (1.83        | )                                   | $          | (0.41 | ) | $ | (2.33 | ) | $ | (0.33 | ) |
| DIVIDENDS  DECLARED PER COMMON SHARE                                                 |       | $                                     | 0.01         |                                | $          | 0.10 |   | $ | 0.03 |   | $ | 0.20 |   |
|                                                                                 |       |                                  |         |                                |       |   |   |   |   |
| **WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING**                                    |       |                                  |         |                                |       |   |   |   |   |
| BASIC                                                                                |       | 63,105                                |         | 62,599                              |       | 63,052 |   | 62,542 |   |
| DILUTED                                                                              |       | 63,105                                |         | 62,599                              |       | 63,052 |   | 62,542 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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EAST WEST BANCORP,INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF CHANGESIN STOCKHOLDERS’ EQUITY

*(Inthousands, except share data)*

*(Unaudited)*

* *
| ** **                                                                                                                                      | ** ** | ** **    | ** ** | **Additional** | ** **  | ** **  | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | **Accumulated**   | ** **  | ** **         | ** **   | ** **             | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|----------------|-------------|-------------|------------|----------------|------------|--------------|-------------|--------------|------------|-------------------|-------------|--------------------|--------------|------------------------|------------|
| ** **                                                                                                                                      | ** ** | ** **    | ** ** | **Paid In**    | ** **  | ** **  | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | **Other**         | ** **  | ** **         | ** **   | ** **             | ** ** |
| ** **                                                                                                                                      | ** ** | ** **    | ** ** | **Capital**    | ** **  | ** **  | ** ** | **Additional** | ** ** | ** **   | ** **  | ** **   | ** ** | **Comprehensive** | ** **  | ** **         | ** **   | **Total**              | ** ** |
| ** **                                                                                                                                      | ** ** | **Preferred** | ** ** | **Preferred**  | ** **  | **Common**  | ** ** | **Paid In**    | ** ** | **Retained** | ** **  | **Treasury** | ** ** | **Loss,**         | ** **  | **Comprehensive**  | ** **   | **Stockholders’** | ** ** |
| ** **                                                                                                                                      | ** ** | **Stock**     | ** ** | **Stock**      | ** **  | **Stock**   | ** ** | **Capital**    | ** ** | **Earnings** | ** **  | **Stock**    | ** ** | **Net of  Tax**   | ** **  | **Income  (Loss)** | ** **   | **Equity**             | ** ** |
|                                                                                                                                            |       |          |       |           |        |        |       |           |       |         |        |         |       |              |        |               |         |                   |       |
| **BALANCE,  JANUARY 1, 2008**                                                                                                                   | ** ** | ** **    | ** ** | ** **     | ** **  | ** **  | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | ** **        | ** **  | ** **         | ** **   | ** **             | ** ** |
| Comprehensive loss                                                                                                                              | ** ** | **$**         | **—** | ** **     | **$**       | **—**  | ** ** | **$**          | **70**     | ** **   | **$**       | **652,297**  | ** ** | **$**             | **657,183** | ** **         | **$**        | **(98,925**            | **)**      | **$** | **(38,802** | **)** | ** ** | ** ** | **$** | **1,171,823** | ** ** |
| Net loss for the period                                                                                                                         |       |          |       |           |        |        |       |           |       | (20,843      | )           |         |       |              |        | $                  | (20,843      | )                      | (20,843    | ) |
| Net  unrealized loss on investment securities available-for-sale                                                                                |       |          |       |           |        |        |       |           |       |         |        |         |       | (66,323           | )           | (66,323            | )            | (66,323                | )          |
| Total comprehensive loss                                                                                                                        |       |          |       |           |        |        |       |           |       |         |        |         |       |              |        | $                  | (87,166      | )                      |       |   |
| Cumulative  effect of change in accounting principle pursuant to adoption of EITF 06-4                                                          |       |          |       |           |        |        |       |           |       | (479         | )           |         |       |              |        |               |         | (479                   | )          |
| Stock compensation costs                                                                                                                        |       |          |       |           |        |        |       | 3,016          |       |         |        |         |       |              |        |               |         | 3,016                  |       |
| Tax provision from stock  plans                                                                                                                 |       |          |       |           |        |        |       | (229           | )          |         |        |         |       |              |        |               |         | (229                   | )          |
| Issuance  of 200,000 shares Series A convertible preferred stock, net of stock  issuance costs                                             |       |          |       | 194,075        |        |        |       |           |       |         |        |         |       |              |        |               |         | 194,075                |       |
| Issuance  of 367,146 shares pursuant to various stock plans and agreements                                                                      |       |          |       |           |        |        |       | 1,529          |       |         |        |         |       |              |        |               |         | 1,529                  |       |
| Cancellation  of 65,561 shares due to forfeitures of issued restricted stock                                                                    |       |          |       |           |        |        |       | 2,096          |       |         |        | (2,096       | )          |              |        |               |         | —                 |       |
| 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                                                                                                                          |       |          |       |           |        |        |       |           |       | (12,659      | )           |         |       |              |        |               |         | (12,659                | )          |
| **BALANCE,  JUNE 30, 2008**                                                                                                                     | ** ** | **$**         | **—** | ** **     | **$**       | **194,075** | ** ** | **$**          | **70**     | ** **   | **$**       | **661,007**  | ** ** | **$**             | **623,202** | ** **         | **$**        | **(101,029**           | **)**      | **$** | **(105,125** | **)** | ** ** | ** ** | **$** | **1,272,200** | ** ** |
| ** **                                                                                                                                      | ** ** | ** **    | ** ** | ** **     | ** **  | ** **  | ** ** | ** **     | ** ** | ** **   | ** **  | ** **   | ** ** | ** **        | ** **  | ** **         | ** **   | ** **             | ** ** |
| **BALANCE,  DECEMBER 31, 2008**                                                                                                                 | ** ** | ** **    | ** ** | **$**          | **472,311** | ** **  | **$**      | **70**         | ** ** | **$**        | **695,521** | ** **   | **$**      | **572,172**       | ** **  | **$**              | **(102,817** | **)**                  | **$**      | **(86,491** | **)** | ** ** | ** ** | **$** | **1,550,766** | ** ** |
| Cumulative effect  adjustment for reclassification of the previously recognized  noncredit-related impairment loss****on  investment securities | ** ** | ** **    | ** ** | ** **     | ** **  | ** **  | ** ** | ** **     | ** ** | 8,110        | ** **  | ** **   | ** ** | (8,110            | )           | ** **         | ** **   | —                 | ** ** |
| **BALANCE,  JANUARY 1, 2009**                                                                                                                   | ** ** | **$**         | **—** | ** **     | **$**       | **472,311** | ** ** | **$**          | **70**     | ** **   | **$**       | **695,521**  | ** ** | **$**             | **580,282** | ** **         | **$**        | **(102,817**           | **)**      | **$** | **(94,601** | **)** | ** ** | ** ** | **$** | **1,550,766** | ** ** |
| Comprehensive loss                                                                                                                              |       |          |       |           |        |        |       |           |       |         |        |         |       |              |        |               |         |                   |       |
| Net loss after  extraordinary item for the year                                                                                                 |       |          |       |           |        |        |       |           |       | (114,557     | )           |         |       |              |        | $                  | (114,557     | )                      | (114,557   | ) |
| Net  unrealized gain on investment securities available-for-sale                                                                                |       |          |       |           |        |        |       |           |       |         |        |         |       | 60,915            |        | 60,915             |         | 60,915                 |       |
| Net unrealized loss as a  result of desecuritization                                                                                            |       |          |       |           |        |        |       |           |       |         |        |         |       | 30,551            |        | 30,551             |         | 30,551                 |       |
| Noncredit-related  impairment loss on investment securities recorded in the current year                                                        |       |          |       |           |        |        |       |           |       |         |        |         |       | (36,717           | )           | (36,717            | )            | (36,717                | )          |
| Total comprehensive loss                                                                                                                        |       |          |       |           |        |        |       |           |       |         |        |         |       |              |        | $                  | (59,808      | )                      |       |   |
| Stock compensation costs                                                                                                                        |       |          |       |           |        |        |       | 2,908          |       |         |        |         |       |              |        |               |         | 2,908                  |       |
| Tax provision from stock  plans                                                                                                                 |       |          |       |           |        |        |       | (404           | )          |         |        |         |       |              |        |               |         | (404                   | )          |
| Series B preferred  stock issuance cost                                                                                                    |       |          |       | (44            | )           |        |       |           |       |         |        |         |       |              |        |               |         | (44                    | )          |
| Issuance  of 385,722 shares pursuant to various stock plans and agreements                                                                      |       |          |       |           |        | 1           |       | 389            |       |         |        |         |       |              |        |               |         | 390                    |       |
| Cancellation  of 45,268 shares due to forfeitures of issued restricted stock                                                                    |       |          |       |           |        |        |       | 1,087          |       |         |        | (1,087       | )          |              |        |               |         | —                 |       |
| Purchase  of 8,978 shares of treasury stock due to the vesting of restricted stock                                                              |       |          |       |           |        |        |       |           |       |         |        | (35          | )          |              |        |               |         | (35                    | )          |
| Amortization of  Series B preferred stock discount                                                                                         |       |          |       | 2,158          |        |        |       |           |       | (2,158       | )           |         |       |              |        |               |         | —                 |       |
| Preferred stock  dividends                                                                                                                      |       |          |       |           |        |        |       |           |       | (15,435      | )           |         |       |              |        |               |         | (15,435                | )          |
| Common stock dividends                                                                                                                          |       |          |       |           |        |        |       |           |       | (1,570       | )           |         |       |              |        |               |         | (1,570                 | )          |
| Inducement of preferred  stock conversion                                                                                                       |       |          |       |           |        |        |       | 14,773         |       | (14,773      | )           |         |       |              |        |               |         | —                 |       |
| **BALANCE,  JUNE 30, 2009**                                                                                                                     | ** ** | **$**         | **—** | ** **     | **$**       | **474,425** | ** ** | **$**          | **71**     | ** **   | **$**       | **714,274**  | ** ** | **$**             | **431,789** | ** **         | **$**        | **(103,939**           | **)**      | **$** | **(39,852** | **)** | ** ** | ** ** | **$** | **1,476,768** | ** ** |

 
| ** **                                                                                                                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| * *                                                                                                                                        | * *   | **(In  thousands)**           | * *   |
| **Disclosure of reclassification amounts:**                                                                                                     |       |                          |       |   |   |
| Unrealized  holding gain (loss) on securities arising during the period, net of tax  (expense) benefit of $(52,607) in 2009 and $48,942 in 2008 |       | $                             | 72,647     |   | $ | (67,586 | ) |
| Less:  Reclassification adjustment for gain included in net loss, net of tax expense  of $(13,628), in 2009 and $(915) in 2008                  |       | 18,819                        |       | 1,263 |   |
| Net  unrealized gain (loss) on securities, net of tax (expense) benefit of  $(66,235) in 2009 and $48,027 in 2008                               |       | $                             | 91,466     |   | $ | (66,323 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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EAST WEST BANCORP,INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

*(Inthousands)*

*(Unaudited)*

* *
| ** **                                                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                           | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                             |       |                               |       |   |   |
| Net  (loss) after extraordinary item                                                                 |       | $                                  | (114,557   | ) | $ | (20,843 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities:                     |       |                               |       |   |   |
| Depreciation  and amortization                                                                       |       | 11,572                             |       | 10,103 |   |
| Impairment  loss on goodwill                                                                         |       | —                             |       | 586 |   |
| Credit-related  impairment loss on investment securities available-for-sale                          |       | 37,647                             |       | 9,945 |   |
| Impairment  loss on other equity investment                                                          |       | 581                                |       | — |   |
| Stock  compensation costs                                                                            |       | 2,908                              |       | 3,016 |   |
| Deferred  tax benefit                                                                                |       | (11,856                            | )          | (49,444 | ) |
| Provision  for loan losses and impact of desecuritization                                            |       | 238,684                            |       | 140,000 |   |
| Provision  for loss on other real estate owned                                                       |       | 15,938                             |       | 690 |   |
| Net  gain on sales of investment securities, loans and other assets                                  |       | 616                                |       | (8,682 | ) |
| Federal  Home Loan Bank stock dividends                                                              |       | —                             |       | (2,362 | ) |
| Originations  of loans held for sale                                                                 |       | (25,785                            | )          | (34,330 | ) |
| Proceeds  from sale of loans held for sale                                                           |       | 25,846                             |       | 34,655 |   |
| Tax  provision from stock plans                                                                      |       | 404                                |       | 229 |   |
| Net  change in accrued interest receivable and other assets                                          |       | (6,507                             | )          | 25,718 |   |
| Net  change in accrued interest payable, accrued expenses and other liabilities                      |       | (13,747                            | )          | (6,583 | ) |
| Total  adjustments                                                                                   |       | 276,301                            |       | 123,541 |   |
| Net  cash provided by operating activities                                                           |       | 161,744                            |       | 102,698 |   |
|                                                                                                 |       |                               |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                             |       |                               |       |   |   |
| Net  decrease (increase) in loans                                                                    |       | 180,368                            |       | (41,862 | ) |
| Purchases  of:                                                                                       |       |                               |       |   |   |
| Short-term  investments                                                                              |       | (376,097                           | )          | (880 | ) |
| Securities  purchased under resale agreements                                                        |       | (25,000                            | )          | — |   |
| Investment  securities held-to-maturity                                                              |       | (672,336                           | )          | — |   |
| Investment  securities available-for-sale                                                            |       | (1,021,779                         | )          | (820,430 | ) |
| Loans  receivable                                                                                    |       | (91,238                            | )          | — |   |
| Federal  Home Loan Bank stock                                                                        |       | —                             |       | (9,400 | ) |
| Federal  Reserve Bank stock                                                                          |       | (9,196                             | )          | (5,904 | ) |
| Investments  in affordable housing partnerships                                                      |       | (19                                | )          | — |   |
| Premises  and equipment                                                                              |       | (360                               | )          | (1,742 | ) |
| Proceeds  from:                                                                                      |       |                               |       |   |   |
| Sale  of investment securities                                                                       |       | 237,379                            |       | 376,148 |   |
| Sale  of securities purchased under resale agreements                                                |       | —                             |       | 100,000 |   |
| Sale  of loans receivable                                                                            |       | 38,768                             |       | 146,556 |   |
| Sale  of other real estate owned                                                                     |       | 36,961                             |       | 9,949 |   |
| Maturity  of short term investments                                                                  |       | 50,245                             |       | — |   |
| Repayments,  maturity and redemption of investment securities                                        |       | 875,483                            |       | 388,627 |   |
| Redemption  of Federal Home Loan Bank stock                                                          |       | —                             |       | 6,054 |   |
| Acquisitions,  net of cash paid                                                                      |       | —                             |       | (924 | ) |
| Net  cash (used in) provided by investing activities                                                 |       | (776,821                           | )          | 146,192 |   |
|                                                                                                 |       |                               |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                                             |       |                               |       |   |   |
| Net  proceeds from (payment for):                                                                    |       |                               |       |   |   |
| Deposits                                                                                             |       | 516,859                            |       | 240,091 |   |
| Short-term  borrowings                                                                               |       | (6,350                             | )          | (487,269 | ) |
| Proceeds  from:                                                                                      |       |                               |       |   |   |
| Issuance  of long-term borrowings                                                                    |       | —                             |       | 250,000 |   |
| Issuance  of preferred stock and common stock warrants, net of stock issuance costs                  |       | —                             |       | 194,075 |   |
| Issuance  of common stock pursuant to various stock plans and agreements                             |       | 390                                |       | 1,529 |   |
| Payment  for:                                                                                        |       |                               |       |   |   |
| Repayment  of long-term borrowings                                                                   |       | (179,997                           | )          | (165,000 | ) |
| Repayment  of notes payable on affordable housing investments                                        |       | (4,928                             | )          | (5,709 | ) |
| Repurchase  of treasury shares pursuant to stock repurchase program and vesting of  restricted stock |       | (35                                | )          | (8 | ) |
| Issuance  cost of Series B preferred stock                                                      |       | (44                                | )          | — |   |
| Cash  dividends on preferred stock                                                                   |       | (14,583                            | )          | — |   |
| Cash  dividends on common stock                                                                      |       | (1,570                             | )          | (12,659 | ) |
| Tax  provision from stock plans                                                                      |       | (404                               | )          | (229 | ) |
| Net  cash provided by financing activities                                                           |       | 309,338                            |       | 14,821 |   |
|                                                                                                 |       |                               |       |   |   |
| NET  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                |       | (305,739                           | )          | 263,711 |   |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                      |       | 878,853                            |       | 160,347 |   |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD                                                            |       | $                                  | 573,114    |   | $ | 424,058 |   |
|                                                                                                 |       |                               |       |   |   |
| **SUPPLEMENTAL CASH FLOW INFORMATION:**                                                              |       |                               |       |   |   |
| Cash  paid during the period for:                                                                    |       |                               |       |   |   |
| Interest                                                                                             |       | $                                  | 131,380    |   | $ | 159,084 |   |
| Income  tax payments, net of refunds                                                                 |       | (13,133                            | )          | 36,477 |   |
| Noncash  investing and financing activities:                                                         |       |                               |       |   |   |
| Desecuritization  of loans receivable                                                                |       | 635,614                            |       | — |   |
| Real  estate acquired through foreclosure                                                            |       | 78,872                             |       | 26,009 |   |
| Loans  to facilitate sales of real estate owned                                                      |       | 27,982                             |       | — |   |
| 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 SixMonths Ended June 30, 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 six months endedJune 30, 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. Events subsequent to the condensed consolidated balance sheet date havebeen evaluated through August 7, 2009, the date the financial statementsare available to be issued, for inclusion in the accompanying financialstatements.  The unaudited condensed consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements and notes included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

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

 

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

 

*Recent Accounting Standards*

 

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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 alltransactions or other events in which the Company obtains control of one ormore businesses.  Management will assesseach transaction on a case-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 into with 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 February 2008,the FASB issued SFAS No. 157-2, *Effective Date of FASB StatementNo. 157*, which provided for a one-yeardeferral of the implementation of this standard for other nonfinanical assetsand liabilities, effective for fiscal years beginning after November 15,2008.  The adoption of this additionalguidance did not have a material effect on the Company’s financial condition,results of operations, or cash flows.

 

In March 2008,the FASB issued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging 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 FASB Staff to issue FSP No. FAS 142-3, *Determination of 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 recognized 

 

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intangibleasset under SFAS 142 and the period of expected cash flows used to measurethe fair value of the asset under SFAS 141(R) and other GAAP. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008.  Earlier application is not permitted.  The adoption of thisguidance did not have a material effect on the Company’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 per share.  This FSP is effective for fiscal yearsbeginning after December 15, 2008, and interim periods within those fiscalyears.  Early adoption isprohibited.  The adoption of thisguidance did not have a material effect on the Company’s basic and dilutedearnings per share calculation.

 

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 disclosuresrequired by this FSP are intended to provide greater transparency to financialstatement users about a transferor’s continuing involvement with transferredfinancial assets and an enterprise’s involvement with variable interestentities and qualifying SPEs.  This FSPshall be effective for the first reporting period ending after December 15,2008, with earlier application encouraged, and shall be applied for each annualand interim reporting period thereafter. Thedisclosure requirements related to the adoption of this guidance are presentedin Note 3 and Note 8 ofthe Company’s condensed consolidated financial statements.

 

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, theCompany reclassified the noncredit portion ofpreviously recognized OTTI totaling $8.1 million, net of tax, from the openingbalance of retained earnings to other comprehensive income.  Additionally, 

 

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upon implementationof this FSP as of March 31, 2009, the Company recorded $200 thousand, on apre-tax basis, of the credit portion of OTTI through earnings and $7.6 million,net of tax, of the non-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.

 

InApril 2009, the FASB issued FSP FAS 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments*,which increases the frequency of fair value disclosures from an annual basisonly to a quarterly basis.  The FSP willrequire public entities to disclose in their interim financial statements thefair value 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 adoption of this FSP on June 30, 2009 resulted in additionaldisclosures which are presented in Note 3 of the Company’s condensedconsolidated financial statements.

 

InMay 2009, the FASB issued SFAS No. 165, *SubsequentEvents*.  SFAS 165 requiresentities to recognize in the financial statements the effect of all events ortransactions that provide additional evidence of conditions that existed at thebalance sheet date, including the estimates inherent in the financial statementpreparation process.  Entities shall not recognize the impact ofevents or transactions that provide evidence about conditions that did notexist at the balance sheet date but arose after that date.  SFAS 165also requires entities to disclose the date through which subsequent eventshave been evaluated.  SFAS 165 was effective for interim and annualreporting periods ending after June 15, 2009.  The adoption ofthis guidance did not have a material effect on the Company’s financialcondition, results of operations, or cash flows.

 

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

 

In June 2009, the FASB issued SFAS No. 167,*Amendments to FASB Interpretation No. 46(R)*,which is a revision to FASB Interpretation No. 46(R), Consolidation ofVariable Interest Entities, and changes how a company determines when an entitythat is insufficiently capitalized or is not controlled 

 

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through voting (or similar rights) should be consolidated.  The determination of whether a company isrequired to consolidate an entity is based on, among other things, an entity’spurpose and design and a company’s ability to direct the activities of theentity that most significantly impact the entity’s economic performance.  It is effective for financial statementsissued for fiscal years beginning after November 15, 2009, and earlyadoption is prohibited.  The Company doesnot expect the adoption of this guidance to have a material effect on itsfinancial condition, results of operations, or cash flows.

 

InJune 2009, the FASB issued SFAS No. 168, *The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles (“GAAP”) — a replacement of FASB Statement No. 162 (“Codification”)*.  This Codification will become the source ofauthoritative U.S. GAAP recognized by the FASB to be applied by nongovernmentalentities.  Once the Codification is ineffect, all of its content will carry the same level of authority, effectivelysuperseding SFAS No. 162, *The***Hierarchy ofGenerally Accepted Accounting Principles**.  In other words, the GAAP hierarchy will bemodified to include only two levels of GAAP: authoritative andnonauthoritative.  SFAS No. 168 iseffective for financial statements issued for interim and annual periods endingafter September 15, 2009.  The Companydoes not expect the adoption of this guidance to have a material effect on itsfinancial condition, results of operations, or cash flows.

 

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

 

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 portfolio, equity swap agreements, derivativespayable, mortgage servicing assets,****and impairedloans**.**

 

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 and reliabilityof the information used to determine fair values.  The hierarchy gives the highest priority toquoted prices available in active markets and the lowest priority to datalacking transparency.  Financial assetsand liabilities carried at fair value will be classified and disclosed in oneof the following three categories:

 

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

 

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

 

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

 

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 June 30, 2009.  Asrequired by SFAS 157, financial assets and liabilities are classified in theirentirety based on the lowest level of input that is significant to their fairvalue measurement.

** **
| ** **                                                                                                          | ** **   | **Assets (Liabilities) Measured at Fair Value on a Recurring  Basis as of June 30, 2009** | ** **   |
|---------------------------------------------------------------------------------------------------------------------|--------------|------------------------------------------------------------------------------------------------|--------------|
| ** **                                                                                                          | ** **   | **Fair Value  Measurements********June 30, 2009**                                         | ** **   | **Quoted Prices in  Active Markets for  Identical Assets********(Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable Inputs********(Level 3)** | ** ** |
| *** ***                                                                                                        | *** *** | **(In Thousands)**                                                                             | *** *** |
| Investment Securities  Available-For-Sale                                                                           | *** *** | *** ***                                                                                   | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| U.S. Treasury  securities                                                                                           |         | $                                                                                              | 2,515        |   | $ | 2,515 |   | $ | — |   | $ | — |   |
| U.S.  Government agency securities and U.S. Government sponsored enterprise debt  securities                        |         | 453,592                                                                                        |         | — |   | 453,592 |   | — |   |
| U.S.  Government agency securities and U.S. Government sponsored enterprise  residential mortgage-backed securities |         | 834,374                                                                                        |         | — |   | 834,374 |   | — |   |
| Municipal securities                                                                                                |         | 11,992                                                                                         |         | — |   | 11,992 |   | — |   |
| Other residential  mortgage-backed securities                                                                       |         | 16,628                                                                                         |         | — |   | — |   | 16,628 |   |
| Corporate debt  securities                                                                                          |         |                                                                                           |         |   |   |   |   |   |   |
| Investment grade                                                                                                    |         | 41,564                                                                                         |         | — |   | 40,319 |   | 1,245 |   |
| Non-investment grade                                                                                                |         | 19,188                                                                                         |         | — |   | 4,601 |   | 14,587 |   |
| U.S. Government  sponsored enterprise equity securities                                                             |         | 1,957                                                                                          |         | — |   | 1,957 |   | — |   |
| Total Investment  Securities Available-For-Sale                                                                     |         | $                                                                                              | 1,381,810    |   | $ | 2,515 |   | $ | 1,346,835 |   | $ | 32,460 |   |
| Equity swap agreements                                                                                              |         | $                                                                                              | 13,308       |   | — |   | $ | 13,308 |   | — |   |
| Derivatives payable                                                                                                 |         | (13,323                                                                                        | )            | — |   | — |   | (13,323 | ) |

 

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| ** **                 | ** ** | **Assets Measured at Fair Value on a Non-Recurring Basis for  the Three Months Ended June 30, 2009** | ** ** | ** **                                                                  | ** ** |
|----------------------------|------------|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Fair Value  Measurements  June 30, 2009**                                                     | ** ** | **Quoted Prices in Active  Markets for Identical  Assets********(Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable Inputs  (Level 3)** | ** ** | **Total Gains  (Losses)** | ** ** |
|                       |       | **(In Thousands)**                                                                                   |       |                                                                        |       |
| Mortgage Servicing  Assets |       | $                                                                                                    | 9,466      |                                                                        | $          | — |   | $ | — |   | $ | 9,466 |   | $ | (86 | ) |
| Impaired Loans             |       | 110,351                                                                                              |       | —                                                                      |       | — |   | 110,351 |   | (3,854 | ) |
| OREO                       |       | 15,986                                                                                               |       | —                                                                      |       | 15,986 |   | — |   | (4,182 | ) |
|                            |            |                                                                                                      |            |                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                 | ** **   | **Assets Measured at Fair Value on a Non-Recurring Basis for  the Six Months Ended June 30, 2009** | ** ** | ** **                                                                  | ** ** |
|----------------------------|--------------|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                 | ** **   | **Fair Value  Measurements********June 30, 2009**                                                  | ** ** | **Quoted Prices in Active  Markets for Identical  Assets********(Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable Inputs********(Level 3)** | ** ** | **Total Gains  (Losses)** | ** ** |
| ** **                 | *** *** | **(In Thousands)**                                                                                      |       |                                                                        |       |
| ** **                 | *** *** |                                                                                                    |       |                                                                        |       |   |   |   |   |   |   |
| Mortgage Servicing  Assets |         | $                                                                                                       | 9,466      |                                                                        | $          | — |   | $ | — |   | $ | 9,466 |   | $ | 680 |   |
| Impaired Loans             |         | 136,373                                                                                                 |       | —                                                                      |       | — |   | 136,373 |   | (4,243 | ) |
| OREO                       |         | 16,359                                                                                                  |       | —                                                                      |       | 16,359 |   | — |   | (6,920 | ) |
|                            |              |                                                                                                         |            |                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |

 

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 and six months ended June 30, 2009:

 
| ** **                                                                                                              | ** ** | **Investment Securities Available-for-Sale** | ** ** | ** **                                  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                              | ** ** | ** **                                   | ** ** | **Residential Mortgage-Backed  Securities** | ** ** | **Corporate Debt Securities** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                              | ** ** | **Total**                                    | ** ** | **Investment  Grade**                       | ** ** | **Non-  Investment  Grade** | ** ** | **Investment  Grade** | ** ** | **Non-  Investment  Grade** | ** ** | **Residual  Securities** | ** ** | **Derivatives  Payable** | ** ** |
|                                                                                                                    |       |                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Beginning balance,  April 1, 2009                                                                                  |       | $                                            | 635,009    |                                        | $          | 546,520 |   | $ | 11,325 |   | $ | 1,306 |   | $ | 21,930 |   | $ | 53,928 |   | $ | (11,509 | ) |
| Total gains or (losses)  (1)                                                                                            |       |                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Included in earnings                                                                                                    |       | (33,858                                      | )          | 2,461                                       |       | 191 |   | 3 |   | (37,442 | ) | 929 |   | (1,814 | ) |
| Included in other  comprehensive loss (unrealized) (2)                                                                  |       | 70,331                                       |       | 71,216                                      |       | 1,350 |   | (54 | ) | 28,717 |   | (30,898 | ) | — |   |
| Purchases, issuances,  sales, settlements (3)                                                                           |       | (639,022                                     | )          | (602,585                                    | )          | (13,850 | ) | (10 | ) | 1,382 |   | (23,959 | ) | — |   |
| Transfers in and/or out  of Level 3 (4)                                                                                 |       | —                                       |       | (17,612                                     | )          | 17,612 |   | — |   | — |   | — |   | — |   |
| Ending balance,  June 30, 2009                                                                                     |       | $                                            | 32,460     |                                        | $          | — |   | $ | 16,628 |   | $ | 1,245 |   | $ | 14,587 |   | $ | — |   | $ | (13,323 | ) |
| Changes in unrealized  losses included in earnings relating to assets and liabilities still held at  June 30, 2009 |       | $                                            | (35,633    | )                                           | $          | — |   | $ | — |   | $ | — |   | $ | (37,447 | ) | $ | — |   | $ | 1,814 |   |

 

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| ** **                                                                                                              | ** ** | **Investment Securities Available-for-Sale** | ** ** | ** **                                  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                              | ** ** | ** **                                   | ** ** | **Residential Mortgage-Backed  Securities** | ** ** | **Corporate Debt Securities** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                              | ** ** | ** **                                   | ** ** | ** **                                  | ** ** | **Non-** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                              | ** ** | ** **                                   | ** ** | **Investment**                              | ** ** | **Investment** | ** ** | **Investment** | ** ** | **Investment** | ** ** | **Residual** | ** ** | **Derivatives** | ** ** |
| ** **                                                                                                              | ** ** | **Total**                                    | ** ** | **Grade**                                   | ** ** | **Grade** | ** ** | **Grade** | ** ** | **Grade** | ** ** | **Securities** | ** ** | **Payable** | ** ** |
|                                                                                                                    |       |                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Beginning balance,  January 1, 2009                                                                                |       | $                                            | 624,351    |                                        | $          | 527,109 |   | $ | 10,216 |   | $ | 1,294 |   | $ | 35,670 |   | $ | 50,062 |   | $ | (14,142 | ) |
| Total gains or (losses)  (1)                                                                                            |       |                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Included in earnings                                                                                                    |       | (30,955                                      | )          | 2,629                                       |       | 192 |   | 7 |   | (37,640 | ) | 3,857 |   | 819 |   |
| Included in other  comprehensive loss (unrealized) (2)                                                                  |       | 92,783                                       |       | 101,456                                     |       | 2,458 |   | (34 | ) | 13,923 |   | (25,020 | ) | — |   |
| Purchases, issuances,  sales, settlements (3)                                                                           |       | (653,719                                     | )          | (613,582                                    | )          | (13,850 | ) | (22 | ) | 2,634 |   | (28,899 | ) | — |   |
| Transfers in and/or out  of Level 3 (4)                                                                                 |       | —                                       |       | (17,612                                     | )          | 17,612 |   | — |   | — |   | — |   | — |   |
| Ending balance,  June 30, 2009                                                                                     |       | $                                            | 32,460     |                                        | $          | — |   | $ | 16,628 |   | $ | 1,245 |   | $ | 14,587 |   | $ | — |   | $ | (13,323 | ) |
| Changes in unrealized  losses included in earnings relating to assets and liabilities still held at  June 30, 2009 |       | $                                            | (38,466    | )                                           | $          | — |   | $ | — |   | $ | — |   | $ | (37,647 | ) | $ | — |   | $ | (819 | ) |

 

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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 pricesobtained from independent external pricing service providers who haveexperience in valuing these securities. In obtaining such valuation information from third parties, the Companyhas reviewed the methodologies used to develop the resulting fair values.

