UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
 
 FORM
10-Q
 
 (Mark
One)
 R
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR
15(d)
 OF
      THE SECURITIES EXCHANGE ACT OF 1934
 
 For the
Quarterly Period Ended September 30, 2009
 
 OR
 
 £
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR
15(d)
 OF
      THE SECURITIES EXCHANGE ACT OF 1934
 
 For the
Transition Period from _____ to _____
 Commission
File Number 1-33199
 
 IMPERIAL
      CAPITAL BANCORP, INC.(Exact
      Name of Registrant as Specified in its Charter)
 
 Delaware
              
              95-4596322(State
      or Other Jurisdiction of Incorporation or
    Organization)
              
              (IRS
      Employer Identification No.)888
      Prospect St., Suite 110, La Jolla, California
              
              92037(Address
      of Principal Executive Offices)
              
              (Zip
      Code)
 
 (858)
      551-0511(Registrant’s
      Telephone Number, Including Area
Code)
 
 Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days.  Yes R   No
      £Indicate
      by check mark whether the registrant has submitted electronically and
      posted on its corporate Web site, if any, every Interactive Data File
      required to be submitted and posted pursuant to Rule 405 of Regulation S-T
      (§ 232.405 of this chapter) during the preceding 12 months (or for such
      shorter period that the registrant was required to submit and post such
      files).  Yes £  No
      £Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See definitions of “larger accelerated filer,” “accelerated filer” and
      “small reporting company” in Rule 12b-2 of the Exchange Act.
                Large
      Accelerated Filer £   Accelerated
      Filer £Non-Accelerated
      Filer £ (Do not
      check if a smaller reporting company)   Smaller reporting
      company RIndicate
      by check mark whether the Registrant is a shell company
                (as
      defined in Rule 12b-2 of the Exchange Act).  Yes £   No
      RNumber
      of shares of common stock of the registrant: 5,428,760 outstanding as of
      November 10, 2009.
  
 
 IMPERIAL CAPITAL BANCORP, INC.
 FORM
10-Q
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009
 
 TABLE
OF CONTENTS
 
 PART I – FINANCIAL INFORMATIONItem 1.
              Financial StatementsConsolidated Balance Sheets – September 30, 2009 (Unaudited)
      and December 31, 2008
              4Consolidated Statements of Operations – Three and Nine
      Months Ended September 30, 2009 and 2008 (Unaudited)
              5Consolidated Statements of Cash Flows – Nine Months Ended
      September 30, 2009 and 2008 (Unaudited)
              6Notes to the Unaudited Consolidated Financial
      Statements
              7Item 2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              28Item 3.
              Quantitative and Qualitative Disclosures about Market
      Risk
              52Item 4.
              Controls and Procedures
              52PART II – OTHER INFORMATIONItem 1.
              Legal Proceedings
              54Item 1A.
              Risk Factors
              54Item 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              57Item 3.
              Defaults Upon Senior Securities
              57Item 4.
              Submission of Matters to a Vote of Security
      Holders
              57Item 5.
              Other Information
              57Item 6.
              Exhibits
              57Signatures
              58
  -2-
 Table of Contents
 