 

TheCompany’s Level 3 available-for-sale securities include one private-labelmortgage-backed security and certain pooled trust preferred securities.  The fair values of the private-label mortgage-backedsecurity and pooled trust preferred securities have traditionally been based onthe average of at least two quoted market prices obtained from independentexternal brokers since broker quotes in an active market are given the highestpriority under SFAS 157.  However, as aresult of the global financial crisis and illiquidity in the U.S. markets, themarket for these securities has become increasingly inactive since mid-2007.  It is the Company’s view that current brokerprices on the private-label mortgage-backed security and certain pooled trustpreferred securities are based on forced liquidation or distressed sale valuesin very inactive markets that are not representative of the economic value ofthese securities.  As such, the fairvalue of the private-label mortgage-backed security and pooled trust preferredsecurities have been below cost since the advent of the financial crisis.  Additionally, most, if not all, of thesebroker quotes are nonbinding.  Inaccordance with FSP SFAS 157-4, the Company considered whether to place little,if any, weight on transactions that are not orderly when estimating fairvalue.  Although length of time andseverity of impairment are among the factors to consider when determiningwhether a security that is other than temporarily impaired, the private-labelmortgage backed security and pooled trust preferred securities have onlyexhibited deep declines in value since the credit crisis began.  The 

 

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Companytherefore believes that this is an indicator that the decline in price issolely a result of the lack of liquidity in the market for these securities andthe broker quotes received stem from distressed sale transactions.

 

Forthe private-label mortgage-backed security, the Company determined thevaluation by using the appropriate combination of the market approachreflecting current broker prices and a discounted cash flow approach.  The values resulting from each approach (i.e.market and income approaches) were weighted to derive the final fair value onthe private-label mortgage-backed security. For the pooled trust preferred securities, the fair value was derived basedon discounted cash flow analyses.  Inorder to determine the appropriate discount rate used in calculating fairvalues derived from the income method for the private-label mortgage-backedsecurity and pooled trust preferred securities, the Company has madeassumptions using an exit pricing approach related to the implied rate ofreturn which have been adjusted for general change in market rates, estimatedchanges in credit quality and liquidity risk premium, specific non-performanceand default experience in the collateral underlying the securities.  The gains and losses recorded in the periodare recognized in noninterest income. During the second quarter of 2009, theprivate-label mortgage-backed security was downgraded from investment grade tonon-investment grade.

 

In May 2009, thedesecuritization of the Company’s Level 3 private-label mortgage backedsecurities resulted in a $635.6 million increase in single and multifamilyloans receivable and is reflected in the decrease of Level 3 investment grademortgage-backed investment securities for the three months and six months endedJune 30, 2009 Level 3 reconciliation table described above.

 

**Equity Swap Agreements**— The Company has enteredinto several equity swap agreements with a major investment brokerage firm tohedge against market fluctuations in a promotional equity index certificate ofdeposit product offered to bank customers. This deposit product, which has a term of 5 years or 51⁄2 years, paysinterest based on the performance of the Hang Seng China Enterprises Index (“HSCEI”).  The fair value of 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 $56 thousandadjustment to the valuation of the equity swap agreements for the quarter endedJune 30, 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 includedin interest-bearing deposits on the consolidated balance sheets.  The fair value of these embedded derivativesis based on the income approach.  ****The Company’sconsideration of its own credit risk resulted in a $41 thousand adjustment tothe valuation of the derivative liabilities, and a net gain of $121thousand was recognized in noninterest income as the net difference between thevaluation of the equity swap agreements and derivatives payable for the quarterended****June 30****, 2009.******** The valuation of thederivatives payable falls within Level 3 of the fair value hierarchy since thesignificant inputs used in deriving the fair value of these derivativecontracts are not directly observable.

 

**Mortgage Servicing Assets (“MSAs”)** — The Company records MSAsin conjunction with its loan sale and securitization activities since theservicing of the underlying loans is retained by the Bank.  MSAs are initially measured at fair 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 float earningsrate.  Net cash flows are present valuedusing a market-derived discount rate. The resulting fair value is then compared to recently observed bulkmarket transactions with similar characteristics.  The fair value is adjusted accordingly to bebetter aligned with current observed market trends and activity.

 

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**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 on the underlying collateral.

 

**Other Real Estate Owned (“OREO”) —**The Company’s OREOrepresents properties acquired through foreclosure or through full or partialsatisfaction of loans, are considered held-for-sale, and are recorded at thelower of cost or estimated fair value at the time of foreclosure.  The fair values of OREO properties are basedon third-party appraisals, broker price opinions or accepted writtenoffers.  These valuations are 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 $27.2 million included inthe condensed consolidated balance sheets as of June 30, 2009 is recordednet of estimated disposal costs.

 

**FairValue of Financial Instruments**

 

TheCompany adopted FSP FAS 107-1 and APB 28-1 effective June 30, 2009, whichincreases the frequency of fair value disclosures from an annual basis only toa quarterly basis.  The carrying amountsand fair values of the Company’s financial instruments as of June 30, 2009and December 31, 2008 were as follows:

 

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| ** **                                    | ** ** | **As of June 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **Carrying**                 | ** ** | ** **                       | ** ** | **Carrying** | ** ** | ** ** | ** ** |
|                                          | ** ** | **Notional  or**             | ** ** | **Estimated**                    | ** ** | **Notional  or** | ** ** | **Estimated** | ** ** |
|                                          | ** ** | **Contract  Amount**         | ** ** | **Fair  Value**                  | ** ** | **Contract  Amount** | ** ** | **Fair  Value** | ** ** |
|                                          | * *   | **(In  thousands)**          | * *   |
| **Financial  Assets:**                        |       |                         |       |                             |       |   |   |   |   |
| Cash and cash  equivalents                    |       | $                            | 573,114    |                             | $          | 573,114 |   | $ | 878,853 |   | $ | 878,853 |   |
| Short-term investments                        |       | 554,293                      |       | 554,721                          |       | 228,441 |   | 228,353 |   |
| Securities purchased  under resale agreements |       | 75,000                       |       | 77,576                           |       | 50,000 |   | 51,581 |   |
| Investment securities  held-to-maturity       |       | 794,840                      |       | 794,463                          |       | 122,317 |   | 123,105 |   |
| Investment securities  available-for-sale     |       | 1,381,810                    |       | 1,381,810                        |       | 2,040,194 |   | 2,040,194 |   |
| Loans receivable, net                         |       | 8,289,229                    |       | 8,187,554                        |       | 8,069,377 |   | 8,036,406 |   |
| Investment in Federal  Home Loan Bank stock   |       | 86,729                       |       | 86,729                           |       | 86,729 |   | 86,729 |   |
| Investment in Federal  Reserve Bank stock     |       | 36,785                       |       | 36,785                           |       | 27,589 |   | 27,589 |   |
| Accrued interest  receivable                  |       | 50,312                       |       | 50,312                           |       | 46,230 |   | 46,230 |   |
| Equity swap agreements                        |       | 38,838                       |       | 13,308                           |       | 43,453 |   | 13,853 |   |
|                                          |       |                         |       |                             |       |   |   |   |   |
| **Financial  Liabilities:**                   |       |                         |       |                             |       |   |   |   |   |
| Customer deposit  accounts:                   |       |                         |       |                             |       |   |   |   |   |
| Demand, savings and  money market deposits    |       | 4,070,949                    |       | 3,650,330                        |       | 3,399,817 |   | 3,141,126 |   |
| Time deposits                                 |       | 4,587,869                    |       | 4,595,022                        |       | 4,742,142 |   | 4,750,957 |   |
| Federal funds purchased                       |       | 22                           |       | 22                               |       | 28,022 |   | 28,022 |   |
| Federal Home Loan Bank  advances              |       | 1,173,238                    |       | 1,200,416                        |       | 1,353,307 |   | 1,397,081 |   |
| Securities sold under  repurchase agreements  |       | 1,020,080                    |       | 1,261,167                        |       | 998,430 |   | 1,204,329 |   |
| Notes payable                                 |       | 11,578                       |       | 11,578                           |       | 16,506 |   | 16,506 |   |
| Accrued interest  payable                     |       | 10,912                       |       | 10,912                           |       | 18,977 |   | 18,977 |   |
| Long-term debt                                |       | 235,570                      |       | 92,099                           |       | 235,570 |   | 120,325 |   |
| Derivatives payable                           |       | 38,838                       |       | 13,323                           |       | 43,453 |   | 14,142 |   |
|                                          |       |                         |       |                             |       |   |   |   |   |
| **Off-balance  sheet financial instruments:** |       |                         |       |                             |       |   |   |   |   |
| Commitments to extend  credit                 |       | 1,196,668                    |       | 12,238                           |       | 1,469,513 |   | 16,001 |   |
| Standby letters of  credit                    |       | 639,233                      |       | 3,286                            |       | 656,979 |   | 3,614 |   |
| Commercial letters of  credit                 |       | 34,434                       |       | (96                              | )          | 39,426 |   | (204 | ) |
|                                               |            |                              |            |                                  |            |  |  |  |  |  |  |  |  |

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

***FederalHome Loan Bank and Federal Reserve******Bank Stock*****- The carryingamount of the Federal Home Loan Bank stock approximates fair value and itsredemption price of $100 per share.  The carryingvalue of the Federal Reserve Bank stock approximates fair value as the stockmay be sold back at its carrying value.

 

***AccruedInterest Receivable****-*Thecarrying amount of accrued interest receivable approximates fair value due toits short-term nature.

 

***EquitySwap Agreements***—The fair value of the derivative contracts is provided by an independent thirdparty and is determined based on the change in 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 of the option, interest rate and time remaining to thematurity.  The Company has alsoconsidered the counterparty’s credit risk in determining the valuation.

 

***Deposits*****—**The fair valueof deposits is determined based on the discounted cash flow approach.  The discount rate is derived from theassociated yield curve, plus spread, if any. For core deposits, the cash outflows are projected by the decay ratebased on the Bank’s core deposit premium study. Cash flows for all non-time deposits are discounted using the LIBORyield curve.  For time deposits, the cashflows are based on the contractual runoff and are discounted by the Bank’scurrent offering rates, plus spread.

 

***FederalFunds Purchased*****— Thecarrying amounts approximate fair values due to the short-term nature of theseinstruments.

 

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

 

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

 

***NotesPayable*****— Thecarrying amount of notes payable approximates fair value as these notes arepayable on demand.

 

***AccruedInterest Payable****-*Thecarrying amount of accrued interest payable approximates fair value due to itsshort-term nature.

 

***Long-TermDebt*** — Thefair values of long-term debt are estimated by discounting the cash flowsthrough maturity based on current market rates the Bank would pay for newissuances.

 

***DerivativesPayable***— The Company’sderivatives payable are recorded in conjunction with the certificate ofdeposits (“host instrument”) that pays interest based on changes in theHSCEI.  The Company’s derivatives payable are estimated usingthe income approach.  The Company hasalso considered its own credit risk in determining the valuation.

 

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

 

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

 

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

 

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 and six months ended June 30, 2009, total compensation costrecognized in the consolidated statements of operations related to stockoptions and restricted stock awards amounted to $1.5 million and $2.9 million,respectively, with related tax benefits of $622 thousand and $1.2 million,respectively.  During the three and sixmonths ended June 30, 2008, total compensation cost recognized in theconsolidated statements of operations related to stock options and restrictedstock awards

 

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amountedto $1.5 million and $3.0 million, respectively, with related tax benefits of$613 thousand and $1.3 million, 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 sixmonths ended June 30, 2009 is presented below:

 
| ** **                          | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **              | ** ** |
|-------------------------------------|------------|------------|------------|--------------|------------|-----------------|------------|-------------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Average**     | ** ** | **Aggregate**           | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Intrinsic**           | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Value**               | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **(In  thousands) (1)** | ** ** |
| Outstanding at  beginning of period |       | 2,588,968  |       | $            | 20.67      |            |       |                    |       |   |
| Granted                             |       | 43,942     |       | 6.83         |       |            |       |                    |       |
| Exercised                           |       | (3,300     | )          | 5.89         |       |            |       |                    |       |
| Forfeited                           |       | (29,904    | )          | 19.93        |       |            |       |                    |       |
| Outstanding at end of  period       |       | 2,599,706  |       | $            | 20.47      |            | 2.97 years |                    | $          | 79 |   |
| Vested or expected to vest          |       | 2,533,282  |       | $            | 20.42      |            | 2.90 years |                    | $          | 73 |   |
| Exercisable at end of  period       |       | 1,661,399  |       | $            | 19.50      |            | 1.57 years |                    | $          | 15 |   |

 

----

(1) Includesin-the-money options only.

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option-pricing model with thefollowing assumptions:

 
| ** **                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                   | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
|                         | ** ** | **2009**               |       | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Expected term (1)            |       | —                 | (5)        | 4 years              |       | 4 years |   | 4 years |   |
| Expected volatility (2)      |       | —                 | (5)        | 28.9                 | %          | 60.5 | % | 27.9 | % |
| Expected dividend yield  (3) |       | —                 | (5)        | 1.3                  | %          | 0.6 | % | 1.2 | % |
| Risk-free interest rate  (4) |       | —                 | (5)        | 3.0                  | %          | 1.8 | % | 2.6 | % |

 

----

(1) The expectedterm (estimated period of time outstanding) of stock options granted wasestimated using the historical exercise behavior of employees.

(2) The expectedvolatility was based on historical volatility for a period equal to the stockoption’s expected term.

(3) The expecteddividend yield is based on the Company’s prevailing dividend rate at the timeof grant.

(4) The risk-freerate is based on the U.S. Treasury strips in effect at the time of grant equalto the stock option’s expected term.

(5) The Company didnot issue any stock options during the second quarter of 2009.

 

During the three and six months ended June 30, 2009 and 2008, informationrelated to stock options is presented as follows:

 

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| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**    | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                              | ** ** | **June 30,**      | ** ** | ** June 30,** | ** ** |
|                                                                    | ** ** | **2009**               | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                    |       |                   |       |                    |       |   |   |   |   |
| Weighted average fair  value of stock options granted during the period |       | $                      | —     | (1)                     | $          | 3.59 |   | $ | 6.83 |   | $ | 4.27 |   |
| Total intrinsic value  of options exercised (in thousands)              |       | 4                      |       | 170                     |       | 5 |   | 337 |   |
| Total fair value of  options vested (in thousands)                      |       | 87                     |       | 116                     |       | 1,438 |   | 1,222 |   |
|                                                                         |            |                        |            |                         |            |  |  |  |  |  |  |  |  |

 

----

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

 

As of June 30, 2009, total unrecognizedcompensation cost related to stock options amounted to $2.9 million.  The cost is expected to be recognized over aweighted average period of 2.7 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 June 30, 2009,including changes during the six months then ended, is presented below:

 

| ** **                          | ** ** | ** ** | ** ** | **Weighted** | ** ** |
|-------------------------------------|------------|------------|------------|--------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Average**  | ** ** |
|                                | ** ** | **Shares** | ** ** | **Price**    | ** ** |
| Outstanding at  beginning of period |       | 753,165    |       | $            | 29.35      |   |
| Granted                             |       | 292,430    |       | 7.14         |       |
| Vested                              |       | (28,662    | )          | 37.60        |       |
| Forfeited                           |       | (90,359    | )          | 31.61        |       |
| Outstanding at end of  period       |       | 926,574    |       | $            | 21.87      |   |

 

The weighted average fair values of restricted stockawards granted during the six months ended June 30, 2009 and 2008 were$7.14 and $20.38, respectively.

 

As of June 30, 2009, total unrecognizedcompensation cost related to restricted stock awards amounted to $10.5 million.  This cost is expected to be recognized over aweighted average period of 2.7 years.

 

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** **

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

 

An analysis of the held-to-maturity and available-for-sale investmentsecurities portfolio is presented as follows:

 
| ** **                                                                                               | ** ** | **As of June 30, 2009** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                               | ** ** | ** **                   | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                                                                               | ** ** | **Amortized**                | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                                                                                               | ** ** | **Cost**                     | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair  Value** | ** ** |
| ** **                                                                                               | ** ** | **(In  thousands)**          | ** ** |
| **Held-to-maturity**                                                                                     |       |                         |       |   |   |   |   |   |   |
| U.S.  Government agency and U.S. Government sponsored enterprise debt securities                         |       | $                            | 252,645    |   | $ | 266 |   | $ | (1,891 | ) | $ | 251,020 |   |
| Municipal securities                                                                                     |       | 36,140                       |       | 606 |   | (391 | ) | 36,355 |   |
| Other residential  mortgage-backed securities                                                            |       |                         |       |   |   |   |   |   |   |
| Investment grade                                                                                         |       | 103,344                      |       | 238 |   | (5,873 | ) | 97,709 |   |
| Non-investment grade                                                                                     |       | 9,800                        |       | — |   | (1,495 | ) | 8,305 |   |
| Corporate debt  securities                                                                               |       |                         |       |   |   |   |   |   |   |
| Investment grade                                                                                         |       | 387,005                      |       | 10,048 |   | (1,781 | ) | 395,272 |   |
| Non-investment grade                                                                                     |       | 4,617                        |       | — |   | (104 | ) | 4,513 |   |
| Other securities                                                                                         |       | 1,289                        |       | — |   | — |   | 1,289 |   |
| **Total  investment securities held-to-maturity**                                                        |       | $                            | 794,840    |   | $ | 11,158 |   | $ | (11,535 | ) | $ | 794,463 |   |
|                                                                                                     |       |                         |       |   |   |   |   |   |   |
| **Available-for-sale**                                                                                   |       |                         |       |   |   |   |   |   |   |
| U.S. Treasury  securities                                                                                |       | $                            | 2,512      |   | $ | 3 |   | $ | — |   | $ | 2,515 |   |
| U.S.  Government agency and U.S. Government sponsored enterprise debt securities                         |       | 452,707                      |       | 1,812 |   | (927 | ) | 453,592 |   |
| U.S.  Government agency and U.S. Government sponsored enterprise residential  mortgage-backed securities |       | 822,614                      |       | 12,668 |   | (908 | ) | 834,374 |   |
| Municipal securities                                                                                     |       | 11,990                       |       | 2 |   | — |   | 11,992 |   |
| Other residential  mortgage-backed securities                                                            |       | 21,329                       |       | — |   | (4,701 | ) | 16,628 |   |
| Corporate debt  securities                                                                               |       |                         |       |   |   |   |   |   |   |
| Investment grade                                                                                         |       | 43,169                       |       | 221 |   | (1,826 | ) | 41,564 |   |
| Non-investment grade(1)                                                                                  |       | 92,995                       |       | — |   | (73,807 | ) | 19,188 |   |
| U.S. Government  sponsored enterprise equity securities                                                  |       | 3,340                        |       | — |   | (1,383 | ) | 1,957 |   |
| **Total  investment securities available-for-sale**                                                      |       | $                            | 1,450,656  |   | $ | 14,706 |   | $ | (83,552 | ) | $ | 1,381,810 |   |
|                                                                                                     |       |                         |       |   |   |   |   |   |   |
| **Total  investment securities**                                                                         |       | $                            | 2,245,496  |   | $ | 25,864 |   | $ | (95,087 | ) | $ | 2,176,273 |   |

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

 

----

(1) As ofDecember 31, 2008, the Company recorded an OTTI charge of $13.6 millionfor corporate debt securities, $55.3 million for U.S. Government sponsoredenterprise equity securities, and $4.3 million for Other securities. Uponadoption of FSP FAS 115-2 and FAS 124-2, the Company reclassified the noncreditportion of previously recognized OTTI for pooled trust preferred securitiestotaling $8.1 million, on a net of tax basis, from the opening balance ofretained earnings to other comprehensive income as of March 31, 2009.Additionally, the Company recorded $37.6 million, on a pre-tax basis, of thecredit portion of OTTI through earnings and $36.7 million, net of tax, of thenon-credit portion of OTTI for pooled trust preferred securities in othercomprehensive income for six months ended June 30, 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 aresult of this analysis, if the Company determines there is a more appropriatefair value based upon the available market data, the price received from thethird 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,the Company believes the current broker prices obtained on the private-labelmortgage-backed security and certain pooled trust preferred securities arebased on forced liquidation or distressed sale values in very inactive marketsthat are not representative of the economic value of these securities.  The fair values of the private-labelmortgage-backed security 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, theCompany has modified its approach in determining the fair values of thesesecurities.  For the pooled trust preferredsecurities, the Company believes that the cash flow analyses which demonstratethat the realizable value of these securities are equal to their carryingvalues should be the primary factor considered when making a judgment aboutother than temporary impairment.  For theprivate-label mortgage-backed security, the Company determined the valuation byusing the appropriate combination of the market approach reflecting currentbroker prices and a discounted cash flow approach.  The values resulting from each approach (i.e.market and income approaches) were weighted to derive the final fair value onthe private-label mortgage-backed security.   In calculating the fair value derived from the income approach, theCompany made assumptions related to the implied rate of return, general change inmarket rates, estimated changes in credit quality and liquidity risk premium,specific non-performance and default experience in the collateral underlyingthe security, as well as broker discount rates.

 

The following tables show the Company’srollforward of the amount related to credit losses for the three and six monthsended June 30, 2009:

 

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| ** **                                                                                                                                 | ** ** | **Three Months Ended  June 30, 2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **(In  thousands)**                        | ** ** |
| Beginning balance,  April 1, 2009                                                                                                     |       | $                                          | 200        |   |
| Addition of OTTI that  was not previously recognized                                                                                       |       | 37,447                                     |       |
| 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,  June 30, 2009                                                                                                        |       | $                                          | 37,647     |   |

 
| ** **                                                                                                                                 | ** ** | **Six Months Ended  June 30, 2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **(In thousands)**                       | ** ** |
| Beginning balance,  January 1, 2009                                                                                                   |       | $                                        | —     |   |
| Addition of OTTI that  was not previously recognized                                                                                       |       | 37,647                                   |       |
| 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,  June 30, 2009                                                                                                        |       | $                                        | 37,647     |   |

 

Thefollowing table shows the Company’s investment portfolio’s gross unrealizedlosses and related fair values, aggregated by investment category and length oftime that individual securities have been in a continuous unrealized lossposition, as of June 30, 2009 and December 31, 2008:

 

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| ** **                                                                                              | ** ** | **As of  June 30, 2009** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                              | ** ** | **Less  Than 12 Months**      | ** ** | **12  Months or More** | ** ** | **Total** | ** ** |
| ** **                                                                                              | ** ** | **Fair**                      | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                                                                                              | ** ** | **Value**                     | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| ** **                                                                                              | ** ** | **(in  thousands)**           | ** ** |
|                                                                                                    |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| **Held-to-maturity**                                                                                    |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government agency and U.S. Governmentsponsored  enterprise debt securities                         |       | $                             | 200,754    |   | $ | (1,891 | ) | $ | — |   | $ | — |   | $ | 200,754 |   | $ | (1,891 | ) |
| Municipal  securities                                                                                   |       | 12,818                        |       | (391 | ) | — |   | — |   | 12,818 |   | (391 | ) |
| Other  residential mortgage-backed securities                                                           |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Investment  grade                                                                                       |       | 68,543                        |       | (5,873 | ) | — |   | — |   | 68,543 |   | (5,873 | ) |
| Non-investment  grade                                                                                   |       | 8,305                         |       | (1,495 | ) | — |   | — |   | 8,305 |   | (1,495 | ) |
| Corporate  debt securities                                                                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Investment  grade                                                                                       |       | 65,280                        |       | (1,781 | ) | — |   | — |   | 65,280 |   | (1,781 | ) |
| Non-investment  grade                                                                                   |       | 4,512                         |       | (104 | ) | — |   | — |   | 4,512 |   | (104 | ) |
| Total  temporarily impaired securities held-to-maturity                                                 |       | $                             | 360,212    |   | $ | (11,535 | ) | $ | — |   | $ | — |   | $ | 360,212 |   | $ | (11,535 | ) |
|                                                                                                    |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| **Available-for-sale**                                                                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government agency and U.S. Government sponsored  enterprise debt securities                        |       | $                             | 161,570    |   | $ | (927 | ) | $ | — |   | $ | — |   | $ | 161,570 |   | $ | (927 | ) |
| U.S. Government agency and U.S. Government sponsored  residential enterprise mortgage-backed securities |       | 104,021                       |       | (908 | ) | — |   | — |   | 104,021 |   | (908 | ) |
| Other  residential mortgage-backed securities                                                           |       | —                        |       | — |   | 16,628 |   | (4,701 | ) | 16,628 |   | (4,701 | ) |
| Corporate  debt securities                                                                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Investment  grade                                                                                       |       | 18,563                        |       | (968 | ) | 1,245 |   | (858 | ) | 19,808 |   | (1,826 | ) |
| Non-investment  grade (1)                                                                               |       | 1,182                         |       | (11,115 | ) | 18,006 |   | (62,692 | ) | 19,188 |   | (73,807 | ) |
| U.S.  Government sponsored enterprise equity securities                                                 |       | 1,957                         |       | (1,383 | ) | — |   | — |   | 1,957 |   | (1,383 | ) |
| Total  temporarily impaired securities available-for-sale                                               |       | $                             | 287,293    |   | $ | (15,301 | ) | $ | 35,879 |   | $ | (68,251 | ) | $ | 323,172 |   | $ | (83,552 | ) |
|                                                                                                    |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Total  temporarily impaired securities                                                                  |       | $                             | 647,505    |   | $ | (26,836 | ) | $ | 35,879 |   | $ | (68,251 | ) | $ | 683,384 |   | $ | (95,087 | ) |

 
| ** **                                                                                             | ** ** | **As of  December 31, 2008** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                             | ** ** | **Less  Than 12 Months**          | ** ** | **12 Months  or More** | ** ** | **Total** | ** ** |
| ** **                                                                                             | ** ** | **Fair**                          | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                                                                                             | ** ** | **Value**                         | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| ** **                                                                                             | ** ** | **(in  thousands)**               | ** ** |
| * *                                                                                               | * *   | * *                          | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Corporate  debt securities                                                                             |       | $                                 | 40,057     |   | $ | (234 | ) | $ | — |   | $ | — |   | $ | 40,057 |   | $ | (234 | ) |
| Total  temporarily impaired securities held-to-maturity                                                |       | $                                 | 40,057     |   | $ | (234 | ) | $ | — |   | $ | — |   | $ | 40,057 |   | $ | (234 | ) |
|                                                                                                   |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| **Available-for-sale**                                                                                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government agency securities and U.S.  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 | ) |

 

----

(1) For the six monthsended June 30, 2009, the Company recorded $63.3 million, on a pre-taxbasis, of the non-credit portion of OTTI for pooled trust preferred securitiesin other comprehensive income, which is included as gross unrealized losses.

 

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

 

Asof June 30, 2009, the fair value of the Company’s held-to-maturitycorporate debt securities totaled $399.8 million.  During the second quarter of 2009, two of thecorporate debt securities were downgraded from investment grade tonon-investment grade.  Except for thesetwo securities, all other corporate debt securities are investment grade as of June 30,2009.  As of June 30, 2009, thesedebt instruments had gross unrealized losses for less than twelve monthsamounting to $1.9 million, or less than 1% of the aggregate amortized costbasis of held-to-maturity corporate debt securities, comprised of $104 thousandand $1.8 million that are non-investment grade and investment grade,respectively.  Due to 

 

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the relatively shortmaturity dates of these securities of 5 years or less, 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 theiramortized cost bases.  As such, theCompany does not deem these securities to be other-than-temporarily impaired asof June 30, 2009.

 

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

 

Themajority of unrealized losses in the available-for-sale portfolio at June 30,2009 are related to pooled trust preferred debt securities.  As of June 30, 2009, the Company had$15.8 million in pooled trust preferred debt securities available-for-sale,representing 1% of total investment securities available-for-saleportfolio.  In April 2009, exceptfor one security which was downgraded but remained at investment grade status,the ratings for the other twelve pooled trust preferred securities weredowngraded to non-investment grade status due to increased deferral and defaultactivity from the issuers of the underlying debt collateralizing theseinstruments.  As of June 30, 2009,these debt instruments had gross unrealized losses amounting to $69.1 million,or 81% of the total amortized cost basis of these securities, comprisedprimarily of the $63.3 million, or $36.7 million on a net of tax basis, innoncredit-related impairment losses recorded during the first half of 2009pursuant to the provisions of FSP FAS 115-2 and FAS 124-2.

 

Almostall of the pooled trust preferred securities held by the Company haveunderlying collateral issued by banks and insurance companies.  Continued deterioration in market conditionshave resulted in many more small banks either deferring or defaulting on theirtrust preferred debt during the second quarter of 2009.  As a result of diminishing collateral values,deteriorating cash flows, and increasing estimates of future deferrals anddefaults, the Company recorded an impairment loss of $100.8 million on itsportfolio of trust preferred securities during the second quarter of 2009, ofwhich $37.4 million was a pre-tax credit loss recorded through earnings.  **Theremaining $63.3 million or $36.7 million on a net of tax basis, innoncredit-related impairment** loss was recorded in othercomprehensive income as of June 30, 2009. The Company determined the amount of credit-related impairment bydiscounting the expected future cash flows with the effective yield of thesecurity in accordance with the methodology described in  SFAS 114, **Accountingby Creditors for Impairment of a Loan—an amendment of FASB Statements No. 5and 15****. **During the first quarter of2009, the Company recorded an impairment loss of $13.4 million on anon-investment grade pooled trust preferred security.  Of the total impairment loss amount, $200thousand was a pretax credit loss recorded through earnings.  The remaining $13.2 million, or $7.6 millionon a net of tax basis, in noncredit-related impairment loss was recorded inother comprehensive income 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.  Upon the implementation of FSP FAS 115-2 and FAS 124, the Companyreclassified the combined $14.0 million, or $8.1 million on a net of tax basis,in noncredit-related OTTI impairment losses recognized during 2008 and 2007from the opening balance of retained earnings to other comprehensive income asof March 31, 2009.

 

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

 

As of June 30,2009, the aggregatefair value of the non-agency held-to-maturity mortgage-backed securitiesamounted to $106.0 million.  Thesesecurities are collateralized by single family loans and secured by first lienson these residential properties.  During thesecond quarter of 2009, one of the mortgage-backed securities was downgradedfrom investment grade to non-investment grade. Except for this non-investment grade security, all held-to-maturitymortgage-backed securities are investment grade.  

 

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As of June 30, 2009,these debt instruments had gross unrealized losses for less than twelve monthsamounting to $7.4 million, or 7% of the aggregate amortized cost basis ofheld-to-maturity mortgage-backed securities, comprised of $1.5 million and $5.9million that are non-investment grade and investment grade, respectively.

 

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

 

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

 

As of June 30,2009, the Company hadone private-label available-for-sale mortgage-backed security with a fair valueof $16.6 million, with a gross unrealized loss of $4.7 million, or 22% of theamortized cost basis of this security, for more than 12 months.  During the second quarter of 2009, thissecurity was downgraded from investment grade to non-investment grade.  This security is collateralized by singlefamily loans and secured by the first lien on these residentialproperties.  Additionally, any principaland interest shortfall that may arise from the deterioration of the collateralwill be covered by a monoline insurance provider.  The Company does not intend to sellthis security and it is not more likely than not that the Company will berequired to sell this security before recovery of its amortized costbasis.  As such, the Company does notdeem this security to be other-than-temporarily impaired as of June 30,2009.

 

In May 2009, theCompany desecuritized its private-label mortgage backed securities whichresulted in a $635.6 million increase in single and multifamily loansreceivable with a corresponding decrease in available-for-sale investmentsecurities.  These single family andmultifamily loans were previously originated by the Company and weresecuritized in 2006 and 2007 for additional liquidity purposes.  All of the resulting securities were retainedby the Company in its available-for-sale investment portfolio.  The Company’s decision to desecuritize thesesecurities was prompted by the mark-to-market adjustments recorded on thesesecurities that were based on price points observed in the general market formortgage-backed securities that were not reflective of the better creditquality of the underlying loans.  Theseloans had very low overall delinquency rates as of June 30, 2009.  The accumulated mark-to-market adjustments onthese securities, recorded in other comprehensive income, were negativelyimpacting the Company’s tangible common equity. The desecuritization added $30.6 million to the Company’s tangiblecommon equity.

 

*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 to non-investment grade status reflectingthe cessation 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 June 30, 2009, the fairvalue of these preferred stock securities was $2.0 million.  Gross unrealized losses on these securities,all of which is less than twelve months in duration, amounted to $1.4 millionas of June 30, 2009, or 41% of the aggregate amortized cost basis of thesesecurities.  The outlook for thesepreferred securities remains stable.  The

 

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Company does not intend tosell these securities and it is not more likely than not that the Company willbe required to sell these securities before recovery of its amortized costbases.  As such, the Company does notdeem these remaining securities to be other-than-temporarily impaired as of June 30,2009.

 

TheCompany has thirteen individual securities that have been in a continuousunrealized loss position for twelve months or longer as of June 30,2009.  These securities are comprised oftwelve corporate debt securities with a total fair value of $19.3 million andone mortgage-backed security with a total fair value of $16.6 million.  As of June 30, 2009, there were also 84securities 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 the Company’s knowledge, established any cause fordefault on these securities.  Thesesecurities have fluctuated in value since their purchase dates as marketinterest rates have fluctuated.  TheCompany does not intend to sell these securities and it is not more likely thannot that the Company will be required to sell the investments before recoveryof its amortized cost bases.  As such,the Company does not deem these securities to be other-than-temporarily impairedas of June 30, 2009.

 

Thescheduled maturities of investment securities at June 30, 2009 arepresented as follows:

 
| ** **                              | ** ** | **Held-to-maturity** | ** **  | **Available-for-sale** | ** ** |
|-----------------------------------------|------------|----------------------|-------------|------------------------|------------|
| ** **                              | ** ** | **Amortized**        | ** **  | **Estimated**          | ** ** | **Amortized** | ** ** | **Estimated** | ** ** |
| **(In thousands)**                      | ** ** | **Cost**             | ** **  | **Fair  Value**        | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Due within one year                     |       | $                    | 212,254     |                   | $          | 213,645 |   | $ | 187,335 |   | $ | 177,636 |   |
| Due after one year  through five years  |       | 314,393              |        | 320,636                |       | 129,704 |   | 129,340 |   |
| Due after five years  through ten years |       | 48,921               |        | 48,672                 |       | 183,810 |   | 186,005 |   |
| Due after ten years                     |       | 219,272              |        | 211,510                |       | 946,467 |   | 886,872 |   |
| Indeterminate maturity                  |       | —               |        | —                 |       | 3,340 |   | 1,957 |   |
| **Total**                               | ** ** | **$**                | **794,840** | ** **             | **$**      | **794,463** | ** ** | **$** | **1,450,656** | ** ** | **$** | **1,381,810** | ** ** |

 

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

 

The carrying amount of goodwill remained at $337.4 million at June 30,2009 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 second 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 June 30, 2009,the Company’s market capitalization based on total outstanding common andpreferred shares was $785.4 million and its total stockholders’ equity was$1.48 billion.  As a result, the Companyperformed an impairment analysis as of June 30, 2009to determine whether and towhat extent, if any, recorded goodwill was impaired.  The analysis compared the fair value of eachof the reporting units, including goodwill, to the respective carryingamounts.  If the carrying amount of thereporting unit, including goodwill exceeds the fair value of that reportingunit, then further testing for goodwill impairment is performed.

 

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,

 

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CommercialBanking, and Other.  In accordance withSFAS No. 142, *Goodwill and OtherIntangible Assets*, the Company determined that there were noadditional reporting units below each operating segment and therefore thereporting units are equivalent to the operating segments.  See Note 10 to the Company’s condensedconsolidated financial statements presented elsewhere in this report for afurther discussion of the revised business segments.

 

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 thediscounted cash 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 June 30,2009 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 recorded goodwill impairment of$586 thousand as a charge to earnings during the first half 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 June 30, 2009 and December 31, 2008, withrelated accumulated amortization expense amounting to $23.2 million and $21.0million, respectively, as of June 30, 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                                                 |         | $                  | 2,128        |   |
| 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** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                     | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                     | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                     | ** ** | **(in thousands)**     | ** ** | **(in thousands)**   | ** ** |
| ** **                                                     | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allowance balance, beginning of period                         |       | $                      | 195,450    |                 | $          | 117,120 |   | $ | 178,027 |   | $ | 88,407 |   |
| Allowance for unfunded loan commitments and letters  of credit |       | 1,442                  |       | 1,136                |       | 434 |   | 232 |   |
| Provision for loan losses                                      |       | 151,422                |       | 85,000               |       | 229,422 |   | 140,000 |   |
| Impact of desecuritization                                     |       | 9,262                  |       | —               |       | 9,262 |   | — |   |
| Chargeoffs:                                                    |       |                   |       |                 |       |   |   |   |   |
| Single family real estate                                      |       | 14,263                 |       | 634                  |       | 18,116 |   | 709 |   |
| Multifamily real estate                                        |       | 2,352                  |       | 436                  |       | 4,098 |   | 436 |   |
| Commercial real estate                                         |       | 13,063                 |       | —               |       | 15,859 |   | — |   |
| Land                                                           |       | 33,599                 |       | 16,337               |       | 46,122 |   | 21,418 |   |
| Construction                                                   |       | 60,083                 |       | 15,726               |       | 78,526 |   | 24,291 |   |
| Commercial business                                            |       | 13,718                 |       | 1,919                |       | 33,177 |   | 13,735 |   |
| Automobile                                                     |       | 27                     |       | 134                  |       | 35 |   | 163 |   |
| Other consumer                                                 |       | 306                    |       | 23                   |       | 1,618 |   | 40 |   |
| Total chargeoffs                                               |       | 137,411                |       | 35,209               |       | 197,551 |   | 60,792 |   |
|                                                           |       |                   |       |                 |       |   |   |   |   |
| Recoveries:                                                    |       |                   |       |                 |       |   |   |   |   |
| Single family real estate                                      |       | 205                    |       | 2                    |       | 226 |   | 2 |   |
| Multifamily real estate                                        |       | 96                     |       | —               |       | 218 |   | — |   |
| Commercial and industrial real estate                          |       | 591                    |       | 3                    |       | 597 |   | 6 |   |
| Land                                                           |       | 416                    |       | —               |       | 416 |   | — |   |
| Construction                                                   |       | 847                    |       | —               |       | 966 |   | — |   |
| Commercial business                                            |       | 1,367                  |       | 357                  |       | 1,648 |   | 537 |   |
| Automobile                                                     |       | 9                      |       | 4                    |       | 31 |   | 21 |   |
| Other consumer                                                 |       | 4                      |       | —               |       | 4 |   | — |   |
| Total recoveries                                               |       | 3,535                  |       | 366                  |       | 4,106 |   | 566 |   |
| Net chargeoffs                                                 |       | 133,876                |       | 34,843               |       | 193,445 |   | 60,226 |   |
| Allowance balance, end of period                               |       | $                      | 223,700    |                 | $          | 168,413 |   | $ | 223,700 |   | $ | 168,413 |   |
| Average loans outstanding                                      |       | $                      | 8,244,850  |                 | $          | 8,773,028 |   | $ | 8,221,143 |   | $ | 8,864,142 |   |
| Total gross loans outstanding, end of period                   |       | $                      | 8,528,961  |                 | $          | 8,656,427 |   | $ | 8,528,961 |   | $ | 8,656,427 |   |
| Annualized net chargeoffs to average loans                     |       | 6.50                   | %          | 1.59                 | %          | 4.71 | % | 1.36 | % |
| Allowance for loan losses to total gross loans, end  of period |       | 2.62                   | %          | 1.95                 | %          | 2.62 | % | 1.95 | % |

 

At June 30, 2009, the allowance for loan losses amounted to $223.7million, or 2.62% of total loans, compared with $178.0 million or 2.16% oftotal loans at December 31, 2008, and $168.4 million, or 1.95% of totalgross loans as of June 30, 2008. The increase in the allowance for loan losses is primarily due to the$229.4 million in provisions for loan losses recorded during the first half of2009 and $9.3 million in allowance for losses recorded during the secondquarter of 2009 in conjunction with the desecuritization of single family andmultifamily loans completed in May 2009. This compares to $140.0 million in loan loss provisions recorded duringthe first half of 2008.  During thesecond quarter of 2009, the Company continued to make significant strides inmanaging down its problem assets with sizeable reductions in nonaccrual loans,delinquent loans, and OREO.  The Companysold $166.3 million in problem loans and $55.8 million in OREO propertiesduring the quarter ended June 30, 2009. Year to date through June 30, 2009, the Company has sold $183.5million in problem loans and $79.8 million in OREO properties.  The proactive measures taken by the Companyto reduce problem assets have resulted in higher net chargeoff activity andincreased loan loss provisions.  Duringthe first half of 2009, the Company recorded $193.4 million in net chargeoffs,compared to $60.2 million in net chargeoffs recorded during the first half of2008.  Throughout the course of 2008 andthe first half of 2009, the Company has actively reduced its exposure to landand construction loans and its overall credit risk on the $945.1 million inconstruction loans and $479.8 million in land loans has been reducedsubstantially.

 

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**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 June 30, 2009 and December 31,2008, respectively, undisbursed loan commitments amounted to $1.20 billion and$1.47 billion, respectively.  Commercialand standby letters of credit amounted to $673.7 million and $696.4 million as of June 30,2009 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 June 30, 2009, total loans securitized with recourse amounted to $504.1million and were comprised of $58.1 million in single family loans with fullrecourse and $446.0 million in multifamily loans with limited recourse.  In comparison, total loans securitized withrecourse amounted to $544.5 million at December 31, 2008, comprised of$62.4 million in single family loans with full recourse and $482.1 million inmultifamily loans with limited recourse. The recourse provision on multifamily loans is limited to 2.5% of thetop loss on the underlying loans.  All ofthese transactions represent securitizations with Fannie Mae.  The Company’srecourse reserve related to loan securitizations totaled $1.1 million****as of June 30, 2009 and December 31, 2008, and isincluded in accrued expenses and other liabilities in the accompanyingcondensed consolidated balance sheets. Despite the challenging conditions in the real estate market, theCompany continues to experience relatively minimal losses from the singlefamily and multifamily loan portfolios.

 

The Company also sells or securitizes 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 June 30, 2009 and December 31, 2008, the amount of loans soldwithout recourse totaled $722.8 million and $693.5 million, respectively.  Totalloans securitized withoutrecourse amounted to $367.7 million and $1.04 billion, respectively, at June 30,2009 and December 31, 2008.  Thedecrease in loans securitized without recourse at June 30, 2009, is due tothe desecuritization of the Company’s private label mortgage backed securitiesduring May 2009 which resulted in an increase of $635.6 million of singleand multifamily loans with a corresponding decrease in investment securitiesavailable-for-sale.  The loans sold orsecuritized without recourse represent the unpaid principal balance of theCompany’s loans serviced for others portfolio.

 

*Litigation*— Neither the Company nor the Bank is involved inany material legal proceedings at June 30, 2009.  The Bank, from time to time, is a party tolitigation which arises in the ordinary course of business, such as claims toenforce liens, claims involving the origination and servicing of loans, andother issues related to the business of the Bank.  After taking into consideration informationfurnished by counsel to the Company and the Bank, management believes that theresolution of such issues will not have a material adverse impact on thefinancial position, results of operations, or liquidity of the Company or theBank.

 

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

 

Inlate June 2009, the Company entered into binding agreements with certainshareholders to exchange approximately 90 thousand shares of Series Apreferred stock into 8.1 million shares of common stock.  This transaction was accounted for as aninduced conversion with the settlement of shares occurring in July 2009.  As a result of entering into these agreementsprior to the end of the second quarter of 2009, the Company recorded apreferred dividend of $14.8 million during the second quarter of 2009 which representsthe additional consideration or inducement given to these shareholders inexcess of the carrying value of the Series A preferred stock.   See Note 11 to the Company’s condensedconsolidated financial statements presented elsewhere in this report for afurther discussion of the subsequent events.

 

*Series B Preferred Stock Offering -*On December 5, 2008, the Companyissued 306,546 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B(“Series B”), with a liquidation preference of $1,000 per share.  The Company received $306.5 million ofadditional Tier 1 qualifying capital from the U.S. Treasury by participating inthe U.S.Treasury’s Capital Purchase Program (“TCPP”).  The Series B preferred shares will paycumulative dividends at a rate of 5% per annum until the fifth anniversary ofthe investment date and thereafter at a rate of 9% per annum.  The Series B preferred shares aretransferable by the U.S. Treasury at any time. Subject to the approval of the Federal Reserve Board, the Series Bpreferred shares 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 $25.2million.  The warrant may be exercised atany time on or before December 5, 2018. The U.S. Treasury may not transfer a portion of the warrants withrespect to more than one-half of the original number of shares of common stockuntil the earlier of the successful completion of an offering of replacementTier 1 capital of at least $306.5 million and December 31, 2009.  The warrants, and all rights under the warrants,are otherwise transferable.  As of June 30,2009, there were 3,035,109 warrants outstanding.

 

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*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 six months ended June 30,2009 in connection with this stock repurchase program.

 

*Quarterly Dividends* — On April 28, 2009,the Company’s Board of Directors declared second quarter preferred stock cashdividends of $20.00 per share on its Series A preferred stock payable onor about May 1, 2009 to shareholders of record on April 15,2009.  On May 15, 2009, the Company’sBoard of Directors declared and paid quarterly preferred cash dividends on its Series Bpreferred shares.  Total cash dividendsaccrued and paid in conjunction with the Company’s Series A and Bpreferred stock amounted to $7.8 million and $15.4 million during the three andsix months ended June 30, 2009, respectively.

 

On April 28, 2009, the Company’s Board of Directors also declaredquarterly common stock cash dividends of $0.01 per share payable on or about May 26,2009 to shareholders of record on May 18, 2009.  The Board authorized the reduction of thecommon stock dividend to $0.01 per share for the second quarter of 2009,compared to the $0.02 per share paid in the first quarter of 2009, in order topreserve capital.  Cash dividendstotaling $640 thousand and $1.6 million were paid to the Company’s commonshareholders during the second quarter and first half of 2009, respectively.

 

*Earnings (Loss) Per Share (“EPS”)* — The actual number ofshares outstanding at June 30, 2009 was 64,032,009.  Basic EPSexcludes dilution and is computed by dividing income or loss available tocommon stockholders by the weighted-average number of shares outstanding duringthe period.  Diluted EPS is calculated onthe basis of the weighted average number of shares outstanding during theperiod plus restricted stock and shares issuable upon the assumed exercise ofoutstanding convertible preferred stock, common stock options and warrants,unless they have an antidilutive effect. In accordance with SFAS No. 128, *Earnings PerShare*, due to the net loss recorded during the second quarter andfirst half of 2009, incremental shares resulting from the assumed conversion,exercise, or contingent issuance of securities are not included as their effecton earnings or loss per share would be antidilutive.

 

The following table sets forth (loss) earnings per share calculationsfor the three and six months ended June 30, 2009 and 2008:

 

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| ** **                                                                                  | ** ** | **Three  Months Ended June 30,**     | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **                                                                                  | ** ** | **Net loss available to**                 | ** ** | **Number** | ** ** | **Per  Share** | ** ** | **Net  loss available to** | ** ** | **Number** | ** ** | **Per  Share** | ** ** |
| ** **                                                                                  | ** ** | **common stockholders**                   | ** ** | **of  Shares** | ** ** | **Amounts** | ** ** | **common  stockholders** | ** ** | **of  Shares** | ** ** | **Amounts** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands, except per share data)** | ** ** |
| **Basic EPS**                                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net  loss before extraordinary item, as reported                                            |       | $                                         | (86,725    | ) | 63,105 |   | $ | (1.37 | ) | $ | (25,887 | ) | 62,599 |   | $ | (0.41 | ) |
| Less:  Preferred stock dividends, inducement, and amortization of preferred stock  discount |       | (23,623                                   | )          | — |   | — |   | — |   | — |   | — |   |
| Loss  available to common stockholders before extraordinary item                            |       | (110,348                                  | )          | 63,105 |   | (1.75 | ) | (25,887 | ) | 62,599 |   | (0.41 | ) |
| Extraordinary  item                                                                         |       | (5,366                                    | )          | 63,105 |   | (0.08 | ) | — |   | — |   | — |   |
| Net  loss available to common stockholders after extraordinary item                         |       | $                                         | (115,714   | ) | 63,105 |   | $ | (1.83 | ) | $ | (25,887 | ) | 62,599 |   | $ | (0.41 | ) |
|                                                                                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                                                                             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Effect  of dilutive securities:                                                             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Stock  options                                                                              |       | —                                    |       | — |   | — |   | — |   | — |   | — |   |
| Restricted  stock                                                                           |       | —                                    |       | — |   | — |   | — |   | — |   | — |   |
| Stock  warrants                                                                             |       | —                                    |       | — |   | — |   | — |   | — |   | — |   |
|                                                                                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Loss  available to common stockholders before extraordinary item                            |       | $                                         | (110,348   | ) | 63,105 |   | $ | (1.75 | ) | $ | (25,887 | ) | 62,599 |   | $ | (0.41 | ) |
| Extraordinary  item                                                                         |       | (5,366                                    | )          | 63,105 |   | (0.08 | ) | — |   | — |   | — |   |
| Net  loss available to common stockholders after extraordinary item                         |       | $                                         | (115,714   | ) | 63,105 |   | $ | (1.83 | ) | $ | (25,887 | ) | 62,599 |   | $ | (0.41 | ) |

 
| ** **                                                                                  | ** ** | **Six  Months Ended June 30,**       | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **                                                                                  | ** ** | **Net loss available to**                 | ** ** | **Number** | ** ** | **Per  Share** | ** ** | **Net  loss available to** | ** ** | **Number** | ** ** | **Per  Share** | ** ** |
| ** **                                                                                  | ** ** | **common stockholders**                   | ** ** | **of  Shares** | ** ** | **Amounts** | ** ** | **common  stockholders** | ** ** | **of  Shares** | ** ** | **Amounts** | ** ** |
| ** **                                                                                  | * *   | **(In thousands, except per share data)** | * *   |
| **Basic EPS**                                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net  loss before extraordinary item, as reported                                            |       | $                                         | (109,191   | ) | 63,052 |   | $ | (1.73 | ) | $ | (20,843 | ) | 62,542 |   | $ | (0.33 | ) |
| Less:  Preferred stock dividends, inducement, and amortization of preferred stock  discount |       | (32,366                                   | )          | — |   | — |   | — |   | — |   | — |   |
| Loss  available to common stockholders before extraordinary item                            |       | (141,557                                  | )          | 63,052 |   | (2.25 | ) | (20,843 | ) | 62,542 |   | (0.33 | ) |
| Extraordinary  item                                                                         |       | (5,366                                    | )          | 63,052 |   | (0.08 | ) | — |   | — |   | — |   |
| Net  loss available to common stockholders after extraordinary item                         |       | $                                         | (146,923   | ) | 63,052 |   | $ | (2.33 | ) | $ | (20,843 | ) | 62,542 |   | $ | (0.33 | ) |
|                                                                                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                                                                             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Effect  of dilutive securities:                                                             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Stock  options                                                                              |       | —                                    |       | — |   | — |   | — |   | — |   | — |   |
| Restricted  stock                                                                           |       | —                                    |       | — |   | — |   | — |   | — |   | — |   |
| Stock  warrants                                                                             |       | —                                    |       | — |   | — |   | — |   | — |   | — |   |
|                                                                                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Loss  available to common stockholders before extraordinary item                            |       | $                                         | (141,557   | ) | 63,052 |   | $ | (2.25 | ) | $ | (20,843 | ) | 62,542 |   | $ | (0.33 | ) |
| Extraordinary  item                                                                         |       | (5,366                                    | )          | 63,052 |   | (0.08 | ) | — |   | — |   | — |   |
| Net  loss available to common stockholders after extraordinary item                         |       | $                                         | (146,923   | ) | 63,052 |   | $ | (2.33 | ) | $ | (20,843 | ) | 62,542 |   | $ | (0.33 | ) |

 

The following outstanding convertible preferred stock, stock options,and restricted stock for the three and six months ended June 30, 2009 and2008, respectively, were excluded from the computation of diluted EPS becauseincluding them would have had an antidilutive effect:

 
| ** **                  | ** ** | **Three Months Ended********June 30,** | ** ** | **Six Months Ended********June 30,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                    | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| * *                    | * *   | **(In thousands)**                          | * *   | **(In thousands)**                        | * *   |
| Convertible preferred stock |       | 12,772                                      |       | 9,838                                     |       | 12,772 |   | 4,919 |   |
| Stock options               |       | 2,568                                       |       | 2,113                                     |       | 2,575 |   | 1,234 |   |
| Restricted stock            |       | 598                                         |       | 58                                        |       | 838 |   | 97 |   |

 

**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 fiveoperating segments for purposes of management reporting: retail banking,commercial lending,

 

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treasury,residential lending, and other.  The Bank’sstrategic focus has been shifting and evolving over the last several yearswhich has influenced how the chief operating decision maker views the Company’sbusiness operations and assesses its economic performance.  Specifically, the Company’s business focushas culminated in a two-segment core business structure: Retail Banking andCommercial Banking.  A third segment,which is comprised of a combination of previous operating segments—Treasury andOther, provides broad 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 accordance with SFAS No. 131.  The objective of combining certain segmentsunder a new reporting structure was to better align the Company’s servicestructure with its customer base, and to provide a platform 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 Bankingsegment 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 2008 since these changes were adopted on a prospectivebasis.  The Company has, however,performed a high level assessment of the impact of these transfer pricingassumption changes to the various operating segments.  Based on this assessment, the Companydetermined that the full year impact of these changes was not significantoverall, and would have been favorable to the segment pretax profit (loss)results for the Retail Banking and Commercial banking segments but unfavorableto the Other segment during 2008. Additionally, the changes in transfer pricing assumptions implementedduring the first quarter of 2009 would not have altered the conclusion of ourgoodwill impairment test performed as of June 30, 2008, had theseassumptions been retroactively implemented during the second quarter and firsthalf 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 

 

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andadministrative costs and the provision for loan losses.  Net interest income is based on the Company’sinternal funds transfer pricing system which assigns a cost of funds or acredit for funds to assets or liabilities based on their type, maturity orrepricing characteristics.  Noninterestincome and noninterest expense, including depreciation and amortization,directly attributable to a segment are assigned to that business.  Indirect costs, including overhead expense,are allocated to the segments based on several factors, including, but notlimited to, full-time equivalent employees, loan volume and depositvolume.  The provision for credit lossesis allocated based on actual chargeoffs for the period as well as average loanvolume 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 and six months ended June 30, 2009 and 2008:

 

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| ** **                               | ** ** | **Three Months Ended June 30, 2009** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **Retail**                                | ** ** | **Commercial** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Banking**                               | ** ** | **Banking** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                               | * *   | **(In thousands)**                        | * *   |
| * *                                 | * *   | * *                                  | * *   | * * | * * | * * | * * | * * | * * |
| Interest income                          |       | $                                         | 53,930     |   | $ | 61,339 |   | $ | 31,064 |   | $ | 146,333 |   |
| Charge for funds used                    |       | (16,395                                   | )          | (17,073 | ) | (51,959 | ) | (85,427 | ) |
| Interest spread on funds used            |       | 37,535                                    |       | 44,266 |   | (20,895 | ) | 60,906 |   |
| Interest expense                         |       | (24,540                                   | )          | (4,566 | ) | (28,967 | ) | (58,073 | ) |
| Credit on funds provided                 |       | 43,026                                    |       | 4,721 |   | 37,680 |   | 85,427 |   |
| Interest spread on funds provided        |       | 18,486                                    |       | 155 |   | 8,713 |   | 27,354 |   |
| Net interest income (expense)            |       | $                                         | 56,021     |   | $ | 44,421 |   | $ | (12,182 | ) | $ | 88,260 |   |
|                                     |       |                                      |       |   |   |   |   |   |   |
| Provision for loan losses                |       | $                                         | 45,263     |   | $ | 106,159 |   | $ | — |   | $ | 151,422 |   |
| Depreciation, amortization and accretion |       | 2,927                                     |       | 1,006 |   | 1,832 |   | 5,765 |   |
| Goodwill                                 |       | 320,566                                   |       | 16,872 |   | — |   | 337,438 |   |
| Segment pretax profit (loss)             |       | (28,275                                   | )          | (72,662 | ) | (46,336 | ) | (147,273 | ) |
| Segment assets                           |       | 6,650,481                                 |       | 4,808,232 |   | 1,260,802 |   | 12,719,515 |   |

 
| ** **                               | ** ** | **Three Months Ended June 30, 2008** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **Retail**                                | ** ** | **Commercial** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Banking**                               | ** ** | **Banking** | ** ** | **Other** | ** ** | **Total** | ** ** |
| * *                                 | * *   | **(In thousands)**                        | * *   |
| * *                                 | * *   | * *                                  | * *   | * * | * * | * * | * * | * * | * * |
| Interest income                          |       | $                                         | 68,913     |   | $ | 81,067 |   | $ | 17,925 |   | $ | 167,905 |   |
| Charge for funds used                    |       | (31,500                                   | )          | (36,189 | ) | (31,414 | ) | (99,103 | ) |
| Interest spread on funds used            |       | 37,413                                    |       | 44,878 |   | (13,489 | ) | 68,802 |   |
| Interest expense                         |       | (35,086                                   | )          | (3,263 | ) | (37,380 | ) | (75,729 | ) |
| Credit on funds provided                 |       | 52,913                                    |       | 4,239 |   | 41,951 |   | 99,103 |   |
| Interest spread on funds provided        |       | 17,827                                    |       | 976 |   | 4,571 |   | 23,374 |   |
| Net interest income                      |       | $                                         | 55,240     |   | $ | 45,854 |   | $ | (8,918 | ) | $ | 92,176 |   |
|                                     |       |                                      |       |   |   |   |   |   |   |
| Provision for loan losses                |       | $                                         | 19,926     |   | $ | 65,074 |   | $ | — |   | $ | 85,000 |   |
| Depreciation, amortization and accretion |       | 3,807                                     |       | 210 |   | 806 |   | 4,823 |   |
| Goodwill                                 |       | 320,436                                   |       | 17,138 |   | — |   | 337,574 |   |
| Segment pretax profit (loss)             |       | 5,467                                     |       | (29,577 | ) | (20,931 | ) | (45,041 | ) |
| Segment assets                           |       | 6,041,185                                 |       | 5,127,452 |   | 616,263 |   | 11,784,900 |   |

 
| ** **                               | ** ** | **Six Months Ended June 30, 2009** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                               | ** ** | **Retail**                              | ** ** | **Commercial** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Banking**                             | ** ** | **Lending** | ** ** | **Treasury** | ** ** | **Total** | ** ** |
| * *                                 | * *   | **(In thousands)**                      | * *   |
| * *                                 | * *   | * *                                | * *   | * * | * * | * * | * * | * * | * * |
| Interest income                          |       | $                                       | 108,940    |   | $ | 124,398 |   | $ | 57,918 |   | $ | 291,256 |   |
| Charge for funds used                    |       | (31,678                                 | )          | (32,103 | ) | (108,824 | ) | (172,605 | ) |
| Interest spread on funds used            |       | 77,262                                  |       | 92,295 |   | (50,906 | ) | 118,651 |   |
| Interest expense                         |       | (51,548                                 | )          | (9,262 | ) | (62,505 | ) | (123,315 | ) |
| Credit on funds provided                 |       | 84,765                                  |       | 9,321 |   | 78,519 |   | 172,605 |   |
| Interest spread on funds provided        |       | 33,217                                  |       | 59 |   | 16,014 |   | 49,290 |   |
| Net interest income (expense)            |       | $                                       | 110,479    |   | $ | 92,354 |   | $ | (34,892 | ) | $ | 167,941 |   |
|                                     |       |                                    |       |   |   |   |   |   |   |
| Provision for loan losses                |       | $                                       | 79,378     |   | $ | 150,044 |   | $ | — |   | $ | 229,422 |   |
| Depreciation, amortization and accretion |       | 6,072                                   |       | 1,887 |   | 3,613 |   | 11,572 |   |
| Goodwill                                 |       | 320,566                                 |       | 16,872 |   | — |   | 337,438 |   |
| Segment pretax (loss) profit             |       | (39,980                                 | )          | (79,567 | ) | (63,657 | ) | (183,204 | ) |
| Segment assets                           |       | 6,650,481                               |       | 4,808,232 |   | 1,260,802 |   | 12,719,515 |   |

 
| ** **                               | ** ** | **Six Months Ended June 30, 2008** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                               | ** ** | **Retail**                              | ** ** | **Commercial** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Banking**                             | ** ** | **Lending** | ** ** | **Treasury** | ** ** | **Total** | ** ** |
| * *                                 | * *   | **(In thousands)**                      | * *   |
| * *                                 | * *   | * *                                | * *   | * * | * * | * * | * * | * * | * * |
| Interest income                          |       | $                                       | 144,959    |   | $ | 174,117 |   | $ | 36,013 |   | $ | 355,089 |   |
| Charge for funds used                    |       | (76,469                                 | )          | (87,985 | ) | (41,276 | ) | (205,730 | ) |
| Interest spread on funds used            |       | 68,490                                  |       | 86,132 |   | (5,263 | ) | 149,359 |   |
| Interest expense                         |       | (77,088                                 | )          | (7,359 | ) | (78,847 | ) | (163,294 | ) |
| Credit on funds provided                 |       | 117,520                                 |       | 9,881 |   | 78,329 |   | 205,730 |   |
| Interest spread on funds provided        |       | 40,432                                  |       | 2,522 |   | (518 | ) | 42,436 |   |
| Net interest income                      |       | $                                       | 108,922    |   | $ | 88,654 |   | $ | (5,781 | ) | $ | 191,795 |   |
|                                     |       |                                    |       |   |   |   |   |   |   |
| Provision for loan losses                |       | $                                       | 47,788     |   | $ | 92,212 |   | $ | — |   | $ | 140,000 |   |
| Depreciation, amortization and accretion |       | 7,064                                   |       | 431 |   | 2,608 |   | 10,103 |   |
| Goodwill                                 |       | 320,436                                 |       | 17,138 |   | — |   | 337,574 |   |
| Segment pretax profit (loss)             |       | 3,792                                   |       | (22,474 | ) | (18,717 | ) | (37,399 | ) |
| Segment assets                           |       | 6,041,185                               |       | 5,127,452 |   | 616,263 |   | 11,784,900 |   |

 

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

 

*Exchange of Series A Preferred Stock for Common Stock*

 

**OnJuly 7, 2009, the Company completed the exchange of approximately 90thousand shares of Series A preferred stock into 8.1 million shares ofcommon stock.  The Company had previouslyentered into binding agreements with certain shareholders on June 29 and June 30,2009 in connection with this exchange. The exchange ratio for this transaction was 90 shares of common stockfor each share of Series A preferred stock.**

** **

**Additionally,the Company has entered into separate agreements at the same exchange ratiowith two other shareholders to exchange a total of 20,466 shares of Series Apreferred stock for 1,841,940 shares of common stock.  Both of these transactions were entered intoand completed in July 2009.**

** **

**Asa result of these exchange transactions, the Company’s tangible common equityincreased by an aggregate of $ 107.5 million net of original stock issuancecosts.**

** **

***Private Sales of Common Stock***

** **

**OnJuly 14, 2009, in private placement transactions, two customers of theCompany purchased 5,000,000 newly issued shares of the Company’s common stockat a price of $5.50 per share, increasing tangible common equity by $26.0million net of stock issuance costs. The investors will have the right toregister these shares for resale to the public, but have agreed not to sell anyof these shares until October 21, 2009 without the Company’s consent.**

** **

*PublicOffering of Common Stock*

 

OnJuly 20, 2009, the Company announced a public offering of 11 millionshares of its common stock priced at $6.35. The underwriter also exercised its option to purchase an additional 1.65million shares of the Company’s common stock. The Company received net proceeds of approximately $76.7 million, net ofstock issuance costs, in conjunction with this common stock offering.

 

*Dividend Payout*

 

On July 15, 2009, the Company’s Board ofDirectors approved the payment of third quarter dividends of $20.00 per shareon the Company’s Series A preferred stock. The dividend is payable on or about August 1, 2009 to shareholdersof record as of July 15, 2009. Additionally, on July 15, 2009, the Board declared a dividend of$0.01 per share on the Company’s common stock payable on or about August 26,2009 to shareholders of record as of August 12, 2009.

 

The Board has also authorized the payment of thirdquarter dividends on the Company’s Series B Preferred Stock to be paid on August 15,2009.

 

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**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL 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 financialinformation contained within these statements is, to a significant extent,financial information that is based on approximate measures of the financialeffects of transactions 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 the results of operations.

 

·                  fair valuation of financialinstruments;

·                  investment securities;

·                  allowance for loan losses;

·                  other real estate owned;

·                  loan sales;

·                  goodwill impairment; and

·                  share-based compensation

 

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**

 

Duringthe second quarter of 2009, we continued to sustain losses brought about by theprolonged recessionary climate and the downturn in the real estate market.  As a result of our aggressive stance inmanaging our problem assets, we recorded a net loss of $92.1 million or $(1.83)per share, largely due to $151.4 million in loan loss provisions and $37.4million in other than temporary impairment (“OTTI”) losses on our trustpreferred securities.  Despite theongoing economic challenges,  we endedthe quarter with record assets, record deposits, and strong levels of bothcapital and allowance

 

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forloan losses.  Our core profitability andliquidity position also remain strong, and our net interest margin has notablyimproved.

 

During the second quarter of 2009, we made significant strides inmanaging down our problem assets with sizeable reductions in nonaccrual loans,delinquent loans, and other real estate owned (“OREO”).  Total nonaccrual loans decreased 35% to$162.2 million as of June 30, 2009 from $248.0 million as of March 31,2009 and 24% from $214.6 million as of December 31, 2008.  Similarly, total loans delinquent 30 or moredays decreased by 39% or $188.0 million as of June 30, 2009 relative to March 31,2009.  The decrease in problem assets isprimarily due to the sale, payoff and resolution of problem assets.  We have also noted fewer migrations into thenonaccrual and delinquency categories. During the second quarter of 2009, we sold $166.3 million in loans and$55.8 million in OREO properties.  Ourproactive actions to identify and manage our problem assets have resulted inelevated chargeoff levels throughout 2008 and the first half of 2009.  Total net chargeoffs amounted to $133.9million during the second quarter of 2009, compared to $59.6 million and $34.8million during the first quarter of 2009 and second quarter of 2008,respectively.  At June 30, 2009, theallowance for loan losses amounted to $223.7 million or 2.62% of total grossloans, compared to $195.5 million or 2.42% as of March 31, 2009, and $178.0million or 2.16% as of December 31, 2008. We recorded $151.4 million in loan loss provisions during the secondquarter of 2009, compared to $78.0 million and $85.0 million recorded duringthe first quarter of 2009 and second quarter of 2008, respectively.

 

Nonperforming assets totaled $189.4 million representing 1.49% of totalassets at June 30, 2009.  Thiscompares to $286.6 million or 2.28% at March 31, 2009 and $252.9 millionor 2.04% of total assets at December 31, 2008.  Nonperforming assets as of June 30, 2009are comprised of nonaccrual loans totaling $162.2 million and other real estateowned totaling $27.2 million.  Includedin nonaccrual loans as of June 30, 2009 are loans totaling $14.7 millionwhich were not 90 days past due as of June 30, 2009, but have beenclassified as nonaccrual due to concerns surrounding collateral values andfuture collectibility.  The decrease innonperforming assets at June 30, 2009, relative to March 31, 2009,was largely due to a decline in nonaccrual loans of $85.8 million.  We also had $89.5 million and $11.0 millionin total performing restructured loans as of June 30, 2009 and December 31,2008, respectively, that were excluded from nonperforming assets.  Included in the $89.5 million totalrestructured loans as of June 30, 2009 were $77.2 million in performingA/B notes.  In A/B note restructurings,the original loan is bifurcated into two notes where the A note represents theportion of the original loan which allows for acceptable loan-to-value and debtcoverage on the collateral and is expected to be collected in full and the Bnote represents the portion of the original loan which is the shortfall invalue and is fully charged off.  The A/Bnotes balance as of June 30, 2009 is comprised of A note balances only.  The A notes are performing loans at marketinterest rates with adequate collateral and cash flow and are accruinginterest.  In accordance with generallyaccepted accounting principles, A notes must be disclosed as troubled debtrestructurings until the beginning of the next fiscal year.

 

Inaddition to the loan loss provision of $151.4 million posted during the secondquarter of 2009, we also recorded $37.4 million in OTTI losses on our pooledtrust preferred securities prompted by diminishing collateral values,deteriorating cash flows, and increased deferrals and defaulted payments frommany small banks that issued these instruments. As a result of these developments, all, but one, of our pooled trustpreferred securities were downgraded to below investment grade status duringthe second quarter of 2009.  Othernotable factors that negatively impacted earnings during the quarter ended June 30,2009 are $5.7 million in FDIC special assessments and $8.7 million in OREOexpenses.  Excluding all of these items,our core pretax operating income before extraordinary item was $56.0 millionfor the second quarter of 2009.  Thiscompares to $49.3 million and $50.4 million in core pretax operating earningsduring the first quarter of 2009 and second quarter of 2008, respectively.  We believe that core pretax operating incomeis a strong indicator of our stable core earnings.  A reconciliation of our loss before benefitfrom income taxes to core pretax operating income is as follows:

 

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| ** **                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **June 30, 2009** | ** ** | **March 31, 2009** | ** ** | **June 30, 2008** | ** ** |
|                                     | ** ** | **(In thousands)**     | ** ** |
| Loss before benefit for income taxes     |       | $                      | (147,273   | ) | $ | (35,931 | ) | $ | (45,041 | ) |
| Add:                                     |       |                   |       |   |   |   |   |
| Provision for loan losses                |       | 151,422                |       | 78,000 |   | 85,000 |   |
| Impairment loss on investment securities |       | 37,447                 |       | 200 |   | 9,945 |   |
| FDIC special assessment                  |       | 5,700                  |       | — |   | — |   |
| Other real estate owned expense          |       | 8,682                  |       | 7,031 |   | 508 |   |
| Core pre-tax operating income            |       | $                      | 55,978     |   | $ | 49,300 |   | $ | 50,412 |   |

 

Netinterest income amounted to $88.3 million during the quarter ended June 30,2009, compared with $79.7 million during the first quarter of 2009 and $92.2million during the second quarter of 2008. Our net interest margin increased 24 basis points to 2.98% during thesecond quarter of 2009 relative to 2.74% during the first quarter of 2009.  The increase in our net interest margin fromthe first quarter can be attributed to the maturation of higher cost CDs, newcore deposits at lower costs, the maturity and paydown of FHLB advances, theimpact from the desecuritization, and higher yields realized on investablefunds and new loans.  Compared to thesecond quarter 2008 net interest margin of 3.33%, our net interest margin forthe second quarter of 2009 decreased 35 basis points.  This is primarily a result of the sharpdecline in interest rates prompted by several consecutive Federal Reserve ratecuts and the reversal of interest from nonaccrual loans.  We anticipate our net interest margin toincrease during the remainder of 2009 as we continue to increase our coredeposit base and pay down higher cost FHLB advances.

 

Totalnoninterest loss amounted to $(26.2) million during the second quarter of 2009,compared with noninterest income of $13.8 million during the first quarter of2009 and $3.4 million during the second quarter of 2008.  The decrease in noninterest income during thesecond quarter of 2009 is primarily due to $37.4 million in OTTI losses ontrust preferred securities recorded during the second quarter of 2009, comparedwith only $200 thousand and $9.9 million in such losses recorded during thefirst quarter of 2009 and the second quarter of 2008, respectively.  Core noninterest income amounted to $9.5million during the second quarter of 2009, compared with $10.4 million and $9.6million recorded during the first quarter of 2009 and the second quarter of2008, respectively.  A reconciliation ofour noninterest income to core noninterest income is as follows:

 
| ** **                                | ** **   | **Three Months Ended** | ** **   |
|-------------------------------------------|--------------|------------------------|--------------|
| ** **                                | ** **   | **June 30, 2009** | ** **   | **March 31, 2009** | ** ** | **June 30, 2008** | ** ** |
| *** ***                              | *** *** | **(In thousands)**     | *** *** |
| Noninterest (loss) income                 |         | $                      | (26,199      | ) | $ | 13,794 |   | $ | 3,438 |   |
| Add:                                      |         |                   |         |   |   |   |   |
| Impairment loss on investment securities  |         | 37,447                 |         | 200 |   | 9,945 |   |
| Subtract:                                 |         |                   |         |   |   |   |   |
| Net gain on sale of investment securities |         | (1,680                 | )            | (3,521 | ) | (3,433 | ) |
| Net gain on fixed assets                  |         | (25                    | )            | (25 | ) | (86 | ) |
| Net gain on sale of loans                 |         | (3                     | )            | (8 | ) | (273 | ) |
| Core noninterest income                   |         | $                      | 9,540        |   | $ | 10,440 |   | $ | 9,591 |   |

 

Totalnoninterest expense amounted to $57.9 million during the second quarter of2009, compared with $51.4 million and $55.7 million recorded during the firstquarter of 2009 and the second quarter of 2008, respectively.  The increase in noninterest expense isprimarily due to higher OREO expenses and credit cycle related expenses as wellas higher deposit insurance premiums and regulatory assessments.  Our efficiency ratio, which representsnoninterest expense (excluding amortization and/or impairment losses onintangible assets and investments in affordable housing partnerships) dividedby the aggregate of net interest income before provision for loan losses andnoninterest income, excluding 

 

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impairmentlosses on investment securities, was 55.12% during the second quarter of 2009compared with 51.80% during the first quarter of 2009 and 48.62% during thesecond quarter of 2008.  We will continueto explore various cost management opportunities during the remainder of 2009.

 

Totalconsolidated assets at June 30, 2009 increased to $12.72 billion, comparedwith $12.42 billion at December 31, 2008. The net increase in total assets is comprised predominantly of increasesof held-to-maturity investment securities of $672.5 million, short-terminvestments of $325.9 million and net loans receivable of $219.9 million.  These increases were partially offset bydecreases in cash and cash equivalents of $305.7 million and available-for-saleinvestment securities of $658.4 million. Total liabilities increased 3% to $11.24 billion as of June 30,2009, compared to $10.87 billion as of December 31, 2008.  The net increase in liabilities is primarilydue to an increase in total deposits of $516.9 million, partially offset by adecrease in FHLB advances of $180.1 million.

 

Totalaverage assets increased to $12.62 billion during the second quarter of 2009,compared to $12.50 billion and $11.77 billion during the first quarter of 2009and the second quarter of 2008, respectively. Growth in average short-term investments and average held-to-maturityinvestment securities accounted for the majority of the increase in total averageassets during the first two quarters of 2009 relative to the second quarter of2008.  The increases in averageshort-term investments and held-to-maturity investment securities can beattributed to proceeds received in conjunction with our issuance of Series Bpreferred stock during December 2008, notable increases in our depositbase during the first two quarters of 2009, as well as the reinvestment of aportion of our loan payoffs into short-term securities and investmentsecurities.  Total average deposits grewto $8.44 billion during the second quarter of 2009, compared to $8.31 billionand $7.50 billion during the first quarter of 2009 and the second quarter of2008, respectively, with the largest increases coming from money marketaccounts and time deposits.

 

Duringthe second quarter of 2009, we continued to experience strong deposit growthwith total deposits increasing to a record $8.66 billion as of June 30,2009, representing a 6% or $516.9 million, increase over year-end 2008.  This increase in total deposits waspredominantly due to a 20% or $671.1 million increase in our core deposit baseas of June 30, 2009 relative to December 31, 2008.  Since mid-2008, we have experienced strongdeposit momentum through both our retail branch network and our commercialdeposit platforms despite volatile and challenging market conditions.  As a result of this increase in coredeposits, we were able to pay down higher cost FHLB advances which decreased$180.0 million or 13% to $1.17 billion as of June 30, 2009.  We intend to pay down maturing FHLB advancestotaling $450.0 million throughout the remainder of 2009.  These FHLB advances currently have interestrates ranging from 4% to over 5%.  Ourcost of deposits has steadily declined in conjunction with the growth of ourcore deposit base, decreasing 34 basis points to 1.47% during the secondquarter of 2009, relative to the first quarter of 2009, and decreasing 67 basispoints since the quarter ended December 31, 2008.  Similarly, our cost of funds decreased 32basis points to 2.12% during the second quarter of 2009, from 2.44% for thefirst quarter of 2009, and decreased 65 basis points since the quarter ended December 31,2008.

 

Our liquidity position continues to get even stronger.  Our total borrowing capacity and holdings ofcash and cash equivalents and short-term investments increased to $3.97 billionas of June 30, 2009, compared to $3.94 billion as of March 31, 2009and $3.57 billion as of December 31, 2008. As of June 30, 2009, we had $573.1 million in cash and cashequivalents, $554.3 million in short-term investments, and approximately $2.85billion in available borrowing capacity from various sources including theFederal Home Loan Bank, the Federal Reserve Bank, and federal funds facilitieswith several financial institutions.  Webelieve that our liquidity position is more than sufficient to meet ouroperating expenses, borrowing needs and other obligations.

 

Despitethe large net loss posted during the second quarter of 2009, we continue tosignificantly exceed well capitalized requirements under all regulatoryguidelines.  However, in light of the 

 

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challengingeconomic environment, we recognize the importance of building capital andpreparing for a potentially more severe economic cycle.  Although the Bank was not subject to theSupervisory Capital Assessment Program (“SCAP”) stress test that many largebanks recently underwent, we conducted our own comprehensive stress test toassess our sensitivity to even more severe economic conditions.  Utilizing loss scenarios similar to those setforth in the public release of the SCAP stress test, we applied the “moreadverse” guidelines to our loan and investment portfolios.  Based on the results of our simulated stresstest, we would continue to be more than well capitalized under all regulatoryguidelines.  Our stress test indicatedthat with an additional $101 million in tangible equity, we would have sufficienttangible common equity to maintain a tangible common equity to risk weightedassets ratio of 4.00% even in a more severe economic environment.

 

Inresponse to the recommendation derived from our simulated stress test, weundertook several initiatives in conjunction with an overall comprehensivecapital plan to boost our tangible common capital during the second quarter of2009.  In May 2009, we desecuritizedour own private-label mortgage backed securities, increasing tangible commonequity by $30.6 million.  In June 2009and July 2009, we exchanged an aggregate of approximately 111 thousandshares of Series A preferred stock for approximately 10 million shares ofour common stock, resulting in $107.5 million of additional tangible commonequity net of original stock issuance costs. In July 2009, we entered into private placement transactions tosell 5 million newly issued shares of common stock at a price of $5.50 pershare increasing tangible common equity by $26.0 million net of stock issuance costs. Also in July 2009, we completed a public offering of12.65 million shares of our common stock for which the Company receivedtotal proceeds of approximately $76.7 million net of stock issuance costs.  These combined actions raised our tangiblecommon equity level by $240.8 million, well above the cushion recommended underour simulated stress test.  With thiscapital cushion, we believe we are well positioned to withstand the prolongedeconomic downturn and challenging credit environment.  As of June 30, 2009, our totalrisk-based capital ratio was 14.28% or $447.4 million more than the 10.00%regulatory requirement for well-capitalized banks.  Our Tier 1 risk-based capital ratio of 12.25%and our Tier 1 leverage ratio of 10.38% as of June 30, 2009 alsosignificantly exceeded regulatory guidelines for well-capitalized banks.

 

Asof June 30, 2009, we updated our goodwill impairment analysis to determinewhether and to what extent our goodwill asset was impaired.  As a result of this updated analysis, wedetermined that there was no goodwill impairment at June 30, 2009.

 

OnApril 27, 2009, the Board of Directors authorized a further reduction inour common stock dividend to $0.01 per share commencing in the second quarterof 2009, as compared with $0.02 per share paid during the first quarter of 2009and 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.  TheBoard of Directors has declared third quarter dividends on our common stock andremaining Series A preferred stock. We will review our dividend policy quarterly in light of the currenteconomic environment.

 

Wecontinue to explore opportunities for growth and expansion.  During the second quarter of 2009, weobtained approval to open a Representative Office in Taipei.  Our growing physical presence in Asiaincludes a full service branch in Hong Kong and Representative Offices inBeijing and Shanghai.  With ourincreasing presence in Asia, we will be better able to facilitate our customers’lending and overall banking needs. Additionally, during the second quarter of 2009, we successfullylaunched a global foreign exchange initiative and built a foreign exchangetrading platform to further expand our international banking services.  We have also embraced “Green” initiatives andhave partnered with organizations including the Los Angeles Lakers, SouthernCalifornia Edison, and Sempra Energy to support programs that fosterconservation and efficient energy usage. These partnerships have raised our visibility on our “Green” initiativesand resulted in many new lending and deposit relationships.

 

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**Resultsof Operations**

 

Netloss after the extraordinary item for the second quarter of 2009 totaled$(92.1) million, compared with net loss of $(25.9) million for the secondquarter of 2008.  On a per basic anddiluted share basis, net loss was $(1.83) and $(0.41) during the secondquarters of 2009 and 2008, respectively. During the second quarter of 2009, our operating results weresignificantly impacted by $151.4 million in loan loss provisions and $37.4million in credit-related impairment loss on investment securities, partiallyoffset by a $60.5 million benefit from income taxes.  In comparison, we recorded $85.0 million inloan loss provisions and $9.9 million in impairment losses on investmentsecurities, partially offset by a $19.2 million benefit from income taxes.  Our annualized return on average total assetsdecreased to (2.92%) for the quarter ended June 30, 2009, from (0.88%) forthe same period in 2008.  The annualizedreturn on average stockholders’ equity decreased to (43.81%) for the secondquarter of 2009, compared with (8.48%) for the second quarter of 2008.

 

We incurred a net loss after extraordinary item for the six monthsended June 30, 2009 of $(114.6) million, or $(2.33) loss per basic anddiluted share, compared with net loss of $20.8 million, or $(0.33) loss perbasic and diluted share, reported during the corresponding period in 2008.  The net loss reported during the first halfof 2009 was primarily due to the $229.4 million in loan loss provisions and$37.6 million in credit-related impairment losses on investment securities,partially offset by a $74.0 million benefit from income taxes.  In comparison, we recorded $140.0 million inloan loss provisions recorded during the first half of 2008 and $9.9 million inimpairment losses on investment securities, partially offset by a $16.6 millionbenefit from income taxes.  Ourannualized return on average total assets decreased to (1.82%) for the sixmonths ended June 30, 2009, compared to (0.35%) for the same period in2008.  The annualized return on averagetotal stockholders’ equity decreased to (14.92%) for the first half of 2009,compared with (3.51%) for the same period in 2008.

 

## *Components of Net Loss*

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                 | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| *** ***                               | ** ** | **(In millions)**      | ** ** | **(In millions)**    | ** ** |
| Net interest income                        |       | $                      | 88.3       |                 | $          | 92.2 |   | $ | 167.9 |   | $ | 191.8 |   |
| Provision for loan losses                  |       | (151.4                 | )          | (85.0                | )          | (229.4 | ) | (140.0 | ) |
| Noninterest (loss) income                  |       | (26.2                  | )          | 3.4                  |       | (12.4 | ) | 19.3 |   |
| Noninterest expense                        |       | (57.9                  | )          | (55.7                | )          | (109.3 | ) | (108.5 | ) |
| Benefit from income taxes                  |       | 60.5                   |       | 19.2                 |       | 74.0 |   | 16.6 |   |
| Net loss before extraordinary item         |       | (86.7                  | )          | (25.9                | )          | (109.2 | ) | (20.8 | ) |
| Impact of desecuritization, net of tax     |       | (5.4                   | )          | —               |       | (5.4 | ) | — |   |
| Net loss after extraordinary item          |       | $                      | (92.1      | )                    | $          | (25.9 | ) | $ | (114.6 | ) | $ | (20.8 | ) |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Annualized return on average total assets  |       | (2.92                  | )%         | (0.88                | )%         | (1.82 | )% | (0.35 | )% |
| Annualized return on average total equity  |       | (24.07                 | )%         | (8.48                | )%         | (14.92 | )% | (3.51 | )% |
| Annualized return on average common equity |       | (43.81                 | )%         | (8.48                | )%         | (27.66 | )% | (3.51 | )% |

#### ** **

#### **Net Interest Income**

#### ** **

Ourprimary source of revenue is net interest income, which is the differencebetween interest earned on loans, investment securities and other earningassets less the interest expense on deposits, borrowings and otherinterest-bearing liabilities.  Netinterest income for the second quarter of 2009 totaled $88.3 million, a 4%decrease over net interest income of $92.2 million same period in2008.  For

 

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thefirst half of 2009, net interest income decreased 12% to $167.9 million,compared to $191.8 million for the first half of 2008.

 

Netinterest margin, defined as net interest income divided by average earningassets, decreased 35 basis points to 2.98% during the quarter ended June 30,2009, from 3.33% during the second quarter of 2008.  Similarly, the net interest margin for thefirst half of 2009 decreased 62 basis points to 2.86%, compared with 3.48%during the same period in 2008.  Thedecline in the net interest margin reflects the steep decrease in the federalfunds target rate during 2008, the actions we took to resolve our problemassets, and the reinvestment of net loan payoffs into lower yielding investmentsecurities and other short-term investments.

 

The following table presents the net interest spread, net interest margin,average balances, interest income and expense, and the average yields and ratesby asset and liability component for the three months ended June 30, 2009and 2008:

 

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| ** **                                      |   | **Three  Months Ended June 30,** |       |
|-------------------------------------------------|--------|---------------------------------------|------------|
| ** **                                      |   | **2009**                              |       | **2008** |   |
| ** **                                      |   |                                  |       |   |   | **Average** |   |   |   |   |   | **Average** |   |
| ** **                                      |   | **Average**                           |       |   |   | **Yield/** |   | **Average** |   |   |   | **Yield/** |   |
| ** **                                      |   | **Volume**                            |       | **Interest** |   | **Rate  (1)** |   | **Volume** |   | **Interest** |   | **Rate  (1)** |   |
| ** **                                      |   | **(in thousands)**                    |       |
| **ASSETS**                                      |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                        |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Short-term investments                          |   | $                                     | 876,386    |   | $ | 2,509 |   | 1.15 | % | $ | 194,206 |   | $ | 1,051 |   | 2.17 | % |
| Securities purchased under resale agreements    |   | 51,374                                |       | 1,292 |   | 9.95 | % | 50,000 |   | 1,264 |   | 10.14 | % |
| Investment securities (2)                       |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Held-to-maturity                                |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                         |   | 769,432                               |       | 11,883 |   | 6.18 | % | — |   | — |   | — |   |
| Tax-exempt (4)(5)                               |   | 22,777                                |       | 374 |   | 6.57 | % | — |   | — |   | — |   |
| Available-for-sale (3)(4)(5)                    |   | 1,820,789                             |       | 18,183 |   | 4.01 | % | 1,990,262 |   | 26,054 |   | 5.25 | % |
| Loans receivable (2)(6)                         |   | 8,244,850                             |       | 111,669 |   | 5.43 | % | 8,773,028 |   | 137,997 |   | 6.31 | % |
| FHLB and FRB stock                              |   | 123,514                               |       | 545 |   | 1.76 | % | 117,608 |   | 1,863 |   | 6.35 | % |
| Total interest-earning assets                   |   | 11,909,122                            |       | 146,455 |   | 4.93 | % | 11,125,104 |   | 168,229 |   | 6.07 | % |
|                                            |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Noninterest-earning assets:                     |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                         |   | 113,853                               |       |   |   |   |   | 123,646 |   |   |   |   |   |
| Allowance for loan losses                       |   | (198,802                              | )          |   |   |   |   | (136,109 | ) |   |   |   |   |
| Other assets                                    |   | 794,849                               |       |   |   |   |   | 658,495 |   |   |   |   |   |
| Total assets                                    |   | $                                     | 12,619,022 |   |   |   |   |   | $ | 11,771,136 |   |   |   |   |   |
|                                            |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                   |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Checking accounts                               |   | $                                     | 356,756    |   | $ | 324 |   | 0.36 | % | $ | 412,422 |   | $ | 681 |   | 0.66 | % |
| Money market accounts                           |   | 1,822,470                             |       | 6,140 |   | 1.35 | % | 1,103,522 |   | 6,118 |   | 2.22 | % |
| Savings deposits                                |   | 415,828                               |       | 659 |   | 0.64 | % | 468,541 |   | 958 |   | 0.82 | % |
| Time deposits less than $100,000                |   | 1,162,205                             |       | 6,947 |   | 2.40 | % | 964,196 |   | 7,560 |   | 3.14 | % |
| Time deposits $100,000 or greater               |   | 3,386,730                             |       | 16,820 |   | 1.99 | % | 3,148,739 |   | 28,219 |   | 3.59 | % |
| Federal funds purchased                         |   | 4,849                                 |       | 3 |   | 0.24 | % | 93,125 |   | 368 |   | 1.59 | % |
| FHLB advances                                   |   | 1,273,640                             |       | 13,142 |   | 4.14 | % | 1,579,062 |   | 17,541 |   | 4.46 | % |
| Securities sold under repurchase agreements     |   | 1,006,614                             |       | 12,004 |   | 4.72 | % | 1,000,797 |   | 11,290 |   | 4.52 | % |
| Long-term debt                                  |   | 235,570                               |       | 2,034 |   | 3.42 | % | 235,570 |   | 2,994 |   | 5.10 | % |
| Total interest-bearing liabilities              |   | 9,664,662                             |       | 58,073 |   | 2.41 | % | 9,005,974 |   | 75,729 |   | 3.37 | % |
|                                            |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| **Noninterest-bearing liabilities:**            |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                 |   | 1,300,676                             |       |   |   |   |   | 1,405,040 |   |   |   |   |   |
| Other liabilities                               |   | 123,431                               |       |   |   |   |   | 138,837 |   |   |   |   |   |
| Stockholders’ equity                       |   | 1,530,253                             |       |   |   |   |   | 1,221,285 |   |   |   |   |   |
| Total liabilities and stockholders’ equity |   | $                                     | 12,619,022 |   |   |   |   |   | $ | 11,771,136 |   |   |   |   |   |
| Interest rate spread                            |   |                                  |       |   |   | 2.52 | % |   |   |   |   | 2.70 | % |
|                                            |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income and net interest margin     |   |                                  |       | $ | 88,382 |   | 2.98 | % |   |   | $ | 92,500 |   | 3.33 | % |

 

----

(1) Annualized.

(2) Includes amortization of premium andaccretion of discounts on investment securities and loans receivable totaling$(915) thousand and $(1.8) million for the three months ended June 30,2009 and 2008, respectively.  Alsoincludes the amortization of deferred loan fees totaling $(1.5) million and $834thousand for the three months ended June 30, 2009 and 2008, respectively.

(3) Averagebalances exclude unrealized gains or losses on available-for-sale securities.

(4) Totalinterest income and average yield rate on an unadjusted basis for tax-exemptinvestment securities held-to-maturity is $252 thousand and 4.43% for the threemonths ended June 30, 2009, respectively, and none for the three monthsended June 30, 2008. There is no total interest income and average yield rateon an unadjusted basis for tax-exempt investment securities available-for-salefor the three months ended June 30, 2009. Total interest income andaverage yield rate on an unadjusted basis for tax-exempt investment securitiesavailable-for-sale is $861 thousand and 5.88% for the three months ended June 30,2008, respectively.

(5) Amountscalculated on a fully taxable equivalent basis using the current statutoryfederal tax rate.

(6) Averagebalances include nonperforming loans.

 

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Thefollowing table presents the net interest spread, net interest margin, averagebalances, interest income and expense and the average yields and rates by assetand liability component for the six months ended June 30, 2009 and 2008:

 
| ** **                                      | ** ** | **Six  Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | ** **                          | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                      | ** ** | **Average**                         | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                      | ** ** | **Volume**                          | ** ** | **Interest** | ** ** | **Rate  (1)** | ** ** | **Volume** | ** ** | **Interest** | ** ** | **Rate  (1)** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                  | ** ** |
| **ASSETS**                                      |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                        |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Short-term investments                          |       | $                                   | 804,379    |   | $ | 5,485 |   | 1.38 | % | $ | 135,373 |   | $ | 1,589 |   | 2.35 | % |
| Securities purchased under resale agreements    |       | 50,691                              |       | 2,542 |   | 9.97 | % | 57,143 |   | 3,817 |   | 13.40 | % |
| Investment securities (2)                       |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Held-to-maturity                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Taxable                                         |       | 588,646                             |       | 18,578 |   | 6.31 | % | — |   | — |   | — |   |
| Tax-exempt (4)(5)                               |       | 19,726                              |       | 651 |   | 6.60 | % | — |   | — |   | — |   |
| Available-for-sale (3)(4)(5)                    |       | 2,050,106                           |       | 40,676 |   | 4.00 | % | 1,914,642 |   | 53,499 |   | 5.60 | % |
| Loans receivable (2)(6)                         |       | 8,221,143                           |       | 222,485 |   | 5.46 | % | 8,864,142 |   | 293,431 |   | 6.64 | % |
| FHLB and FRB stock                              |       | 121,786                             |       | 1,051 |   | 1.73 | % | 116,627 |   | 3,472 |   | 5.97 | % |
| Total interest-earning assets                   |       | 11,856,477                          |       | 291,468 |   | 4.96 | % | 11,087,927 |   | 355,808 |   | 6.44 | % |
|                                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Noninterest-earning assets:                     |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                         |       | 118,351                             |       |   |   |   |   | 137,057 |   |   |   |   |   |
| Allowance for loan losses                       |       | (192,465                            | )          |   |   |   |   | (113,098 | ) |   |   |   |   |
| Other assets                                    |       | 775,633                             |       |   |   |   |   | 668,126 |   |   |   |   |   |
| Total assets                                    |       | $                                   | 12,557,996 |   |   |   |   |   | $ | 11,780,012 |   |   |   |   |   |
|                                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                   |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Checking accounts                               |       | $                                   | 358,492    |   | $ | 717 |   | 0.40 | % | $ | 407,631 |   | $ | 2,048 |   | 1.01 | % |
| Money market accounts                           |       | 1,655,476                           |       | 11,834 |   | 1.44 | % | 1,099,111 |   | 14,582 |   | 2.66 | % |
| Savings deposits                                |       | 413,046                             |       | 1,361 |   | 0.66 | % | 469,989 |   | 2,412 |   | 1.03 | % |
| Time deposits less than $100,000                |       | 1,247,101                           |       | 16,565 |   | 2.68 | % | 951,241 |   | 16,401 |   | 3.46 | % |
| Time deposits $100,000 or greater               |       | 3,434,140                           |       | 37,486 |   | 2.20 | % | 3,088,157 |   | 60,346 |   | 3.92 | % |
| Federal funds purchased                         |       | 3,653                               |       | 6 |   | 0.33 | % | 129,405 |   | 1,746 |   | 2.71 | % |
| FHLB advances                                   |       | 1,279,323                           |       | 27,019 |   | 4.26 | % | 1,663,188 |   | 37,223 |   | 4.49 | % |
| Securities sold under repurchase agreements     |       | 1,002,621                           |       | 23,876 |   | 4.74 | % | 1,000,991 |   | 21,819 |   | 4.37 | % |
| Long-term debt                                  |       | 235,570                             |       | 4,451 |   | 3.76 | % | 235,570 |   | 6,717 |   | 5.72 | % |
| Total interest-bearing liabilities              |       | 9,629,422                           |       | 123,315 |   | 2.58 | % | 9,045,283 |   | 163,294 |   | 3.62 | % |
|                                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| **Noninterest-bearing liabilities:**            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                 |       | 1,270,716                           |       |   |   |   |   | 1,399,920 |   |   |   |   |   |
| Other liabilities                               |       | 122,326                             |       |   |   |   |   | 145,586 |   |   |   |   |   |
| Stockholders’ equity                       |       | 1,535,532                           |       |   |   |   |   | 1,189,223 |   |   |   |   |   |
| Total liabilities and stockholders’ equity |       | $                                   | 12,557,996 |   |   |   |   |   | $ | 11,780,012 |   |   |   |   |   |
| Interest rate spread                            |       |                                |       |   |   | 2.38 | % |   |   |   |   | 2.82 | % |
|                                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income and net interest margin     |       |                                |       | $ | 168,153 |   | 2.86 | % |   |   | $ | 192,514 |   | 3.48 | % |

 

----

(1) Annualized.

(2) Includes short-term securities purchased under resaleagreements.

(3) Includesamortization of premium and accretion of discounts on investment securities andloans receivable totaling $(1.7) million and $(2.1) million for six monthsended June 30, 2009, and 2008, respectively.  Also includes the amortization of deferredloan fees totaling $(2.7) million and $1.8 million for the six months ended June 30,2009 and 2008, respectively.

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

(5) Totalinterest income and average yield rate on an unadjusted basis for tax-exemptinvestment securities held-to-maturity is $439 thousand and 4.45% for the sixmonths ended June 30, 2009, respectively, and none for the six monthsended June 30, 2008. There is no total interest income and average yieldrate on an unadjusted basis for tax-exempt investment securitiesavailable-for-sale for the six months ended June 30, 2009. Total interestincome and average yield rate on an unadjusted basis for tax-exempt investmentsecurities available-for-sale is $1.9 million and 6.05% for the six monthsended June 30, 2008, respectively.

(6) Average balances include 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 and interest-bearingliability is segmented into the change attributable to variations in volume(changes in volume multiplied by old rate) and the change attributable tovariations in interest rates (changes in rates multiplied by old volume).  Nonaccrual loans are included in averageloans used to compute this table.

 
| ** **                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                   | ** ** | **2009 vs. 2008**                    | ** ** | **2009 vs. 2008**                  | ** ** |
| ** **                                   | ** ** | **Total**                            | ** ** | **Changes Due to**                 | ** ** | **Total** | ** ** | **Changes Due to** | ** ** |
| ** **                                   | ** ** | **Change**                           | ** ** | **Volume (1)**                     | ** ** | **Rates (1)** | ** ** | **Change** | ** ** | **Volume (1)** | ** ** | **Rates (1)** | ** ** |
| ** **                                   | ** ** | **(In thousands)**                   | ** ** | **(In thousands)**                 | ** ** |
| **INTEREST-EARNING ASSETS:**                 | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Short-term investments                       |       | $                                    | 1,458      |                               | $          | 2,159 |   | $ | (701 | ) | $ | 3,896 |   | $ | 4,819 |   | $ | (923 | ) |
| Securities purchased under resale agreements |       | 28                                   |       | 35                                 |       | (7 | ) | (1,275 | ) | (397 | ) | (878 | ) |
| Investment securities held-to-maturity       |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Taxable                                      |       | 11,883                               |       | —                             |       | — |   | 18,578 |   | — |   | — |   |
| Tax-exempt (2)                               |       | 374                                  |       | —                             |       | — |   | 651 |   | — |   | — |   |
| Investment securities available-for-sale (2) |       | (7,871                               | )          | (1,977                             | )          | (5,894 | ) | (12,823 | ) | 3,676 |   | (16,499 | ) |
| Loans receivable                             |       | (26,328                              | )          | (7,959                             | )          | (18,369 | ) | (70,946 | ) | (20,180 | ) | (50,766 | ) |
| FHLB and FRB stock                           |       | (1,318                               | )          | 89                                 |       | (1,407 | ) | (2,421 | ) | 147 |   | (2,568 | ) |
| Total interest and dividend income           |       | $                                    | (21,774    | )                                  | $          | (7,653 | ) | $ | (26,378 | ) | $ | (64,340 | ) | $ | (11,935 | ) | $ | (71,634 | ) |
|                                         |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| **INTEREST-BEARING LIABILITIES**             |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Checking accounts                            |       | $                                    | (357       | )                                  | $          | (82 | ) | $ | (275 | ) | $ | (1,331 | ) | $ | (222 | ) | $ | (1,109 | ) |
| Money market accounts                        |       | 22                                   |       | 3,010                              |       | (2,988 | ) | (2,748 | ) | 5,600 |   | (8,348 | ) |
| Savings deposits                             |       | (299                                 | )          | (100                               | )          | (199 | ) | (1,051 | ) | (266 | ) | (785 | ) |
| Time deposits less than $100,000             |       | (613                                 | )          | 1,382                              |       | (1,995 | ) | 164 |   | 4,427 |   | (4,263 | ) |
| Time deposits $100,000 or greater            |       | (11,399                              | )          | 1,995                              |       | (13,394 | ) | (22,860 | ) | 6,157 |   | (29,017 | ) |
| Federal funds purchased                      |       | (365                                 | )          | (193                               | )          | (172 | ) | (1,740 | ) | (914 | ) | (826 | ) |
| FHLB advances                                |       | (4,399                               | )          | (3,216                             | )          | (1,183 | ) | (10,204 | ) | (8,202 | ) | (2,002 | ) |
| Securities sold under resale agreements      |       | 714                                  |       | 66                                 |       | 648 |   | 2,057 |   | 36 |   | 2,021 |   |
| Long-term debt                               |       | (960                                 | )          | —                             |       | (960 | ) | (2,266 | ) | — |   | (2,266 | ) |
| Total interest expense                       |       | (17,656                              | )          | 2,862                              |       | (20,518 | ) | (39,979 | ) | 6,616 |   | (46,595 | ) |
| **CHANGE IN NET INTEREST INCOME**            |       | $                                    | (4,118     | )                                  | $          | (10,515 | ) | $ | (5,860 | ) | $ | (24,361 | ) | $ | (18,551 | ) | $ | (25,039 | ) |

 

----

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

 

(2) Amountscalculated on a fully taxable equivalent basis using the current statutoryfederal tax rate.  Total change on anunadjusted basis for tax-exempt investment securities held-to-maturity is $252thousand, and there is no total change due to volume and rates on an unadjustedbasis for tax-exempt investment securities held-to-maturity for the threemonths ended June 30, 2009 vs. 2008. Total change on an unadjusted basisfor tax-exempt investment securities available-for-sale is $(861) thousand, andtotal changes due to volume and rates on an unadjusted basis for tax-exemptinvestment securities available-for-sale is $(418) thousand and $(443) thousandfor the three months ended June 30, 2009 vs. 2008, respectively. Totalchange on an unadjusted basis for tax-exempt investment securities held-to-maturityis $439 thousand, and there is no total change due to volume and rates on anunadjusted basis for tax-exempt investment securities held-to-maturity for thesix months ended June 30, 2009 vs. 2008. Total change on an unadjustedbasis for tax-exempt investment securities available-for-sale is $(1.9)million, and total changes due to volume and rates on an unadjusted basis fortax-exempt investment securities available-for-sale is $(928) thousand and$(979) thousand for the six months ended June 30, 2009 vs. 2008,respectively.

 

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**Provision for Loan Losses**

 

We recorded $151.4 million and $229.4 million in provisions for loanlosses during the second quarter and first half of 2009.  In comparison, we recorded $85.0 million and$140.0 million in provisions for loan losses during the second quarter andfirst half of 2008, respectively.  Thesignificant increase in loan loss provisions recorded during the second quarterof 2009 reflects our elevated chargeoff levels as we managed down our problemassets with sizeable reductions in nonaccrual loans, delinquent loans, andOREO.  During the second quarter of 2009,we continued to proactively identify and resolve problem assets which resultedin the sale of $166.3 million in problem loans and $55.8 million in OREOproperties.  Losses realized from thesale of problem loans are included in total chargeoffs during the period ofsale.  Our actions to reduce problemassets resulted in higher chargeoffs and increased loan loss provisions duringthe second quarter of 2009.  The Companyrecorded $133.9 million and $193.4 million in net chargeoffs during the secondquarter and first half of 2009, compared to $34.8 million and $60.2 million innet chargeoffs recorded during the second quarter and first half of 2008.  Although we believe that credit challengeswill continue throughout 2009, we have actively lowered our exposure to landand construction loans and our overall credit risk on these portfolios havebeen significantly reduced.  Throughoutthe course of 2008 and the first half of 2009, we have substantially pared downboth the outstanding loan balances as well as the total commitments on theseloan categories.  We continue toaggressively monitor delinquencies and proactively review the credit riskexposure of other segments of our loan portfolio to mitigate losses.

 

During May 2009, we desecuritized our private label mortgagebacked securities which resulted in $635.6 million of single and multifamilyloans being added to the loan portfolio with a corresponding decrease ininvestment securities available-for-sale. As a result of this transaction, we recorded anextraordinaryloss of $5.4 million on a net of tax basis, representing the allowance for loanlosses on these single family and multifamily loans.

 

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 (Loss) Income**

### ** **

*Components of Noninterest (Loss) Income*

* *
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                               | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                               | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                               | ** ** | **(In millions)**      | ** ** | **(In millions)**    | ** ** |
| Impairment loss on investment securities |       | $                      | (37.45     | )                    | $          | (9.95 | ) | $ | (37.65 | ) | $ | (9.95 | ) |
| Branch fees                              |       | 4.99                   |       | 4.34                 |       | 9.78 |   | 8.44 |   |
| Net gain on investment securities        |       | 1.68                   |       | 3.43                 |       | 5.20 |   | 7.77 |   |
| Letters of credit fees and commissions   |       | 1.93                   |       | 2.48                 |       | 3.78 |   | 5.15 |   |
| Ancillary loan fees                      |       | 1.36                   |       | 0.98                 |       | 3.59 |   | 2.13 |   |
| Income from life insurance policies      |       | 1.10                   |       | 1.03                 |       | 2.18 |   | 2.05 |   |
| Net gain on sale of loans                |       | —                 |       | 0.27                 |       | 0.01 |   | 2.13 |   |
| Other operating income                   |       | 0.19                   |       | 0.86                 |       | 0.70 |   | 1.63 |   |
| Total                                    |       | $                      | (26.20     | )                    | $          | 3.44 |   | $ | (12.41 | ) | $ | 19.35 |   |

 

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 

 

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finance activities and the issuance of letters of credit, ancillaryfees on loans, net gains on sales of loans, investment securities, and otherassets, impairment losses on investment securities and other assets, and othernoninterest-related revenues.

 

Noninterestloss amounted to $(26.2) million during the quarter ended June 30, 2009compared with noninterest income of $3.4 million for the corresponding quarterin 2008.  For the first half of 2009,noninterest loss totaled $(12.4) million, compared to noninterest income of$19.4 million recorded during the first half of 2008.  The decrease in noninterest income for bothperiods in 2009, as compared to the same periods in 2008, is predominantlyattributable to higher credit-related impairment losses recorded on investmentsecurities.

 

Includedin noninterest (loss) income during the second quarter of 2009 is a $37.4million credit-related impairment loss on our pooled trust preferred securitiesrecorded pursuant to the provisions of FSP FAS 115-2 and FAS 124-2 which theCompany implemented during the first quarter of 2009.  During the first half of 2009, totalcredit-related impairment losses on investment securities amounted to $37.6million.  In comparison, impairmentlosses recorded on investment securities amounted to $9.9 million during thefirst six months of 2008.  Of the $9.9million total impairment charge, $8.4 million related to certain Fannie Mae andFreddie Mac preferred securities with the remaining $1.5 million related to certainpooled trust preferred securities.

 

Branchfees, which represent revenues derived from branch operations, increased 15% to$5.0 million in the second quarter of 2009, from $4.3 million for the samequarter in 2008.  Similarly, branch feeincome for the first six months of 2009 increased 16% to $9.8 million, comparedto $8.4 million in the same prior year period. The increase in branch-relatedfees can be attributed primarily to higher revenues from service andtransaction charges on deposit accounts.

 

Letters of credit fees and commissions, which represent revenues fromtrade finance operations as well as fees related to the issuance andmaintenance of standby letters of credit, decreased 22% to $1.9  million during the second quarterof 2009, from $2.5 million during the same period in 2008.  For the first half of 2009,letters of credit fees and commissions decreased 27% to $3.8 million, comparedto $5.2 million for the first half of 2008. The decrease in letters of credit fees and commissions is primarily dueto the decline in the volume of standby letters of credit during the first halfof 2009 relative to the prior year as well as a decrease in commissionsgenerated from trade finance activities due to the downturn in the economy.

 

Netgain on sales of investment securities decreased to $1.7 million during thesecond quarter of 2009, compared to $3.4 million during the same quarter in2008.  During the first six months of2009, net gain on sales of investment securities decreased 33% to $5.2 million,from $7.8 million during the same period in 2008.  Proceeds from the sale of investmentsecurities provide additional liquidity to purchase additional investmentsecurities, to fund loan originations, and to pay down borrowings.

 

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 39% to $1.4 million during the secondquarter of 2009, compared to $984 thousand recorded during the same period in2008. For the first half of 2009, ancillary loan fees increased 69% to $3.6million, compared to $2.1 million for the first half of 2008.

 

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

 

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**Noninterest Expense**

 

*Components of Noninterest Expense*

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                         | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                         | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                         | ** ** | **(In millions)**      | ** ** | **(In millions)**    | ** ** |
| Compensation and employee benefits                                 |       | $                      | 16.51      |                 | $          | 25.79 |   | $ | 33.62 |   | $ | 49.06 |   |
| Other real estate owned expense                                    |       | 8.68                   |       | 0.51                 |       | 15.71 |   | 1.40 |   |
| Occupancy and equipment expense                                    |       | 6.30                   |       | 6.54                 |       | 13.69 |   | 13.55 |   |
| Deposit insurance premiums and regulatory assessments              |       | 9.57                   |       | 2.32                 |       | 12.89 |   | 3.51 |   |
| Legal expense                                                      |       | 1.76                   |       | 1.14                 |       | 3.53 |   | 3.04 |   |
| Amortization of investments in affordable housing  partnerships    |       | 1.65                   |       | 1.92                 |       | 3.41 |   | 3.63 |   |
| Loan related expense                                               |       | 1.64                   |       | 2.24                 |       | 3.08 |   | 3.62 |   |
| Data processing                                                    |       | 1.14                   |       | 1.13                 |       | 2.28 |   | 2.33 |   |
| Amortization and impairment loss of premiums on  deposits acquired |       | 1.09                   |       | 1.83                 |       | 2.22 |   | 4.56 |   |
| Deposit-related expenses                                           |       | 1.01                   |       | 1.24                 |       | 1.92 |   | 2.18 |   |
| Impairment loss on goodwill                                        |       | —                 |       | 0.59                 |       | — |   | 0.59 |   |
| Other operating expenses                                           |       | 8.56                   |       | 10.41                |       | 16.97 |   | 21.08 |   |
| Total noninterest expense                                          |       | $                      | 57.91      |                 | $          | 55.66 |   | $ | 109.32 |   | $ | 108.55 |   |
| Efficiency Ratio (1)                                               |       | 55.12                  | %          | 48.62                | %          | 53.51 | % | 45.12 | % |

 

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(1)  Represents noninterest expense, excluding the amortizationand/or impairment losses of intangibles, and amortization of investments inaffordable housing partnerships, divided by the aggregate of net interestincome before provision for loan losses and noninterest income, excludingimpairment loss on investment securities.

 

Noninterest expense, which is comprised primarily of compensation and employeebenefits, occupancy and other operating expenses increased 4% to $57.9 millionduring the second quarter of 2009, from $55.7 million for the same quarter in2008.  For the first half of 2009,noninterest expense increased 1% to $109.3 million, compared with $108.5million during the same period in 2008.

 

Compensation and employee benefits decreased 36% to $16.5 millionduring the second quarter of 2009, compared to $25.8 million for the secondquarter of 2008.  For the first half of2009, compensation and employee benefits decreased 31% to $33.6 million,compared with $49.1 million for the first half of 2008.  The decrease in compensation and employeebenefit expenses is due to the impact of initiatives undertaken by the Companythroughout the past year and 2008 to reduce overall staffing levels and lowercompensation-related incentives and expenses.

 

Depositinsurance premiums and regulatory assessments increased to $9.6 million duringthe quarter ended June 30, 2009, compared with $2.3 million during thesame period in 2008.  For the first halfof 2009, deposit insurance premiums and regulatory assessments increased to$12.9 million compared to $3.5 million for the same period in 2008.  The increase in deposit insurance premiumsand regulatory assessments is primarily due to the special assessment imposedon each insured depository institution to maintain public confidence in thefederal deposit insurance system.  On May 22,2009, the Federal Deposit Insurance Corporation (“FDIC”) adopted a final rule imposinga 5 basis point special assessment on each insured depository institution’stotal assets minus Tier 1 capital as of June 30, 2009.  This special assessment resulted in a $5.7million impact to our pretax earnings during the second quarter of 2009 and ispayable on September 30, 2009. Additionally, increases in the FDIC deposit assessment rate during thesecond quarter of 2009 as well as the enactment of the Emergency EconomicStabilization Act in October 2008 temporarily raising the basic limit offederal deposit insurance coverage from $100,000 to $250,000 per depositor andfully insured all non-interest bearing deposit accounts until 

 

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December 31,2009 further contributed to the increase in deposit insurance premiums andregulatory assessments during the second quarter and first half of 2009,relative to the same periods in 2008.

 

We recorded OREO expenses,net of OREO revenues and gains, totaling $8.7 million during the quarterended June 30, 2009,compared with $509 thousand recorded during the same period in 2008.  For the firsthalf of 2009, net OREO expenses increased to $15.7 million, compared with $1.4million in net OREO expenses during the first half of 2008.  The $8.7 million in total OREO expenses incurredduring the second quarter of 2009 is comprised of $1.6 million in variousoperating and maintenance expenses related to our higher volume of OREOproperties, $4.2 million in valuation losses, and $2.9 million in net lossesfrom the sale of 52 OREO properties consummated during the second quarter of2009.  For the first half of 2009, totalnet OREO expenses amounting to $15.7 million were comprised of $2.9 million invarious operating and maintenance expenses on OREO properties, $6.9 million invaluation losses, and $5.9 million in net losses from the sale of 74 OREOproperties consummated during the first six months of 2009.  As of June 30, 2009, total OREO, net amounted to $27.2million, compared to $17.5 million as of June 30, 2008.

 

Amortization expense and impairment losses on premiums on depositsacquired decreased 40% to $1.1 million during the quarter ended June 30,2009, compared with $1.8 million during the same period in 2008.  For the first half of 2009, amortizationexpense and impairment writedowns of premiums on deposits totaled $2.2 million,compared with $4.6 million incurred 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.  In comparison, we did not record any impairmentlosses on deposit premiums during the first two quarters of 2009.  Additionally, the amortization expense ondeposit premiums related to the United National Bank and Standard Bankacquisitions decreased during the first half of 2009, relative to the sameperiod in 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 operating expenses include advertising and public relations,telephone and postage, stationery and supplies, bank and item processingcharges, insurance expenses, and other professional fees, and charitablecontributions.  Other operating expensesdecreased 18% to $8.6 million during the quarter ended June 30, 2009,compared with $10.4 million during the same period in 2008.  Similarly, other operating expenses decreased19% to $17.0 million for the first half of 2009, from $21.1 million for thesame period in 2008.  The decrease inother operating expenses for both periods in 2009, relative to the same periodsin 2008, is primarily due to various cost-cutting measures and initiatives thatwe undertook throughout 2008 and the first half of 2009.

 

Our efficiency ratio increased to 55.12% for the quarter ended June 30,2009, compared to 48.62% for the corresponding period in 2008.  For the first half of 2009, the efficiencyratio was 53.51% compared with 45.12% for the same period in 2008.  The increase in our efficiency ratio duringthe second quarter of 2009 can be attributed largely to higher depositinsurance premiums and higher credit cycle related expenses associated withOREO/foreclosure transactions as well as lower net interest income before theprovision for loan losses.

 

**Income Taxes**

 

Theincome tax benefit amounted to $60.5 million for the second quarter of 2009,representing an effective tax benefit rate of 41.1%.  In comparison, the income tax benefit of$19.2 million

 

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representedan effective tax rate of 42.5% for the second quarter of 2008.   Included in the income tax benefitrecognized during the second quarters of 2009 and 2008 are $1.6 million and$1.7 million, respectively, in tax credits generated from our investments inaffordable housing partnerships.

 

Forthe first half of 2009, the income tax benefit totaled $74.0 millionrepresenting an effective tax rate of 40.4%. This compares to $16.6 million income tax expense, representing a 44.3%effective tax rate, recorded during the first half of 2008.  For the first six months of 2009, the incometax benefit includes $3.2 million in tax credits, compared to $3.3 million intax credits during the same period in 2008. Due to the high degree of variability of the estimated annual effectivetax rate when considering the range of projected income (loss) for theremainder of the year, we have determined that the actual year-to-dateeffective tax rate is the best estimate of the annual effective tax rate.

 

**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 provide a platform to more efficiently manage thecomplexities and challenges 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 Banking 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 and long-terminterest rates since 2007, we reassessed our transfer pricing assumptionsduring the first quarter of 2009 to be consistent with the Company’s strategicgoal of growing core deposits and originating profitable, good credit qualityloans.  Changes to our funds transferpricing assumptions were made with the intent to promote core deposit growthand, given our recent credit experience, to better reflect the current riskprofiles of various loan categories within our credit portfolio.  Our transfer pricing assumptions andmethodologies are reviewed at least annually to ensure that our process isreflective of current market conditions. Our transfer pricing 

 

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process is formulated with the goal of incenting loan and depositgrowth that is consistent with the Company’s overall growth objectives as wellas provide a reasonable and consistent basis for measurement of our businesssegments and product net interest margins. Changes to our transfer pricing assumptions and methodologies areapproved by the Asset Liability Committee.

 

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

 

*RetailBanking*

 

TheRetail Banking segment reported a $(28.3) million pretax loss for the quarterended June 30, 2009, compared to a $5.5 million pretax income forthe same quarter in 2008.  The increasein pretax loss for this segment during the second quarter of 2009 is comprisedof a $25.3 million increase in loan loss provision, a $3.2 million decrease innoninterest income, and a $7.9 million increase in noninterest expense, partiallyoffset by a $780 thousand increase in net interest income.

 

Forthe six months ended June 30, 2009, the pretax loss for the Retail Bankingsegment amounted to $(40.0) million, compared to the $3.8 million in pretaxincome recorded for the same period in 2008. The increase in pretax loss for this segment during the six months endedJune 30, 2009 is comprised of a $31.6 million or 66% increase in loan lossprovisions, a $7.9 million or 35% decrease in noninterest income, and a $7.3million or 12% increase in noninterest expense to $68.3 million, partiallyoffset by a $1.6 million or 1% increase in net interest income to $110.5million.

 

Theslight increases in net interest income during the second quarter and firsthalf of 2009 is attributable to the interest rate floors as part of the newly originatedvariable-rate loans, which partially offsets the steep 200 basis point decreasein interest rates since June 2008. The increase in loan loss provisions for this segment during the secondquarter of 2009 and first half of 2009, relative to the same periods in 2008,were due to increased chargeoff activity resulting from the downturn in thereal estate housing market.  Loan lossprovisions are also impacted by average loan balances for each reportingsegment.

 

Noninterestincome for this segment decreased 30%, to $7.3 million for the quarter ended June 30,2009, from $10.4 million recorded during the same period in 2008.  For the first half of 2009, noninterestincome for the retail banking segment decreased 35% to $14.5 million, comparedto $22.4 million for the same period in 2008. The decrease in noninterest income for both periods is primarily due tolower loan fee income resulting from a notable decrease in our loan originationactivities and lower net gain on sale of loans, partially offset by an increasein branch-related revenues pertaining to service and transaction chargeson deposit accounts.  Additionally,noninterest income during the second quarter and first half of 2008 reflectsthe $2.7 million and $6.1 million, respectively, gain on sale of investmentsecurities from loans originated by this segment that have been securitized aspart of the Company’s securitization activities.

 

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Noninterest expense forthis segment increased 27% to $37.5 million during the second quarter of 2009,compared with $29.6million recorded during the second quarter of 2008.  For the first half of 2009, noninterestexpense increased 12% to $68.3 million, from $61.0 million for the same periodin 2008.  The increase in noninterestexpense for both periods is primarily due to higher OREO expenses and FDICinsurance premiums, partially offset by a decrease in compensation and employeebenefits and amortization and impairment losses on premiums on depositsacquired.

 

*CommercialBanking*

 

TheCommercial Banking segment reported a pretax loss of $(72.7) million during thequarter ended June 30, 2009, compared with pretax loss of $(29.6) millionfor the same period in 2008.  For thefirst six months of 2009, the pretax loss for the Commercial Banking segmentamounted to $(79.6) million, compared to a pretax loss of $(22.5) millionrecorded during the same period in 2008. The primary driver of the increase in pretax loss for both periods forthis segment is due to a significant increase in loan loss provisions resultingfrom increased chargeoff activity.  Loanloss provisions increased 63% to $106.2 million during the second quarter of2009, compared with $65.1 million for the same period in 2008.  During the first half of 2009, loan lossprovisions increased 63% to $150.0 million, compared with $92.2 million for thesame period in 2008.

 

Netinterest income for this segment slightly decreased 3% to $44.4 million duringthe quarter ended June 30, 2009, compared to $45.9 million for the sameperiod in 2008.  For the first six monthsof 2009, net interest income for the Commercial Banking segment amounted to$92.4 million, or a 4% increase from net interest income of $88.7 millionrecorded during 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.

 

Noninterestincome for this segment decreased 8% to $5.2 million during the second quarterof 2009, compared with $5.7 million recorded in the same quarter of 2008.  For the first half of 2009, noninterestincome decreased 22% to $10.5 million, from $13.5 million for the same periodin 2008.  The decrease in noninterestincome is primarily due to a decrease in net gain on sale of loans as well as adecrease in letters of credit fees and commissions driven by a decline in thevolume of standby letters of credit and commissions generated from tradefinance activities due to the downturn in the economy.

 

Noninterestexpense for this segment increased 15% to $12.8 million during the secondquarter of 2009, compared with $11.2 million recorded duringthe same quarter in 2008.  For the firsthalf of 2009, noninterest expense for this segment increased 3%, to $25.9million, from $25.1 million for the same period in 2008.  The increase in noninterestexpense is due to an increase in OREO expenses and FDIC insurance premiums,partially offset by a decrease in compensation and employee benefits for thissegment.

 

*Other*

 

Thissegment reported a pretax loss of $(46.3) million during the quarter ended June 30,2009, compared with a pretax loss of $(20.9) million recorded in the samequarter of 2008.  For the first sixmonths of 2009, the pretax loss for this segment amounted to $(63.7) million,compared to a pretax loss of $(18.7) million recorded during the same period in2008.  The increase in the pretax lossfor both periods is primarily due to an increase in net interest expense andnoninterest loss, partially offset by a decrease in noninterest expense.

 

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Netinterest expense for this segment increased to $12.2 million during the quarterended June 30, 2009, compared to net interest expense of $8.9 millionrecorded in the same quarter of 2008. For the first six months of 2009, net interest expense for this segmentamounted to $34.9 million, compared with net interest expense of $5.8 millionrecorded during the same period in 2008. Since this segment now includes the treasury function, which is responsiblefor the liquidity and interest rate risk management of the Bank, it bears thecost of adverse movements in interest rates affecting our net interest marginand supports the Retail Banking and Commercial Banking segments through fundstransfer pricing.

 

Noninterestloss for this segment amounted to $38.7 million, compared with $12.6 million innoninterest loss recorded during the same quarter of 2008.  For the first half of 2009, noninterest lossamounted to $37.4 million, compared with $16.5 million for the same period in2008.  The increase in noninterest lossduring both periods is due to the $37.4 million in credit-related impairmentloss recorded on our pooled trust preferred securities during the secondquarter of 2009.

 

Noninterest expense for this segment decreased 49% to $7.6 million,compared with $14.9 million recorded during the same quarter in 2008.  For the first half of 2009, noninterest expense forthis segment decreased 33%, to $15.1 million, from $22.4 million for the sameperiod in 2008.  The decrease innoninterest expense for both periods is primarily due to a decrease incompensation and employee benefits, partially offset by higher FDIC insurancepremiums.

 

### **Balance Sheet Analysis**

### ** **

Total assets increased $296.7 million, or 2%, to $12.72 billion at June 30,2009, relative to total assets of $12.42 billion at December 31,2008.  The increase is comprisedpredominantly of increases in short-term investments amounting to$325.9 million, held-to-maturity investment securities totaling $672.5 million,and net loans receivable amounting to $219.9 million, partially offset by decreases incash and cash equivalents totaling $305.7 million, and available-for-saleinvestment securities totaling $658.4 million.  A largeportion of the net increase in total assets was funded by deposit growth of$516.9 million, partially offset by a decrease in FHLB advances of$180.1 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-recurringbasis.  For the Company, this includesthe investment securities available-for-sale portfolio, equity swap agreements,derivatives payable, mortgage servicing assets and, impaired loans.  The adoption of 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.

 

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

 

Wepurchase securities under resale agreements (“resale agreements”) with termsthat range from one day to several years. Total resale agreements increased to $75.0 million as of June 30,2009, compared with $50.0 million as of December 31, 2008, all of whichare long-term agreements.  On June 26,2009, we entered into a new resale agreement amounting to $25.0 million, whichhas a stated termination date of June 26, 2024.  The collateral for theseresale agreements consists of U.S. Government agency and/or U.S. Governmentsponsored enterprise debt and/or mortgage-backed securities held in safekeepingby a third party custodian.

 

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 counterparties to these agreements arenationally recognized investment banking firms that meet credit eligibilitycriteria and with whom a master repurchase agreement has been duly executed.

 

**Investment Securities**

 

Income from investing activities provides a significant portion of ourtotal income.  We aim to maintain aninvestment portfolio with an adequate mix of fixed-rate and adjustable-ratesecurities with relatively short maturities to minimize overall interest raterisk.  Our investment securitiesportfolio primarily consists of U.S. Treasury securities, U.S. Governmentagency securities, U.S. Government sponsored enterprise debt securities, U.S.Government sponsored and other mortgage-backed securities, municipalsecurities, corporate debt securities, and U.S. Government sponsored enterpriseequity securities.  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.

 

Investmentsecurities held-to-maturity totaled $794.8 million and $122.3 million at June 30,2009  and December 31, 2008,respectively, representing U.S. Government agency and U.S. Government sponsoredenterprise debt securities, municipal securities, corporate debt securities andmortgage backed-securities, and other securities purchased during the firsthalf of 2009 and fourth quarter of 2008. The increase in investment securities was funded by deposit growth andcapital raised during 2008.

 

Total investmentsecurities available-for-sale decreased 32% to $1.38 billion as of June 30,2009, compared with$2.04 billion at December 31, 2008.  The decrease is due to the desecuritization of our private-labelmortgage backed securities in May 2009 which resulted in a $635.6 millionincrease in single and multifamily loan receivable with a correspondingdecrease in available-for-sale investment securities.  Total repayments/maturitiesand proceeds from sales of investment securities amounted to $875.5 million and$237.4 million, respectively, during the six months ended June 30, 2009.

 

We recorded net gains onsales of investment securities totaling $1.7 million during the second quarterof 2009, compared to $3.4 million recorded during the same period in 2008.  For the first half of 2009, we recorded netgains on sales of investment securities totaling $5.2 million, compared with$7.8 million during the first half of 2008.

 

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Aportion of the proceeds from repayments, maturities, sales, and redemptions ofinvestment securities were applied towards additional investment securitiespurchases totaling $1.69 billion.

 

AtJune 30, 2009, investment securities held-to-maturity with an aggregatepar value of $726.4 million and available-for-sale securities with an aggregatepar value of $1.07 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.  Noncredit-relatedimpairment losses are charged to other comprehensive income.  Other-than-temporarydeclines in fair value are assessed based on factors including the duration thesecurity has been in a continuous unrealized loss position, the severity of thedecline in value, the rating of the security, the probability that we will beunable to collect all amounts due, and our ability and intent to not sell thesecurity before recovery of its amortized cost basis.

 

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, andmonitoring of trading volumes.  We ensurethat prices received from independent brokers represent a reasonable estimateof fair value through the use of internal and external cash flow modelsdeveloped based on spreads, and when available, market indices. As a result ofthis analysis, if we determine that there is a more appropriate fair valuebased upon the available market data, the price received from the third partyis adjusted accordingly.

 

Prices from third party pricing services are oftenunavailable for securities that are rarely traded or are traded only in privatelynegotiated transactions.  As a result,certain securities are priced via independent broker quotations which utilizeinputs that may be difficult to corroborate with observable market based data.  Additionally, the majority of theseindependent broker quotations are non-binding.

 

Asa result of the global financial crisis and illiquidity in the U.S. markets, webelieve that the current broker prices obtained on one private-labelmortgage-backed security and certain pooled trust preferred securities arebased on forced liquidation or distressed sale values in very inactive marketsthat are not representative of the economic value of these securities.  The fair values of the private-labelmortgage-backed security 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.  For the pooled trust preferred securities, webelieve that the cash flow analyses which demonstrate that the realizable valueof these securities are equal to their carrying values should be the primaryfactor considered when making a judgment about other than temporaryimpairment.  For the private-labelmortgage-backed security, we determined the valuation by using the appropriatecombination of the market approach reflecting current broker prices and adiscounted cash flow approach.  Thevalues resulting from each approach (i.e. market and income approaches) wereweighted to derive the final fair value on the private-label mortgage-backed security.  In calculating the fair value derived fromthe income approach, we made assumptions related to the implied rate of return,general change in market rates, estimated changes in credit quality andliquidity risk premium, specific non-performance and default experience in thecollateral underlying the security.

 

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

 

Asof June 30, 2009, the fair value of our held-to-maturity corporate debtsecurities totaled $399.8 million.  Duringthe second quarter of 2009, two of the corporate debt securities weredowngraded from investment grade to non-investment grade.  Except for these two securities, allcorporate debt securities are investment grade as of June 30, 2009.  As of June 30, 2009, these debtinstruments had gross unrealized losses for less than twelve months amountingto $1.9 million, or less than 1% of the aggregate amortized cost basis ofheld-to-maturity mortgage-backed securities, comprised of $104 thousand and$1.8 million that are non-investment grade and investment grade,respectively.  Due to the relativelyshort maturity dates of these securities of 5 years or less, we do not intendto sell these securities and it is not more likely than not that we will berequired to sell these securities before recovery of their amortized costbases.  As such, we do not deem thesesecurities to be other-than-temporarily impaired as of June 30, 2009.

 

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

 

Themajority of unrealized losses in the available-for-sale portfolio at June 30,2009 are related to pooled trust preferred debt securities.  As of June 30, 2009, we had $15.8million in pooled trust preferred debt securities available-for-sale,representing 1% of total investment securities available-for-saleportfolio.  In April 2009, exceptfor one security that was downgraded but remained at investment grade status,the ratings for the other twelve pooled trust preferred securities weredowngraded to noninvestment grade due to increased deferral and defaultactivity from the issuers of the underlying debt collateralizing theseinstruments.  As of June 30, 2009,these debt instruments had gross unrealized losses amounting to $69.1 million,or 81% of the total amortized cost basis of these securities, comprisedprimarily of the $63.3 million, or $36.7 million on a net of tax basis, innoncredit-related impairment losses recorded during the first half of 2009pursuant to the provisions of FSP FAS 115-2 and FAS 124-2.

 

Almostall of our pooled trust preferred securities have underlying collateral issuedby banks and insurance companies. Continued deterioration in market conditions have resulted in many moresmall banks either deferring or defaulting on their trust preferred debt duringthe second quarter of 2009.  As a resultof diminishing collateral values, deteriorating cash flows, and increasingestimates of future deferrals and defaults, we recorded an impairment loss of$100.8 million on our portfolio of trust preferred securities during the secondquarter of 2009, of which $37.4 million was a pre-tax credit loss recordedthrough earnings.  **The remaining $63.3 million, or $36.7 million on a net of tax basis, innoncredit-related impairment** loss was recorded in othercomprehensive income as of June 30, 2009. We determined the amount of credit-related impairment by discounting theexpected future cash flows with the effective yield of the security inaccordance with the methodology described in SFAS 114, **Accounting by Creditors forImpairment of a Loan—an amendment of FASB Statements No. 5 and 15****. **During thefirst quarter of 2009, we recorded an impairment loss of $13.4 million on anon-investment grade pooled trust preferred security.  Of the total impairment loss amount, $200thousand was a pretax credit loss recorded through earnings.  The remaining $13.2 million or $7.6 millionon a net of tax basis, in noncredit-related impairment loss was recorded inother comprehensive income 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 

 

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impairment losses recognizedduring 2008 and 2007 from the opening balance of retained earnings to othercomprehensive income as of March 31, 2009.

 

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

 

As of June 30,2009, the aggregatefair value of our non-agency held-to-maturity mortgage-backed securities amountedto $106.0 million.  These securities arecollateralized by single family loans and secured by the first lien on theseresidential properties.  During thesecond quarter of 2009, one of the mortgage-backed securities was downgradedfrom investment grade to non-investment grade. Except for this non-investment grade security, all held-to-maturitymortgage-backed securities are investment grade.  As of June 30, 2009, these debtinstruments had gross unrealized losses for less than twelve months amountingto $7.4 million, or 7% of the aggregate amortized cost basis ofheld-to-maturity mortgage-backed securities, comprised of $1.5 million and $5.9million that are non-investment grade and investment grade, respectively.

 

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

 

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

 

As of June 30,2009, we had oneprivate-label available-for-sale mortgage-backed security with a fair value of$16.6 million, with a gross unrealized loss of $4.7 million, or 22% of theamortized cost basis of this security, for more than 12 months.  During the second quarter of 2009, thissecurity was downgraded from investment grade to non-investment grade.  This security is collateralized by singlefamily loans and secured by the first lien on these residentialproperties.  Additionally, any principaland interest shortfall that may arise from the deterioration of the collateralwill be covered by a monoline insurance provider.  We do not intend to sellthis security and it is not more likely than not that we will be required tosell this security before recovery of its amortized cost basis.  As such, we do not deem this security to beother-than-temporarily impaired as of June 30, 2009.

 

In May 2009, wedesecuritized our private-label mortgage backed securities which resulted in a$635.6 million increase in single and multifamily loans receivable with acorresponding decrease in available-for-sale investment securities.  We had previously originated all of thesesingle family and multifamily loans and they were securitized in 2006 and 2007for additional liquidity purposes.  Weretained all of the resulting securities in our available-for-sale investmentportfolio.  Our decision to desecuritizethese securities was prompted by the mark-to-market adjustments recorded onthese securities that were based on price points observed in the general marketfor mortgage-backed securities that were not reflective of the better creditquality of the underlying loans.  Theseloans had very low overall delinquency rates as of June 30, 2009.  The accumulated mark-to-market adjustments onthese securities, recorded in other comprehensive income, were negativelyimpacting our tangible common equity. The desecuritization added $30.6 million to the Company’s tangiblecommon equity.

 

*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 to non-investment grade statusreflecting the cessation of dividend payments on these securities.  These securities are non-cumulative perpetualpreferred stock in 

 

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which unpaid dividends donot accumulate.  The purchase agreementbetween the U.S. Treasury and these government-sponsored entities contains acovenant prohibiting the payment of dividends on existing preferred stock.  As the assessment on the status of anyresumption in dividend payments on these securities was uncertain, we recorded $55.3 million in OTTIcharges on Fannie Mae and Freddie Mac preferred stock securities in 2008.  As of June 30, 2009, the fair value ofthese preferred stock securities was $2.0 million.  Gross unrealized losses on these securities,all of which is less than twelve months in duration, amounted to $1.4 millionas of June 30, 2009, or 41% of the aggregate amortized cost basis of thesesecurities.  The outlook for thesepreferred securities remains stable.  Wedo not intend to sell these securities and it is not more likely than not thatwe will be required to sell these securities before recovery of our amortizedcost bases.  As such, we do not deemthese remaining securities to be other-than-temporarily impaired as of June 30,2009.

 

Wehave thirteen individual securities that have been in a continuous unrealizedloss position for twelve months or longer as of June 30, 2009.  These securities are comprised of twelvecorporate debt securities with a total fair value of $19.3 million and onemortgage-backed security with a total fair value of $16.6 million.  As of June 30, 2009, there were also 84securities 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 sellthese securities and it is not more likely than not that we will be required tosell the investments before recovery of our amortized cost bases.  As such, we do not deem these securities to beother-than-temporarily impaired as of June 30, 2009.

 

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

 

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| ** **                                                                                              | ** **   | **As of June 30, 2009** | ** **   |
|---------------------------------------------------------------------------------------------------------|--------------|------------------------------|--------------|
| ** **                                                                                              | ** **   | ** **                   | ** **   | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                                                                              | ** **   | **Amortized**                | ** **   | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                                                                                              | ** **   | **Cost**                     | ** **   | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| *** ***                                                                                            | *** *** | **(In thousands)**           | *** *** |
| **Held-to-maturity**                                                                                    |         |                         |         |   |   |   |   |   |   |
| U.S. Government agency and U.S. Government sponsored  enterprise debt securities                        |         | $                            | 252,645      |   | $ | 266 |   | $ | (1,891 | ) | $ | 251,020 |   |
| Municipal securities                                                                                    |         | 36,140                       |         | 606 |   | (391 | ) | 36,355 |   |
| Other residential mortgage-backed  securities                                                           |         |                         |         |   |   |   |   |   |   |
| Investment grade                                                                                        |         | 103,344                      |         | 238 |   | (5,873 | ) | 97,709 |   |
| Non-investment grade                                                                                    |         | 9,800                        |         | — |   | (1,495 | ) | 8,305 |   |
| Corporate debt securities                                                                               |         |                         |         |   |   |   |   |   |   |
| Investment grade                                                                                        |         | 387,005                      |         | 10,048 |   | (1,781 | ) | 395,272 |   |
| Non-investment grade                                                                                    |         | 4,617                        |         | — |   | (104 | ) | 4,513 |   |
| Other securities                                                                                        |         | 1,289                        |         | — |   | — |   | 1,289 |   |
| **Total investment  securities held-to-maturity**                                                       |         | $                            | 794,840      |   | $ | 11,158 |   | $ | (11,535 | ) | $ | 794,463 |   |
|                                                                                                    |         |                         |         |   |   |   |   |   |   |
| **Available-for-sale**                                                                                  |         |                         |         |   |   |   |   |   |   |
| U.S. Treasury securities                                                                                |         | $                            | 2,512        |   | $ | 3 |   | $ | — |   | $ | 2,515 |   |
| U.S. Government agency and U.S. Government sponsored  enterprise debt securities                        |         | 452,707                      |         | 1,812 |   | (927 | ) | 453,592 |   |
| U.S. Government agency and U.S. Government sponsored  enterprise residential mortgage-backed securities |         | 822,614                      |         | 12,668 |   | (908 | ) | 834,374 |   |
| Municipal securities                                                                                    |         | 11,990                       |         | 2 |   | — |   | 11,992 |   |
| Other residential mortgage-backed  securities                                                           |         | 21,329                       |         | — |   | (4,701 | ) | 16,628 |   |
| Corporate debt securities                                                                               |         |                         |         |   |   |   |   |   |   |
| Investment grade                                                                                        |         | 43,169                       |         | 221 |   | (1,826 | ) | 41,564 |   |
| Non-investment grade(1)                                                                                 |         | 92,995                       |         | — |   | (73,807 | ) | 19,188 |   |
| U.S. Government sponsored enterprise equity  securities                                                 |         | 3,340                        |         | — |   | (1,383 | ) | 1,957 |   |
| **Total investment  securities available-for-sale**                                                     |         | $                            | 1,450,656    |   | $ | 14,706 |   | $ | (83,552 | ) | $ | 1,381,810 |   |
|                                                                                                    |         |                         |         |   |   |   |   |   |   |
| **Total investment  securities**                                                                        |         | $                            | 2,245,496    |   | $ | 25,864 |   | $ | (95,087 | ) | $ | 2,176,273 |   |

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

 

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(1) As of December 31, 2008, theCompany recorded an OTTI charge of $13.6 million for corporate debt securities,$55.3 million for U.S. Government sponsored enterprise equity securities, and$4.3 million for Other securities. Upon adoption of FSP FAS 115-2 and FAS124-2, the Company reclassified the noncredit portion of previously recognizedOTTI for pooled trust preferred securities totaling $8.1 million, on a net oftax basis, from the opening balance of retained earnings to other comprehensiveincome as of March 31, 2009. Additionally, the Company recorded $37.6million, on a pre-tax basis, of the credit portion of OTTI through earnings and$36.7 million, net of tax, of the non-credit portion of OTTI for pooled trustpreferred securities in other comprehensive income for six months ended June 30,2009.

 

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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 June 30,2009.  Securities with no stated maturity dates,such as equity securities, are included in the “indeterminate maturity”category.
|                                                                                                     |         |                       |         |            |       |            |       |            |       |              |       |       |       |       |       |       |       |       |       |       |       |       |       |      |       |    |      |   |   |
|----------------------------------------------------------------------------------------------------------|--------------|----------------------------|--------------|-----------------|------------|-----------------|------------|-----------------|------------|-------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-----------|------------|---------|-----------|--------|--------|
| ** **                                                                                               | ** **   | ** **                 | ** **   | ** **      | ** ** | **After  One**  | ** ** | **After  Five** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                               | ** **   | **Within**                 | ** **   | **But  Within** | ** ** | **But  Within** | ** ** | **After**       | ** ** | **Indeterminate** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                               | ** **   | **One  Year**              | ** **   | **Five  Years** | ** ** | **Ten  Years**  | ** ** | **Ten  Years**  | ** ** | **Maturity**      | ** ** | **Total**  | ** ** |
| ** **                                                                                               | ** **   | **Amount**                 | ** **   | **Yield**       | ** ** | **Amount**      | ** ** | **Yield**       | ** ** | **Amount**        | ** ** | **Yield**  | ** ** | **Amount** | ** ** | **Yield**  | ** ** | **Amount** | ** ** | **Yield**  | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| *** ***                                                                                             | *** *** | **(Dollars in thousands)** | *** *** |
| **Held-to-maturity**                                                                                     |         |                       |         |            |       |            |       |            |       |              |       |       |       |       |       |       |       |       |       |       |       |       |       |      |       |
| U.S.  Government agency and U.S. Government sponsored enterprise debt securities                         |         | $                          | 100,000      |            | 4.38       | %               | $          | 25,000          |       | 4.00              | %          | —     |       | —     |       | $          | 127,645    |       | 5.50       | %          | —     |       | —     |      | $          | 252,645 |      | 4.91   | %      |
| Municipal  securities                                                                                    |         | —                     |         | —          |       | 18,792          |       | 5.46            | %          | 13,825            |       | 6.66       | %          | 3,523      |       | 6.84       | %          | —     |       | —     |       | 36,140     |       | 6.05      | %          |
| Other  residential mortgage-backed securities                                                            |         |                       |         |            |       |            |       |            |       |              |       |       |       |       |       |       |       |       |       |       |       |       |       |      |       |
| Investment  grade                                                                                        |         | —                     |         | —          |       | —          |       | —          |       | 25,040            |       | 5.48       | %          | 78,304     |       | 8.49       | %          | —     |       | —     |       | 103,344    |       | 7.76      | %          |
| Non-investment  grade                                                                                    |         | —                     |         | —          |       | —          |       | —          |       | —            |       | —     |       | 9,800      |       | 10.26      | %          | —     |       | —     |       | 9,800      |       | 10.26     | %          |
| Corporate  debt securities                                                                               |         |                       |         |            |       |            |       |            |       |              |       |       |       |       |       |       |       |       |       |       |       |       |       |      |       |
| Investment  grade                                                                                        |         | 110,965                    |         | 6.51            | %          | 265,984         |       | 5.57            | %          | 10,056            |       | 4.75       | %          | —     |       | —     |       | —     |       | —     |       | 387,005    |       | 5.81      | %          |
| Non-investment  grade                                                                                    |         | —                     |         | —          |       | 4,617           |       | 8.11            | %          | —            |       | —     |       | —     |       | —     |       | —     |       | —     |       | 4,617      |       | 8.11      | %          |
| Other  securities                                                                                        |         | 1,289                      |         | 0.13            | %          | —          |       | —          |       | —            |       | —     |       | —     |       | —     |       | —     |       | —     |       | 1,289      |       | 0.13      | %          |
| **Total investment securities held-to-maturity**                                                         |         | $                          | 212,254      |            | 5.46       | %               | $          | 314,393         |       | 5.47              | %          | $          | 48,921     |       | 5.66       | %          | $          | 219,272    |       | 6.80       | %          | —     |       | —    |       | $       | 794,840   |   | 5.85   | % |
|                                                                                                     |         |                       |         |            |       |            |       |            |       |              |       |       |       |       |       |       |       |       |       |       |       |       |       |      |       |
| **Available-for-sale**                                                                                   |         |                       |         |            |       |            |       |            |       |              |       |       |       |       |       |       |       |       |       |       |       |       |       |      |       |
| U.S.  Treasury securities                                                                                |         | $                          | 2,515        |            | 0.66       | %               | —     |            | —     |              | —     |       | —     |       | —     |       | —     |       | —     |       | —     |       | $          | 2,515     |       | 0.66    | %         |
| U.S.  Government agency and U.S. Government sponsored enterprise debt securities                         |         | 168,961                    |         | 4.00            | %          | 83,970          |       | 2.68            | %          | 129,201           |       | 4.03       | %          | 71,460     |       | 4.42       | %          | —     |       | —     |       | 453,592    |       | 3.83      | %          |
| U.S.  Government agency and U.S. Government sponsored enterprise residential  mortgage-backed securities |         | 2,268                      |         | 0.00            | %          | 2,303           |       | 6.77            | %          | 49,626            |       | 4.72       | %          | 780,177    |       | 5.14       | %          | —     |       | —     |       | 834,374    |       | 5.12      | %          |
| Municipal  securities                                                                                    |         | —                     |         | —          |       | 11,992          |       | 4.02            | %          | —            |       | —     |       | —     |       | —     |       | —     |       | —     |       | 11,992     |       | 4.02      | %          |
| Other  residential mortgage-backed securities                                                            |         | —                     |         | —          |       | —          |       | —          |       | —            |       | —     |       | 16,628     |       | 6.41       | %          | —     |       | —     |       | 16,628     |       | 6.41      | %          |
| Corporate  debt securities                                                                               |         |                       |         |            |       |            |       |            |       |              |       |       |       |       |       |       |       |       |       |       |       |       |       |      |       |
| Investment  grade                                                                                        |         | 2,066                      |         | 3.79            | %          | 31,075          |       | 4.39            | %          | 7,178             |       | 6.40       | %          | 1,245      |       | 1.61       | %          | —     |       | —     |       | 41,564     |       | 4.56      | %          |
| Non-investment  grade                                                                                    |         | 1,826                      |         | 2.98            | %          | —          |       | —          |       | —            |       | —     |       | 17,362     |       | 3.42       | %          | —     |       | —     |       | 19,188     |       | 3.37      | %          |
| U.S.  Government sponsored enterprise equity securities                                                  |         | —                     |         | —          |       | —          |       | —          |       | —            |       | —     |       | —     |       | —     |       | 1,957      |       | —     |       | 1,957      |       | —    |       |
| **Total investment securities available-for-sale**                                                       |         | $                          | 177,636      |            | 3.89       | %               | $          | 129,340         |       | 3.30              | %          | $          | 186,005    |       | 4.30       | %          | $          | 886,872    |       | 4.96       | %          | 1,957      |       | —    |       | $       | 1,381,810 |   | 4.58   | % |
|                                                                                                     |         |                       |         |            |       |            |       |            |       |              |       |       |       |       |       |       |       |       |       |       |       |       |       |      |       |
| **Total investment securities**                                                                          |         | $                          | 389,890      |            | 4.73       | %               | $          | 443,733         |       | 4.84              | %          | $          | 234,926    |       | 4.59       | %          | $          | 1,106,144  |       | 5.31       | %          | 1,957      |       | —    |       | $       | 2,176,650 |   | 5.03   | % |

 

**Loans**

 

We offer a broad range of products designed to meetthe credit needs of our borrowers.  Ourlending activities consist of residential single family loans, residentialmultifamily loans, commercial real estate loans, land loans, constructionloans, commercial business loans, trade finance loans, and consumer loans.  Net loans receivable increased $219.9million, or 3%, to $8.29 billion at June 30, 2009, relative to December 31,2008.  The increase in net loans receivableat June 30, 2009 is primarily due to the desecuritization of ourprivate-label mortgage backed securities which resulted in a $635.6 millionincrease in single and multifamily loan receivable with a correspondingdecrease in available-for-sale investment securities.  The purchase of $50.2 million in singlefamily loans and $43.0 million in consumer loans from third parties alsocontributed to the increase in net loans receivable during the second quarterof 2009.  These factors were partiallyoffset by loan sales, payoffs, and higher loan loss provisions recorded in thesecond quarter of 2009 as a result of the sustained downtown in the real estatemarket.

 

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

 

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| ** **                                 | ** **   | **June 30, 2009** | ** **   | **December 31, 2008** | ** ** |
|--------------------------------------------|--------------|------------------------|--------------|----------------------------|------------|
| ** **                                 | ** **   | **Amount**             | ** **   | **Percent**                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| *** ***                               | *** *** | **(in thousands)**     | *** *** |
| Real estate loans:                         |         |                   |         |                       |       |   |   |   |   |
| Residential, single family                 |         | $                      | 883,447      |                       | 10.4       | % | $ | 491,315 |   | 6.0 | % |
| Residential, multifamily                   |         | 1,017,803              |         | 11.9                       | %          | 677,989 |   | 8.2 | % |
| Commercial real estate                     |         | 3,510,248              |         | 41.2                       | %          | 3,472,000 |   | 42.1 | % |
| Land                                       |         | 479,808                |         | 5.6                        | %          | 576,564 |   | 7.0 | % |
| Construction                               |         | 945,107                |         | 11.1                       | %          | 1,260,724 |   | 15.3 | % |
| Total real estate loans                    |         | 6,836,413              |         | 80.2                       | %          | 6,478,592 |   | 78.6 | % |
|                                       |         |                   |         |                       |       |   |   |   |   |
| Other loans:                               |         |                   |         |                       |       |   |   |   |   |
| Commercial business                        |         | 1,143,526              |         | 13.4                       | %          | 1,210,260 |   | 14.6 | % |
| Trade finance                              |         | 269,150                |         | 3.2                        | %          | 343,959 |   | 4.2 | % |
| Automobile                                 |         | 7,982                  |         | 0.1                        | %          | 9,870 |   | 0.1 | % |
| Other consumer                             |         | 271,890                |         | 3.1                        | %          | 206,772 |   | 2.5 | % |
| Total other loans                          |         | 1,692,548              |         | 19.8                       | %          | 1,770,861 |   | 21.4 | % |
| Total gross loans                          |         | 8,528,961              |         | 100.0                      | %          | 8,249,453 |   | 100.0 | % |
|                                       |         |                   |         |                       |       |   |   |   |   |
| Unearned fees, premiums and discounts, net |         | (16,032                | )            |                       |       | (2,049 | ) |   |   |
| Allowance for loan losses                  |         | (223,700               | )            |                       |       | (178,027 | ) |   |   |
| Loan receivable, net                       |         | $                      | 8,289,229    |                       |       |   | $ | 8,069,377 |   |   |   |

 

### **Nonperforming Assets**

### ** **

Nonperforming assets are comprised of nonaccrual loansand other real estate owned, net.  Nonperformingassets totaled $189.4 million or 1.49% of total assets at June 30, 2009 and$252.9 million or 2.04% of total assets at December 31, 2008.  Nonaccrual loans amounted to $162.2million at June 30,2009, compared with $214.6 million at year-end 2008.  During the first half of 2009, we tookaggressive actions to manage down and resolve our problem assets.  Included in these efforts was the sale ofproblem loans with aggregate principal balances of $183.5 million during thefirst six months of 2009.

 

Loans totaling $210.6million were placed onnonaccrual status during the second quarter of 2009.  As a part of our comprehensive loan review,loans totaling $14.7million whichwere not 90 days past due as of June 30, 2009, were classified asnonaccrual loans due to concerns regarding collateral values and futurecollectibility.  Additions to nonaccrualloans were offset by $74.4million in net chargeoffs, $107.8 million in payoffs and principalpaydowns, $58.8 million in loans that were transferred to other real estateowned, and $55.4million inloans brought current.  The additions tononaccrual loans during the second quarter of 2009 were comprised of $22.4million in single family loans, $10.1 million in multifamily loans, $34.3million in commercial real estate loans, $21.7 million in land loans, $105.0million in construction loans, $10.3 million in commercial business loansincluding SBA loans, $6.3 million in trade finance loans, and $359 thousand inautomobile and other consumer loans.

 

All loans that were past due90 days or more were on nonaccrual status as of June 30, 2009 and December 31,2008.

 

We had $89.5 million and $11.0 million in total performing restructuredloans as of June 30, 2009 and December 31, 2008, respectively, that wereexcluded from nonperforming assets.  As ofJune 30, 2009, the $89.5 million of restructured loans includes $77.2million of performing, accrual loans that were structured as A/B notes.  In these A/B notes, the original loan wasrestructured into two notes where 

 

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the A note represents the portion of the original loanthat is performing and is expected to be collected in full.  The B note represents the portion of theoriginal loan which was the shortfall in value and was fully charged off.  The A/B notes balance as of June 30,2009 is comprised of the A note balances. As of June 30, 2009, restructured loans were comprised of $14.5 millionin single family loans, $49.1 million in multifamily loans, $10.5 million incommercial real estate loans, $8.0 million in construction loans, $7.0 millionin commercial business loans and $375 thousand in land loans.

 

Other real estateowned includes properties acquired through foreclosure or through full orpartial satisfaction of loans.  We had 43OREO properties as of June 30, 2009 with a combined aggregate carrying value of $27.2million. The majority of these properties were related to our land and singlefamily residential loan portfolios. Approximately 81% of OREO properties were located in California and 19%of the OREO properties were located in Texas as of June 30, 2009.  As of December 31, 2008, we had 41 OREOproperties with a carrying value of $38.3 million.  During the first six months of 2009, we foreclosed on 73 propertieswith an aggregate carrying value of $100.0 million as of the foreclosuredate.  During the first half of 2009, wesold 74 OREO properties with a carrying value of $79.8 million resulting in atotal net loss on sale of $5.9 million. We financed the sale of OREO properties in the amount of $28.0 millionduring the first half of 2009.  During thefirst half of 2008, we sold five OREO properties with a combined carrying valueof $10.0 million for a total net gain on sale of $71 thousand.

 

The following table setsforth information regarding nonaccrual loans and other real estate owned as ofthe dates indicated:

 
| ** **                                       | ** **   | **June 30,**  | ** **   | **December 31,** | ** ** |
|--------------------------------------------------|--------------|--------------------|--------------|-----------------------|------------|
| ** **                                       | ** **   | **2009**           | ** **   | **2008**              | ** ** |
| *** ***                                     | *** *** | **(in thousands)** | *** *** |
|                                             | ** **   | ** **         | ** **   | ** **            | ** ** |
| Nonaccrual loans                                 |         | $                  | 162,174      |                  | $          | 214,607 |   |
| Total nonperforming loans                        |         | 162,174            |         | 214,607               |       |
|                                             |         |               |         |                  |       |
| Other real estate owned, net                     |         | 27,188             |         | 38,302                |       |
| Total nonperforming assets                       |         | $                  | 189,362      |                  | $          | 252,909 |   |
|                                             |         |               |         |                  |       |
| Performing restructured loans                    |         | $                  | 89,488       |                  | $          | 10,992 |   |
|                                             |         |               |         |                  |       |
| Total nonperforming assets to total assets       |         | 1.49               | %            | 2.04                  | %          |
| Allowance for loan losses to nonperforming loans |         | 137.94             | %            | 82.95                 | %          |
| Nonperforming loans to total gross loans         |         | 1.90               | %            | 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.

 

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At June 30,2009, our totalrecorded investment in impaired loans was $265.5million, compared with $232.1 million at December 31, 2008.  All nonaccrual loans are included in impairedloans.  As of June 30, 2009, theincrease in impaired loans is primarily due to the increase of $77.2 million inA/B notes, partially offset by the decrease of $52.4 million in nonacccrualloans since December 31, 2008.  Impaired loans at June 30, 2009 are comprised of single family loanstotaling $19.4 million, multifamily loans totaling $56.3 million, commercialreal estate loans totaling $36.5 million, land totaling $37.7 million, constructionloans totaling $74.8million,commercial business loans totaling $35.9million, trade finance loans amounting to $3.7million,SBA loanstotaling $462 thousand, and automobile and other consumer loans totaling $752thousand.

 

Specific reserves on impaired loans amounted to $19.1 million and $23.4million at June 30, 2009 and December 31, 2008, respectively.  Our average recorded investment in impairedloans for the six months ended June 30, 2009 and 2008 were $291.1 millionand $234.9 million, respectively.  Duringthe six months ended June 30, 2009 and 2008, gross interest income thatwould have been recorded on impaired loans had they performed in accordancewith their original terms, totaled $8.9 million and $8.8 million,respectively.  Of this amount, actualinterest recognized on impaired loans, on a cash basis, was $4.3 million and$5.4 million, for the six months ended June 30, 2009 and 2008,respectively.

 

Inlight of the credit and mortgage crisis affecting the entire financial industryand its impact on our borrowers, we took a more proactive approach in assessingpotential loan impairment in our overall portfolio.  We have expanded our scope to perform focusedreviews of certain sectors of our loan portfolio to identify and mitigatepotential losses.  Our recent experiencemade us aware of the rapid deterioration occurring in the market in arelatively short period of time. Specifically, we have noted that while our borrowers may continue to payas agreed in accordance with their contractual terms and/or even though loansmay not have reached a significant stage of delinquency, the existence ofcertain warning signs indicating possible collectibility issues warranted amore careful scrutiny of these loans for potential impairment.  Specifically, we reviewed loans thatexhibited the following characteristics:

 

·                  diminishingor adverse changes in cash flows that serve as the principal source ofrepayment;

·                  adversechanges in the financial position or net worth of guarantors or investors;

·                  adversechanges in collateral values for collateral-dependent loans;

·                  decliningor adverse changes in inventory levels securing commercial business and tradefinance;

·                  failurein meeting financial covenants; or

·                  otherchanges or conditions that may adversely impact the ultimate collectibility ofloans.

 

Although certain loans are not 90 days or more delinquent and thereforestill accruing interest, we have classified them as impaired as of June 30,2009 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 June 30,2009, futureadditions to the allowance will be subject to a continuing evaluation ofestimated and known, as well as inherent, risks in the loan portfolio.

 

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 June 30, 2009, the allowance for loan losses amounted to $223.7 million, or 2.62% oftotal loans, compared with $178.0 million, or 2.16% of total loans, at 

 

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December 31, 2008, and $168.4 million, or 1.95% oftotal loans, at June 30,2008.  The $45.7 million increase in theallowance for loan losses at June 30, 2009, from year-end 2008, reflects$229.4 million in additional loss provisions and $9.3 million of additionalallowance for loan losses resulting from the impact of the desecuritization in May 2009,less $193.4 million in net chargeoffs recorded during the first six months of2009.  The allowance for unfunded loancommitments, off-balance-sheet credit exposures, and recourse provisions isincluded in accrued expenses and other liabilities and amounted to $5.9 millionat June 30, 2009, compared to $6.3 million at December 31, 2008.

 

We recorded $151.4 million in loan loss provisions during the secondquarter of 2009 and $229.4 million during the first half of 2009.  In comparison, we recorded $85.0 million in loan lossprovisions during the second quarter of 2008 and $140.0 million during thefirst half of 2008.  The increase inloss provisions recorded during thesecond quarter of 2009 resulted from our actions to reduce problemassets brought on by the sustained downturn in the real estate market andcontinued instability in the overall economy. During the second quarter of2009, we recorded $133.9 millionin net chargeoffs representing 6.50% of average loans outstanding during thequarter.  In comparison, we recorded netchargeoffs totaling $34.8 million, or 1.59% of average loans outstanding for the same period 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.  Duringthe first six months of 2009, net chargeoffs amounted to $193.4 million, or4.71% of average loans outstanding during the period.  This compares to net chargeoffs of $60.2million, or 1.36% of average loans outstanding during the same period of 2008.

 

The following table summarizesactivity in the allowance for loan losses for the three and six months ended June 30,2009 and 2008:

 

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| ** **                                                     | ** **   | **Three Months Ended** | ** **   | **Six Months Ended** | ** **   |
|----------------------------------------------------------------|--------------|------------------------|--------------|----------------------|--------------|
| ** **                                                     | ** **   | **June 30,**      | ** **   | **June 30,**    | ** **   |
| ** **                                                     | ** **   | **2009**               | ** **   | **2008**             | ** **   | **2009** | ** ** | **2008** | ** ** |
| *** ***                                                   | *** *** | **(in thousands)**     | *** *** | **(in thousands)**   | *** *** |
|                                                           | ** **   | ** **             | ** **   | ** **           | ** **   | ** ** | ** ** | ** ** | ** ** |
| Allowance balance, beginning of period                         |         | $                      | 195,450      |                 | $            | 117,120 |   | $ | 178,027 |   | $ | 88,407 |   |
| Allowance for unfunded loan commitments and letters  of credit |         | 1,442                  |         | 1,136                |         | 434 |   | 232 |   |
| Provision for loan losses                                      |         | 151,422                |         | 85,000               |         | 229,422 |   | 140,000 |   |
| Impact of desecuritization                                     |         | 9,262                  |         | —               |         | 9,262 |   | — |   |
| Chargeoffs:                                                    |         |                   |         |                 |         |   |   |   |   |
| Single family real estate                                      |         | 14,263                 |         | 634                  |         | 18,116 |   | 709 |   |
| Multifamily real estate                                        |         | 2,352                  |         | 436                  |         | 4,098 |   | 436 |   |
| Commercial real estate                                         |         | 13,063                 |         | —               |         | 15,859 |   | — |   |
| Land                                                           |         | 33,599                 |         | 16,337               |         | 46,122 |   | 21,418 |   |
| Construction                                                   |         | 60,083                 |         | 15,726               |         | 78,526 |   | 24,291 |   |
| Commercial business                                            |         | 13,718                 |         | 1,919                |         | 33,177 |   | 13,735 |   |
| Automobile                                                     |         | 27                     |         | 134                  |         | 35 |   | 163 |   |
| Other consumer                                                 |         | 306                    |         | 23                   |         | 1,618 |   | 40 |   |
| Total chargeoffs                                               |         | 137,411                |         | 35,209               |         | 197,551 |   | 60,792 |   |
|                                                           |         |                   |         |                 |         |   |   |   |   |
| Recoveries:                                                    |         |                   |         |                 |         |   |   |   |   |
| Single family real estate                                      |         | 205                    |         | 2                    |         | 226 |   | 2 |   |
| Multifamily real estate                                        |         | 96                     |         | —               |         | 218 |   | — |   |
| Commercial and industrial real estate                          |         | 591                    |         | 3                    |         | 597 |   | 6 |   |
| Land                                                           |         | 416                    |         | —               |         | 416 |   | — |   |
| Construction                                                   |         | 847                    |         | —               |         | 966 |   | — |   |
| Commercial business                                            |         | 1,367                  |         | 357                  |         | 1,648 |   | 537 |   |
| Automobile                                                     |         | 9                      |         | 4                    |         | 31 |   | 21 |   |
| Other consumer                                                 |         | 4                      |         | —               |         | 4 |   | — |   |
| Total recoveries                                               |         | 3,535                  |         | 366                  |         | 4,106 |   | 566 |   |
| Net chargeoffs                                                 |         | 133,876                |         | 34,843               |         | 193,445 |   | 60,226 |   |
| Allowance balance, end of period                               |         | $                      | 223,700      |                 | $            | 168,413 |   | $ | 223,700 |   | $ | 168,413 |   |
| Average loans outstanding                                      |         | $                      | 8,244,850    |                 | $            | 8,773,028 |   | $ | 8,221,143 |   | $ | 8,864,142 |   |
| Total gross loans outstanding, end of period                   |         | $                      | 8,528,961    |                 | $            | 8,656,427 |   | $ | 8,528,961 |   | $ | 8,656,427 |   |
| Annualized net chargeoffs to average loans                     |         | 6.50                   | %            | 1.59                 | %            | 4.71 | % | 1.36 | % |
| Allowance for loan losses to total gross loans, end  of period |         | 2.62                   | %            | 1.95                 | %            | 2.62 | % | 1.95 | % |

 

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 loss factorsderived from trends and losses associated with each pool over a specifiedperiod of time.  Based on this process,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.

 

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 eighteen risk-rated or heterogeneous loan pool categories andthree homogeneous loan categories.  Theloan 

 

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sectors included in the heterogeneous loanpools are residential single family, residential multifamily, commercial realestate, construction, commercial business, trade finance, and automobileloans.  With the exception of automobileloans, all other heterogeneous loan categories have been broken down intoadditional subcategories.  For example,the commercial 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 risks associatedwith 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:

 
| ** **                 | ** **   | **June 30, 2009** | ** **   | **December 31, 2008** | ** ** |
|----------------------------|--------------|------------------------|--------------|----------------------------|------------|
| ** **                 | ** **   | **Amount**             | ** **   | **%**                      | ** ** | **Amount** | ** ** | **%** | ** ** |
| *** ***               | *** *** | **(in thousands)**     | *** *** |
| Residential, single family |         | $                      | 19,225       |                       | 10.4       | % | $ | 6,178 |   | 5.9 | % |
| Residential, multifamily   |         | 6,910                  |         | 11.9                       | %          | 6,811 |   | 8.2 | % |
| Commercial real estate     |         | 25,530                 |         | 41.1                       | %          | 19,169 |   | 42.1 | % |
| Land                       |         | 50,119                 |         | 5.6                        | %          | 30,398 |   | 7.0 | % |
| Construction               |         | 60,504                 |         | 11.1                       | %          | 60,478 |   | 15.3 | % |
| Commercial business        |         | 53,010                 |         | 13.4                       | %          | 40,843 |   | 14.7 | % |
| Trade finance              |         | 5,974                  |         | 3.2                        | %          | 12,721 |   | 4.2 | % |
| Automobile                 |         | 83                     |         | 0.1                        | %          | 282 |   | 0.1 | % |
| Other consumer             |         | 2,345                  |         | 3.2                        | %          | 1,147 |   | 2.5 | % |
| Total                      |         | $                      | 223,700      |                       | 100.0      | % | $ | 178,027 |   | 100.0 | % |

 

**Deposits**

 

Depositsincreased 6% to $8.66 billion at June 30, 2009, from $8.14 billion at December 31,2008.  The net increase in depositsprimarily came from money market accounts which rose $676.1 million or 51% andnoninterest bearing accounts of $34.0 million or 3%.  These were offset by decreases in timedeposits of $154.3 million or 3%, interest-bearing checking accounts of $24.6million or 7%, and savings accounts of $14.3 million or 3%.

 

Sincemid-2008, as a result of the turbulence in the banking sector, we haveexperienced a heightened interest in deposit products that afford greaterdeposit insurance coverage to deposit customers.  As of June 30, 2009, time depositswithin the Certificate of Deposit Account Registry Service (“CDARS”) programamounted to $899.4 million, compared with $946.8 million at December 31,2008.   The CDARS program allowscustomers with deposits in excess of FDIC-insured limits to obtain fullcoverage on time deposits through a network of banks within the CDARSprogram.  The Bank acts as custodian forthe depositor with respect to certificates issued to the depositor byparticipating institutions. Additionally, during the third quarter of 2008, we partnered withanother financial institution to implement a new retail sweep product fornon-time deposit accounts to provide added 

 

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depositinsurance coverage for deposits in excess of FDIC-insured limits.  Deposits gathered through these programs areconsidered brokered deposits under regulatory reporting guidelines.

 

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

 
| ** **                 | ** **   | **June 30,**  | ** **   | **December 31,** | ** ** |
|----------------------------|--------------|--------------------|--------------|-----------------------|------------|
| ** **                 | ** **   | **2009**           | ** **   | **2008**              | ** ** |
| *** ***               | *** *** | **(In thousands)** | *** *** |
|                       |         |               |         |                  |       |
| Noninterest-bearing demand |         | $                  | 1,326,952    |                  | $          | 1,292,997 |   |
| Interest-bearing checking  |         | 338,696            |         | 363,285               |       |
| Money market               |         | 1,999,464          |         | 1,323,402             |       |
| Savings                    |         | 405,837            |         | 420,133               |       |
| Total core deposits        |         | 4,070,949          |         | 3,399,817             |       |
| Time deposits:             |         |               |         |                  |       |
| Less than $100,000         |         | 1,121,648          |         | 1,521,988             |       |
| $100,000 or greater        |         | 3,466,221          |         | 3,220,154             |       |
| Total time deposits        |         | 4,587,869          |         | 4,742,142             |       |
| Total deposits             |         | $                  | 8,658,818    |                  | $          | 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 June 30, 2009, federal fundspurchased decreased to $22 thousand from the $28.0 million balance at December 31,2008.  FHLB advances decreased 13% to $1.17billion as of June 30,2009, 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 the first half of 2009, aportion of the proceeds from the maturities and sales of investment securitiesand redemption of our money-market mutual funds were used to pay down our borrowings.  During the first half of 2009, severallong-term FHLB advances totaling $180.0 million matured and were paid off.  As of June 30, 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 $1.02 billion and $998.4 million as of June 30, 2009and December 31, 2008, respectively. Included in this balance is $25.1 million in overnight repurchaseagreements with customers that the Company assumed in conjunction with the DCBacquisition.  The interest rates on thesecustomer repurchase agreements ranged from 0.50% to 0.75% as of June 30,2009.  All of the other repurchaseagreements are long-term with ten year maturity terms.  Repurchase agreements are accounted for ascollateralized financing transactions and recorded at the amounts at which thesecurities were sold.  The collateral forthese agreements consist of U.S. Government agency and U.S. Governmentsponsored enterprise debt and mortgage-backed securities.  All of these repurchase agreements have anoriginal term of ten years.  The rateswere generally initially floating rate for a period of time ranging from sixmonths to three years, with the floating interest rates ranging from thethree-month Libor minus 80 basis points to the three-month Libor minus 340basis points.  With the exception of onerepurchase agreement, the rates have been switched to fixed rates for theremainder of the term, with fixed interest rates ranging from 4.29% to5.13%.  The counterparty has the right toeither a one-time call or a quarterly call when the rates change from floatingto fixed, for each of the repurchase agreements.

 

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**Long-term Debt**

** **

**Long-termdebt remained at $235.6 million at**June 30,2009 andDecember 31, 2008. Long-term debt is comprised of subordinated debt which qualifies as TierII capital and junior subordinated debt issued in connection with our varioustrust preferred securities offerings which qualify as Tier I capital forregulatory purposes.

** **

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

### ** **

The following table presents, as of June 30, 2009, theCompany’s significant fixed and determinable contractual obligations, withinthe categories described below, by payment date.  With the exception of operating leaseobligations, these contractual obligations are included in theconsolidated balance sheets.  The paymentamounts represent the amounts and interest contractually due to the recipient.

 
| ** **                                  | ** **   | **Payment Due by Period** | ** **   |
|---------------------------------------------|--------------|---------------------------|--------------|
| ** **                                  | ** **   | **Less than**             | ** **   | ** ** | ** ** | ** ** | ** ** | **After** | ** ** | **Indeterminate** | ** ** | ** ** | ** ** |
| **Contractual Obligations**                 | ** **   | **1 year**                | ** **   | **1-3 years** | ** ** | **3-5 years** | ** ** | **5 years** | ** ** | **Maturity** | ** ** | **Total** | ** ** |
| *** ***                                | *** *** | **(In thousands)**        | *** *** |
| * *                                    | * *     | * *                  | * *     | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Deposits                                    |         | $                         | 4,538,941    |   | $ | 85,496 |   | $ | 30,736 |   | $ | 7,559 |   | $ | 4,185,901 |   | $ | 8,848,633 |   |
| Federal funds purchased                     |         | 22                        |         | — |   | — |   | — |   | — |   | 22 |   |
| FHLB advances                               |         | 933,533                   |         | 271,267 |   | 266 |   | 3,123 |   | — |   | 1,208,189 |   |
| Securities sold under repurchase agreements |         | 72,592                    |         | 95,023 |   | 95,023 |   | 1,091,782 |   | — |   | 1,354,420 |   |
| Notes payable                               |         | —                    |         | — |   | — |   | — |   | 11,578 |   | 11,578 |   |
| Long-term debt obligations                  |         | 7,321                     |         | 14,643 |   | 14,643 |   | 347,367 |   | — |   | 383,974 |   |
| Operating lease obligations                 |         | 11,469                    |         | 21,208 |   | 14,683 |   | 21,893 |   | — |   | 69,253 |   |
| Unrecognized tax benefits                   |         | —                    |         | — |   | — |   | — |   | 7,392 |   | 7,392 |   |
| Postretirement benefit payments             |         | 4,144                     |         | 11,156 |   | 1,732 |   | 2,316 |   | — |   | 19,348 |   |
| Total contractual obligations               |         | $                         | 5,568,022    |   | $ | 498,793 |   | $ | 157,083 |   | $ | 1,474,040 |   | $ | 4,204,871 |   | $ | 11,902,809 |   |

 

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 June 30, 2009****isas follows:

 

| ** **                   | ** **   | **Commitments**    | ** **   |
|------------------------------|--------------|--------------------|--------------|
| ** **                   | ** **   | **Outstanding**    | ** **   |
| *** ***                 | *** *** | **(In thousands)** | *** *** |
| Undisbursed loan commitments |         | $                  | 1,196,668    |   |
| Standby letters of credit    |         | 639,233            |         |
| Commercial letters of credit |         | 34,434             |         |
|                              |              |                    |              |  |

 

### **Capital Resources**

### ** **

At June 30, 2009, stockholders’ equity totaled $1.48billion, a 5% decrease from the year-end 2008 balanceof $1.55 billion.  The decrease iscomprised of the following: (1) net loss after the extraordinaryitem of $114.6 million recorded during the first half of 2009; (2) anoncredit-related 

 

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impairment loss oninvestment securities recorded in the current year of $36.7 million, net oftax; (3) Series B preferred stock issuance cost of $44 thousand; (4) taxprovision of $404 thousand from various stock plans; (5) purchase oftreasury shares related to vested restricted stock amounting to $35 thousand,representing 8,978 shares; and (6) accrual and payment of quarterly cashdividends on common and preferred stock totaling $17.0 million during the firsthalf of 2009.  These transactions wereoffset by:  (1) net unrealized gainon investment securities available-for-sale of $60.9 million; (2) netunrealized loss of $30.6 million as a result of the desecuritization of ourprivate-label mortgage-backed securities; (3) stock compensation costsamounting to $2.9 million related to grants of restricted stock and stockoptions; and (4) net issuance of common stock totaling $390 thousand,representing 385,722 shares, pursuant to various stock plans and agreements.

 

*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 this report.

 

On June 29 and June 30,2009, we entered into binding agreements with certain shareholders to exchangeapproximately 90 thousand shares of Series A preferred stock into 8.1million shares of common stock that was accounted for as an induced conversion,with the settlement of shares occurring in July 2009.  The exchange ratio was 90 shares of commonstock for each share of Series A preferred stock.  As a result of entering into these agreementsbefore the end of second quarter of 2009, the Company recorded a preferreddividend of $14.8 million during the second quarter of 2009 that represents theadditional consideration or inducement paid to the holders in excess of thecarrying value of our Series A preferred stock.   For a further discussion on this exchange, see Notes 9and 11 to the condensed consolidated financial statements presented elsewherein this report.

 

*Series B Preferred Stock Offering*

 

On December 5, 2008, wereceived $306.5 million of additional Tier 1 qualifying capital from the U.S. Treasurythrough the issuance of 306,546 shares of fixed-rate, cumulative perpetualpreferred stock.  The issuance of Series Bpreferred stock was made in conjunction with the Company’s participation in theU.S. Treasury’s Capital Purchase Program.  For a furtherdiscussion on this preferred stock offering, see Note 9 to the condensedconsolidated financial statements presented elsewhere in this report.

 

***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**June 30, 2009, the Bank’s Tier Iand total capital ratios were 12.1% and 14.1%, 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 June 30, 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)  |       | 14.3          | %          | 14.1          | %          | 8.0              | %          | 10.0             | %          |
| Tier 1 Capital (to Risk-Weighted Assets) |       | 12.3          | %          | 12.1          | %          | 4.0              | %          | 6.0              | %          |
| Tier 1 Capital (to Average Assets)       |       | 10.4          | %          | 10.2          | %          | 4.0              | %          | 5.0              | %          |

 

**ASSETLIABILITY AND MARKET RISK MANAGEMENT**

 

**Liquidity**

 

Liquidity management involves our ability tomeet cash flow requirements arising from fluctuations in deposit levels anddemands of daily operations, which include funding of securities purchases,providing for customers’ credit needs and ongoing repayment of borrowings.  Our liquidity is actively managed on a dailybasis and reviewed periodically by the Asset/Liability Committee and the Boardof Directors.  This process is intendedto ensure the maintenance of sufficient funds to meet the needs of the Bank,including adequate 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.

 

During the first half of 2009, we experienced netcash inflows from operating activities of $161.7 million, compared tonet cash inflows of $102.7 million for the first six months of 2008.  Net cash inflows from operating activitiesreflects the $238.7 million and $140.0 million loan loss provision and impactof desecuritization recorded during the first half of 2009 and 2008,respectively.

 

Net cash outflows from investing activitiestotaled $776.8 million for the first half of 2009 compared with netinflows from investing activities of $146.2 million for the half quarter 2008.  Net cash outflows from investing activities for the first half of 2009 were dueprimarily to purchases of short-term investments, investment securities andloans receivable.  These factors werepartially offset by the proceeds from the sale of investment securities, aswell as repayments, maturities and redemptions of investment securities, and adecrease in loans receivable due to lower loan origination volume during thefirst half of 2009 relative to the first half 2008.  Netcash inflows from investing activities for the first half of 2008 were dueprimarily to proceeds from the sale of investment securities and loans, theearly termination of a resale agreement, and repayments, maturities and redemptionsof investment securities.  These factorswere partially offset by the growth in our loan portfolio and purchases ofinvestment securities and other assets.

 

Weexperienced net cash inflows from financing activities of $309.3 million forthe first half of 2009, 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 

 

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depositcustomers beginning in the second half of 2008. We have focused on attracting new customers and growing deposits throughboth our retail branch and commercial deposit platforms.  We have successfully introduced new coredeposit products and increased money market deposits during the first half of2009.  Cash from financing activitieswere partially offset by net decreases in federal funds purchased and FHLBadvances, and dividends paid on our common and preferred stock for the firstsix months of 2009.  We experienced netcash inflows from financing activities of $14.8 million for the first half of2008, primarily due to the net increase in deposits as well as net proceedsreceived from the issuance of convertible preferred stock.  These factors were partially offset byrepayment of federal funds purchased, FHLB advances and dividends paid on ourcommon stock for the first half of 2008.

 

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 June 30,2009, our total borrowing capacity and holdings of cash and cash equivalentsand short-term investments increased to $3.97 billion, compared to $3.57billion as of December 31, 2008.  Webelieve our liquidity sources to be stable and adequate to meet our day-to-daycash 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, risk-based capitalrequirements, and approval from our regulator. For the six months ended June 30, 2009 and 2008, total dividendspaid by the Bank to East West Bancorp, Inc. amounted to $18.5 million and$12.7 million, respectively.   Theincrease in dividend payment for the six months ended June 30, 2009reflects the additional dividends paid by the Bank to allow the Bancorp to, inturn, make the dividend payments on the Series A and B preferred stockissued in April 2008 and December 2008, respectively.  This was partially offset by the reductionsin quarterly common stock dividends to $0.01 per share and $0.02 per shareduring the second quarter and first quarter of 2009, respectively, from $0.10per share during the first half of 2008.

 

The Company’s Board of Directors has approved thedeclaration of third quarter 2009 dividends on July 3, 2009 on our Series Apreferred stock and on July 27, 2009 on our common shares.  Additionally, our Board of Directors alsoapproved the payment of third quarter dividends on our Series B preferredstock payable on August 17, 2009. The quarterly dividend rate is $0.01 per share on our common stockpayable on or about August 26, 2009 to shareholders of record as of August 12,2009.  The Board-authorized reduction incommon stock dividends is consistent with our continuing efforts to preservecapital.  Future dividend payments fromBank to Bancorp and to our common and preferred shareholders will continue tobe reviewed quarterly in light of the business conditions we are operating in,and considering current and projected earnings and desired 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.

 

The fundamental objective of the assetliability management process is to manage our exposure to interest ratefluctuations while maintaining adequate levels of liquidity and capital.  Our strategy is formulated by the AssetLiability Committee, which coordinates with the Board of Directors to monitorour overall asset and liability composition. The Committee meets regularly to evaluate, among other 

 

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things, the sensitivity of our assets andliabilities to interest rate changes, the book and market values of assets andliabilities, unrealized gains and losses on the available-for-sale portfolio(including those attributable to hedging transactions, if any), purchase andsecuritization activity, and maturities of investments and borrowings.

 

Our overall strategy is to minimize the adverse impactof immediate incremental changes in market interest rates (rate shock) on netinterest income and net portfolio value. Net portfolio value is defined as the present value of assets, minus thepresent value of liabilities.  Theattainment of this goal requires a balance between profitability, liquidity andinterest rate risk exposure.  To minimizethe adverse impact of changes in market interest rates, we simulate the effectof instantaneous interest rate changes on net interest income and net portfoliovalue on a quarterly basis.  The tablebelow shows the estimated impact of changes in interest rates on net interestincome and market value of equity as of June 30, 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** | ** ** | **June 30,**       | ** ** | **December 31,**   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| **(Basis Points)**           | ** ** | **2009**                | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| +200                         |       | 5.9                     | %          | 11.6                    | %          | (3.9 | )% | 8.8 | % |
| +100                         |       | 2.2                     | %          | 5.4                     | %          | (2.5 | )% | 4.4 | % |
| -100                         |       | 0.4                     | %          | (1.6                    | )%         | 1.3 | % | (4.5 | )% |
| -200                         |       | 1.9                     | %          | (1.4                    | )%         | 7.4 | % | (9.7 | )% |

 

----

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

 

(2) The percentage change represents net portfolio value of theBank in a stable interest rate environment versus net portfolio value in thevarious rate scenarios.

 

Allinterest-earning assets, interest-bearing liabilities and related derivativecontracts are included in the interest rate sensitivity analysis at June 30,2009 and December 31, 2008.  At June 30,2009 and December 31, 2008, our estimated changes in net interest incomeand net portfolio value were within the ranges established by the Board ofDirectors.

 

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

 

The following table provides the outstanding principalbalances and the weighted average interest rates of our financial instrumentsas of June 30, 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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| ** **                                                    | ** **   | ** **                                       | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | **Fair  Value at** | ** ** |
|---------------------------------------------------------------|--------------|--------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|--------------------|------------|
| ** **                                                    | ** **   | **Expected  Maturity or Repricing Date by Year** | ** ** | ** ** | ** ** | **June 30,** | ** ** |
| ** **                                                    | ** **   | **Year 1**                                       | ** ** | **Year 2** | ** ** | **Year 3**        | ** ** | **Year 4** | ** ** | **Year 5** | ** ** | **Thereafter** | ** ** | **Total**  | ** ** | **2009**           | ** ** |
| *** ***                                                  | *** *** | **(in thousands)**                               | ** ** |
| **Assets:**                                                   |         |                                             |       |       |       |              |       |       |       |       |       |           |       |       |       |               |       |
| CD  investments                                               |         | $                                                | 554,293    |       |       |              |       |       |       |       |       |           |       |       | $          | 554,293            |       | $ | 554,721 |   |
| average  yield (fixed rate)                                   |         | 1.30                                             | %          |       |       |              |       |       |       |       |       |           |       | 1.30       | %          |               |       |
| Short-term  investments                                       |         | $                                                | 424,201    |       |       |              |       |       |       |       |       |           |       |       | $          | 424,201            |       | $ | 424,201 |   |
| Weighted  average rate                                        |         | 0.54                                             | %          |       |       |              |       |       |       |       |       |           |       | 0.54       | %          |               |       |
| Securities  purchased under resale agreements                 |         | $                                                | 50,000     |       |       |              |       |       |       |       |       |           | $          | 25,000     |       | $                  | 75,000     |   | $ | 77,576 |   |
| Weighted  average rate                                        |         | 10.00                                            | %          |       |       |              |       |       |       |       |       | 8.05           | %          | 9.35       | %          |               |       |
| Investment  securities held-to-maturity (fixed rate)          |         | $                                                | 92,219     |       | $          | 60,584            |       | $          | 50,843     |       | $          | 109,125        |       | $          | 68,494     |               | $          | 112,257 |   | $ | 493,522 |   | $ | 497,063 |   |
| Weighted  average rate                                        |         | 6.25                                             | %          | 6.08       | %          | 5.96              | %          | 5.35       | %          | 5.77       | %          | 5.28           | %          | 5.71       | %          |               |       |
| Investment  securities held-to-maturity (variable rate)       |         | $                                                | 136,071    |       | $          | 60,422            |       | $          | 103,114    |       | $          | 1,275          |       | $          | 399        |               | $          | 37 |   | $ | 301,318 |   | $ | 297,400 |   |
| Weighted  average rate                                        |         | 2.20                                             | %          | 4.19       | %          | 4.42              | %          | 5.20       | %          | 5.16       | %          | 5.40           | %          | 3.38       | %          |               |       |
| Investment  securities available-for-sale (fixed rate)        |         | $                                                | 154,507    |       | $          | 122,123           |       | $          | 172,999    |       | $          | 81,714         |       | $          | 101,549    |               | $          | 284,952 |   | $ | 917,844 |   | $ | 919,740 |   |
| Weighted  average rate                                        |         | 6.25                                             | %          | 3.79       | %          | 4.55              | %          | 5.41       | %          | 4.38       | %          | 5.25           | %          | 5.01       | %          |               |       |
| Investment  securities available-for-sale (variable rate) (1) |         | $                                                | 335,918    |       | $          | 124,220           |       | $          | 34,005     |       | $          | 19,263         |       | $          | 18,088     |               | $          | 1,320 |   | $ | 532,814 |   | $ | 462,070 |   |
| Weighted  average rate                                        |         | 4.04                                             | %          | 5.42       | %          | 5.49              | %          | 5.78       | %          | 4.75       | %          | 5.29           | %          | 4.54       | %          |               |       |
| Total  gross loans                                            |         | $                                                | 6,758,723  |       | $          | 927,397           |       | $          | 373,249    |       | $          | 197,840        |       | $          | 140,279    |               | $          | 131,473 |   | $ | 8,528,961 |   | $ | 8,427,286 |   |
| Weighted  average rate                                        |         | 5.36                                             | %          | 6.68       | %          | 6.95              | %          | 6.91       | %          | 6.30       | %          | 5.70           | %          | 5.63       | %          |               |       |
|                                                          |         |                                             |       |       |       |              |       |       |       |       |       |           |       |       |       |               |       |
| **Liabilities:**                                              |         |                                             |       |       |       |              |       |       |       |       |       |           |       |       |       |               |       |
| Checking  accounts                                            |         | $                                                | 338,697    |       |       |              |       |       |       |       |       |           |       |       | $          | 338,697            |       | $ | 272,329 |   |
| Weighted  average rate                                        |         | 0.37                                             | %          |       |       |              |       |       |       |       |       |           |       | 0.37       | %          |               |       |
| Money  market accounts                                        |         | $                                                | 1,999,464  |       |       |              |       |       |       |       |       |           |       |       | $          | 1,999,464          |       | $ | 1,928,372 |   |
| Weighted  average rate                                        |         | 1.32                                             | %          |       |       |              |       |       |       |       |       |           |       | 1.32       | %          |               |       |
| Savings  deposits                                             |         | $                                                | 405,836    |       |       |              |       |       |       |       |       |           |       |       | $          | 405,836            |       | $ | 333,101 |   |
| Weighted  average rate                                        |         | 0.63                                             | %          |       |       |              |       |       |       |       |       |           |       | 0.63       | %          |               |       |
| Time  deposits                                                |         | $                                                | 4,482,605  |       | $          | 70,500            |       | $          | 9,131      |       | $          | 25,191         |       | $          | 382        |               | $          | 60 |   | $ | 4,587,869 |   | $ | 4,595,022 |   |
| Weighted  average rate                                        |         | 1.87                                             | %          | 2.56       | %          | 4.55              | %          | 4.06       | %          | 2.77       | %          | 2.16           | %          | 1.90       | %          |               |       |
| Federal  funds purchased                                      |         | $                                                | 22         |       |       |              |       |       |       |       |       |           |       |       | $          | 22                 |       | $ | 22 |   |
| Weighted  average rate                                        |         | 0.24                                             | %          |       |       |              |       |       |       |       |       |           |       | 0.24       | %          |               |       |
| FHLB  advances (term)                                         |         | $                                                | 905,238    |       | $          | 210,000           |       | $          | 55,000     |       |       |           |       |       | $          | 3,000              |       | $ | 1,173,238 |   | $ | 1,200,416 |   |
| Weighted  average rate                                        |         | 4.34                                             | %          | 4.15       | %          | 5.21              | %          |       |       |       |       | 4.44           | %          | 4.35       | %          |               |       |
| Customer  repurchase agreements                               |         | $                                                | 25,080     |       |       |              |       |       |       |       |       |           |       |       | $          | 25,080             |       | $ | 25,080 |   |
| Weighted  average rate                                        |         | 0.52                                             | %          |       |       |              |       |       |       |       |       |           |       | 0.52       | %          |               |       |
| Securities  sold under repurchase agreements (fixed rate)     |         |                                             |       |       |       |              |       |       |       |       |       | $              | 945,000    |       | $          | 945,000            |       | $ | 1,183,660 |   |
| Weighted  average rate                                        |         |                                             |       |       |       |              |       |       |       |       |       | 4.81           | %          | 4.81       | %          |               |       |
| Securities  sold under repurchase agreements (variable rate)  |         | $                                                | 50,000     |       |       |              |       |       |       |       |       |           |       |       | $          | 50,000             |       | $ | 52,427 |   |
| Weighted  average rate                                        |         | 4.15                                             | %          |       |       |              |       |       |       |       |       |           |       | 4.15       | %          |               |       |
| Subordinated  debt                                            |         | $                                                | 75,000     |       |       |              |       |       |       |       |       |           |       |       | $          | 75,000             |       | $ | 44,038 |   |
| Weighted  average rate                                        |         | 2.16                                             | %          |       |       |              |       |       |       |       |       |           |       | 2.16       | %          |               |       |
| 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            |       | $ | 25,307 |   |
| Weighted  average rate                                        |         | 2.42                                             | %          |       |       |              |       |       |       |       |       |           |       | 2.42       | %          |               |       |

 

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

 

Expected maturities of assets are 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 for amortizing securities. The actual maturities of these instruments could vary significantly iffuture prepayments and repricing frequencies differ from our expectations basedon historical experience.

 

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Thefair values of short-term investments generally 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 and taking into consideration thecall features of each instrument.  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.  In obtaining such valuation information fromthird parties, the Company has reviewed the methodologies used to develop theresulting fair values.  For theprivate-label mortgage-backed security, the fair value was derived based on acombination of broker prices and discounted cash flow analyses that is weightedas deemed appropriate.  For the pooledtrust preferred securities, the fair value was derived based on a discountedcash flow analyses.  The discount rate isderived from assumptions using an exit pricing approach related to the impliedrate of return which have been adjusted for general change in market rates,estimated changes in credit quality and liquidity risk premium, and specificnon-performance and default experience in the collateral underlying thesecurities.

 

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 areprojected by the decay rate based on the Bank’s core deposit premiumstudy.  Cash flows for all non-timedeposits are discounted using the LIBOR yield curve.  For time deposits, the cash flows are basedon the contractual runoff and are discounted by the Bank’s current offeringrates, plus spread.  For federal fundspurchased, fair value approximates book value due to their shortmaturities.  The fair value of FHLB termadvances is estimated by discounting the cash flows through maturity or thenext repricing date based on current rates offered by the FHLB for borrowingswith similar maturities.  Customerrepurchase agreements, which have maturities ranging from one to three days,are presumed to have equal book and fair values because the interests ratespaid on these instruments are based on prevailing market rates.  The fair values of securities sold underrepurchase agreements are calculated by discounting future cash flows based onexpected maturities or repricing dates, utilizing estimated market discountrates and taking into consideration the call features of each instrument.  For both subordinated and junior subordinateddebt instruments, fair values are estimated by discounting cash flows throughmaturity based on current market rates the Bank would pay for new issuances.

 

The Asset/Liability Committee is 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 June 30,2009, the combined notional amounts of the equity swap agreements total $15.6million with termination dates similar to the stated maturity date on theunderlying certificate of deposit host contracts.  For the equity swap agreements, we agreed topay interest based on the one-month Libor minus a spread on a monthly basis andreceive any increase in the HSCEI at swap termination date.  Under SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, a certificate ofdeposit that pays interest based on changes in an equity index is a hybridinstrument with an embedded derivative (i.e., equity call option) that must beaccounted for separately from the host contract (i.e., the certificate of deposit).  In accordance with SFAS No. 133, boththe embedded equity call options on the certificates of deposit and thefreestanding equity swap 

 

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

 

On April 1, 2005, we amended the four equityswap agreements entered into in 2004 effectively removing the swap payableleg.  The amendments to the swapagreements changed the terms of the agreements such that instead of 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.  Thetotal amount paid in conjunction with these swap agreement amendments was $4.2million on April 1, 2005.

 

In December 2007, we entered into twoadditional equity swap agreements with a major investment brokerage firm tohedge against market fluctuations in a promotional equity index certificate ofdeposit product offered to bank customers. This product, which has a term of 5 years, also pays interest based onthe performance of the HSCEI similar to the previous index certificate offeringin 2004.  As of June 30, 2009, the combined notional amounts ofthese new equity swap agreements totaled $23.3 million and have terminationdates similar to the stated maturities of the underlying certificate of deposithost contracts.  On December 3,2007, we prepaid $4.5 million for the option cost based on the current marketvalue of the cash streams.

 

The fair values of the equity swap agreements andembedded derivative liability for these six derivative contracts amounted to$13.3 million as of June 30, 2009, compared to $13.9 million as of December 31, 2008.  The 7% decrease in fair value of thederivative contracts as of June 30, 2009 relative to December 31, 2008 is primarily due to a 25%reduction in the HSCEI volatility and lower time value as the options areapproaching their expiration dates.

 

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

 

Our disclosure controls and procedures are designed toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules 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 the Company nor the Bank is involved in any material legalproceedings.  The Bank, from time to time,is party to litigation which arises in the ordinary course of business, such asclaims to enforce liens, claims involving the origination and servicing ofloans, and other issues related to the business of the Bank.  After taking into consideration informationfurnished by counsel to the Company and the Bank, management believes that theresolution of such issues would not have a material adverse impact on thefinancial position, results of operations, or liquidity of the Company or theBank.

 

**ITEM 1A. RISK FACTORS**

 

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

 

***If the Bank continues to incur losses that erode its capital, it mayneed more capital and become subject to enhanced regulation or supervisoryaction.***Upon completion, our offering of common stocktogether with our concurrent offer to exchange common stock for our outstandingSeries A preferred stock will strengthen our common equity capitalbase.  Despite this increase in our capital base,*** ***if economicconditions continue to deteriorate, particularly in the California commercialreal estate and residential building markets where our business isconcentrated, we may need to raise even more capital to support any additionalprovisions for loan losses and loan chargeoffs.  We cannot provideassurance that we would succeed in raising any such additional capital, and anycapital we obtain may dilute the interests of holders of our common stock, orotherwise have an adverse effect on their investment.

 

Under federal and state laws and regulations pertaining to the safetyand soundness of insured depository institutions, the DFI and the FederalReserve, and separately the FDIC as insurer of the Bank’s deposits, haveauthority to compel or restrict certain actions if the Bank’s capital shouldfall below adequate capital standards as a result of future operating losses,or if its bank regulators determine that it has insufficient capital.  Among other matters, the corrective actionsinclude but are not limited to requiring affirmative action to correct anyconditions resulting from any violation or practice; directing an increase incapital and the maintenance of specific minimum capital ratios; restricting theBank’s operations; limiting the rate of interest it may pay on brokereddeposits; restricting the amount of distributions and dividends and payment ofinterest on its trust preferred securities; requiring the Bank to enter intoinformal or formal enforcement orders, including memoranda of understanding,written agreements and consent or cease and desist orders to take correctiveaction and enjoin unsafe and unsound practices; removing officers and directorsand assessing civil monetary penalties; and taking possession and closing andliquidating the Bank.  See Supervisionand Regulation in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2008.

 

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

 

***If we were to undergo an “ownershipchange” for tax purposes, our ability to use certain tax benefits would belimited.***  If we were to undergo an “ownership change”for tax purposes, our ability to deduct then existing net operating losscarryforwards would be limited.  Inaddition, our ability to claim certain subsequent deductions could be limitedif we had a “net unrealized built-in loss” at the time of the ownershipchange.  The rules for determiningwhen a company has an ownership change and the subsequent calculation ofapplicable limitations are highly complex. We do not believe that our currentissuance of common stock will result in an ownership change.  However, future transactions (which we may beunable to control) might result in an ownership change.  If we were to undergo an ownership change,limitations on our ability to use our tax benefits could have a materiallyadverse effect on us.

 

***Our outstanding debt securitiesrestrict our ability to pay dividends on our capital stock.***  In March 2000, East West Capital Trust Iissued $10,750,000 of 10.875% Trust Preferred Securities.  In July 2000, East West Capital Trust IIissued $10,000,000 of 10.945% Trust Preferred Securities.  In December 2003, East West CapitalStatutory Trust III issued $10,000,000 of Floating Rate Trust PreferredSecurities.  In June 2004, East WestCapital Trust IV issued $10,000,000 of Floating Rate Trust Preferred Securities.  In November 2004, East West CapitalTrust V issued $15,000,000 of Floating Rate Trust Preferred Securities. In September 2005,East West Capital Trust VI issued $20,000,000 of Floating Rate Trust PreferredSecurities.  In March 2006, EastWest Capital Trust VII issued $30,000,000 of Floating Rate Trust PreferredSecurities.  In March 2007, EastWest Capital Trust VIII issued $20,000,000 of Floating Rate Trust PreferredSecurities.  In August 2007, EastWest Capital Trust IX issued $30,000,000 of Floating Rate Trust PreferredSecurities. These securities are collectively referred to herein as “TrustPreferred Securities.” Payments to investors in respect of the Trust PreferredSecurities are funded by distributions on certain series of securities issuedby us, with similar terms to the relevant series of Trust Preferred Securities,which we refer to as the “Junior Subordinated Securities.”

 

InApril 2005, we issued $50,000,000 in subordinated debt, and in September 2005,we issued an additional $25,000,000 in subordinated debt. These securities arecollectively referred to herein as the “Subordinated Securities.”

 

Weexpect to seek the prior approval of the Federal Reserve prior to paying anyinterest on our Junior Subordinated Securities (which will be used to makedistributions on the Trust Preferred Securities).  If we are unable to make payments on any ofour Junior Subordinated Securities for more than 20 consecutive quarters, wewould be in default under the governing agreements for such securities and theamounts due under such agreements would be immediately due and payable.  Additionally, if for 

 

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anyinterest payment period we do not pay interest in respect of the JuniorSubordinated Securities (which will be used to make distributions on the TrustPreferred Securities), or if for any interest payment period we do not payinterest in respect of the Subordinated Securities, or if any other event ofdefault occurs, then we generally will be prohibited from declaring or payingany dividends or other distributions, or redeeming, purchasing or acquiring,any of our capital securities, including the Common Stock, during the nextsucceeding interest payment period applicable to any of the Junior SubordinatedSecurities, or next succeeding interest payment period applicable to theSubordinated Securities, as the case may be.

 

Moreover,any other financing agreements that we enter into in the future may limit ourability to pay cash dividends on our capital stock, including the CommonStock.  In the event that our existing orfuture financing agreements restrict our ability to pay dividends in cash onthe Common Stock, we may be unable to pay dividends in cash on the Common Stockunless we can refinance amounts outstanding under those agreements.

 

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

 

Except as previously disclosed on Reports on Form 8-K,there were no unregistered sales of equity securities during the quarter ended June 30, 2009. Thefollowing summarizes share repurchase activities during the second quarter of2009:

 
| ** **          | ** ** | ** **        | ** ** | ** **     | ** ** | **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)**            | ** ** |
| April 30, 2009 |       | —            |       | $              | —     |                      | —     |                            | $          | 26.2 |   |
| May 31, 2009   |       | —            |       | —         |       | —                    |       | 26.2                            |       |
| June 30, 2009  |       | —            |       | —         |       | —                    |       | 26.2                            |       |
| Total               |       | —            |       | $              | —     |                      | —     |                            | $          | 26.2 |   |

 

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(1)          Excludes 54,246 in repurchasedshares totaling $1.1 million due to forfeituresand vesting of restricted stock awards pursuant to the Company’s 1998 StockIncentive Plan.

 

(2)          During thefirst quarter of 2007, the Company’s Board of Directors announced a repurchaseprogram authorizing the repurchase of up to $80.0 million of its commonstock.  This repurchase program has noexpiration date and, to date, 1,392,176 shares totaling $53.8 million have beenpurchased under this program.

 

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES**

 

Not applicable.

 

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

 

An annual meeting of shareholders of EastWest Bancorp, Inc. was held on May 28, 2009 for the purpose of (1) electionof all directors to serve until the 2011 Annual Meeting, (2) ratifying theappointment of KPMG LLP as the Company’s independent auditors for its fiscalyear ending December 31, 2009, and (3) an advisory vote to approveexecutive compensation.  The followingmatters were submitted to a vote in the annual meeting in person or by proxy.

 

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| ** **                                                                                                                                | ** ** | **In Favor** | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Broker Non-  Votes** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|-------------|------------|------------------------|------------|
| (1) The combined votes cast to approve the  following nine directors elected to serve until the next Annual Meeting are  as follows: |       |         |       |         |       |        |       |                   |       |
| Peggy Cherng                                                                                                                              |       | 51,917,303   |       | 1,527,760    |       | —      |       | —                 |       |
| Rudolph Estrada                                                                                                                           |       | 29,801,349   |       | 23,643,714   |       | —      |       | —                 |       |
| Julia Gouw                                                                                                                                |       | 49,196,175   |       | 4,248,888    |       | —      |       | —                 |       |
| Andrew Kane                                                                                                                               |       | 52,577,139   |       | 867,924      |       | —      |       | —                 |       |
| John Lee                                                                                                                                  |       | 52,544,003   |       | 901,060      |       | —      |       | —                 |       |
| Herman Li                                                                                                                                 |       | 48,432,408   |       | 5,012,655    |       | —      |       | —                 |       |
| Jack Liu                                                                                                                                  |       | 48,535,679   |       | 4,909,384    |       | —      |       | —                 |       |
| Dominic Ng                                                                                                                                |       | 48,900,121   |       | 4,544,942    |       | —      |       | —                 |       |
| Keith Renken                                                                                                                              |       | 51,890,952   |       | 1,554,111    |       | —      |       | —                 |       |
| (2) The votes cast to ratify KPMG LLP as the  Company’s independent auditors.                                                   |       | 53,010,443   |       | 330,362      |       | 104,258     |       | —                 |       |
| (3) The advisory votes cast to approve  Executive Compensation.                                                                      |       | 48,400,688   |       | 4,837,117    |       | 207,258     |       | —                 |       |

 

**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:  August 10, 2009

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

 

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