 Forward
Looking Statements
  “Safe
Harbor” statement under the Private Securities Litigation Reform Act of 1995:
This Form 10-Q contains forward-looking statements that are subject to risks and
uncertainties, including, but not limited to, the possibility that we will be
unable to comply with the conditions imposed upon us by the notification from
the California Department of Financial Institutions (the “DFI”) that the Bank
promptly increase its capital or merge or sell its business to another
depository institution, the Supervisory Prompt Corrective Action Directive
issued by the Federal Deposit Insurance Corporation (the “FDIC”), the Order to
Cease and Desist issued by the DFI and the FDIC and/or our Agreement with the
Federal Reserve Bank of San Francisco and the DFI, including, without
limitation, our inability to promptly raise sufficient capital or find a
suitable buyer or merger partner, which could result in the imposition of
additional restrictions on our operations and/or the placement of the Bank into
FDIC conservatorship or receivership; changes in economic conditions, either
nationally and/or in our market areas; fluctuations in loan demand, the number
of unsold homes, other properties and real estate values in our market areas;
the quality and/or composition of our loan or investment portfolios; our ability
to manage loan delinquency rates, which may be impacted
by  deterioration in the housing and commercial real estate markets
that may lead to increased losses and non-performing assets in our loan
portfolios, and may result in our allowance for loan losses not being adequate
to cover actual losses and may require us to materially increase our reserves;
changes in general economic conditions, either nationally or in our market
areas; changes in the levels of general interest rates, and the relative
differences between short and long term interest rates, deposit interest rates,
net interest margin, and funding sources; deposit flows; fluctuations in the
demand for loans, the number of unsold homes and other properties, and
fluctuations in real estate values in our market areas; adverse changes in the
securities markets, including the possibility that the Company will recognize
additional credit losses from our mortgage backed securities as a result of
other than temporary impairment (“OTTI”) charges; results of examinations by the
DFI, the FDIC and/or other regulatory authorities, including the possibility
that any such regulatory authority may, among other things, require us to
increase our reserve for loan losses, write-down assets, recognize additional
OTTI charges on our investment securities, change our regulatory capital
position and/or affect our ability to borrow funds or maintain or increase
deposits, which could adversely affect our liquidity and results of operations;
our ability to control operating costs and expenses; the use of estimates in
determining fair value of certain of our assets, which estimates may prove to be
incorrect and result in significant declines in valuation; difficulties in
reducing risk associated with the loans on our balance sheet; staffing
fluctuations in response to product demand or the implementation of corporate
strategies that affect our work force and potential associated charges; computer
systems on which we depend could fail or experience a security breach; our
ability to retain key members of our senior management team and other key
employees; costs and effects of pending and threatened litigation, including
settlements and judgments; increased competitive pressures among financial
services companies; changes in consumer spending, borrowing, and savings habits;
legislative or regulatory changes that adversely affect our business, including
changes in regulatory policies and principles, and the interpretation of
regulatory capital or other rules; the availability of resources to address
changes in laws, rules, or regulations or to respond to regulatory actions;
adverse changes in the securities markets; the inability of key third-party
providers to perform their obligations to us; changes in accounting
policies,  principles or guidance, as may be adopted by the financial
institution regulatory agencies and/or the Financial Accounting Standards Board,
or their application to our business or audit adjustments of our consolidated
financial statements proposed by our independent auditors; the economic impact
of any terrorist actions; other economic, competitive, governmental, regulatory,
and technological factors affecting our operations, pricing, products, and
services. We caution readers not to place undue reliance on any forward-looking
statements. We do not undertake and specifically disclaim any obligation to
revise any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
These risks could cause our actual results for 2009 and beyond to differ
materially from those expressed in any forward-looking statements by or on
behalf of us, and could negatively affect the Company’s financial condition,
liquidity and operating and stock price performance.
 
 As used
throughout this report, the terms “we”, “our”, “us”, or the “Company” refer to
Imperial Capital Bancorp, Inc. and its consolidated subsidiaries unless the
context indicates otherwise.
  -3-
 Table of Contents
 
 PART I – FINANCIAL INFORMATION
  
 IMPERIAL
      CAPITAL BANCORP, INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSSeptember
      30,2009
              
              
              December
      31,(unaudited)
              
              
              2008(in
      thousands, except share data)AssetsCash
      and cash equivalents
              
              $
              302,755
              
              
              $
              403,119Investment
      securities available-for-sale, at fair value
              
              
              238,344
              
              
              
              146,799Investment
      securities held-to-maturity, at amortized cost
              
              
              806,491
              
              
              
              942,686Stock
      in Federal Home Loan Bank
              
              
              63,498
              
              
              
              63,498Loans,
      net (net of allowance for loan losses of $73,183 and $50,574as
      of September 30, 2009 and December 31, 2008, respectively)
              
              
              2,481,150
              
              
              
              2,748,956Interest
      receivable
              
              
              18,460
              
              
              
              21,305Other
      real estate and other assets owned, net
              
              
              88,793
              
              
              
              38,031Premises
      and equipment, net
              
              
              5,343
              
              
              
              7,701Deferred
      income taxes, net
              
              
              —
              
              
              
              22,338Goodwill
              
              
              3,118
              
              
              
              3,118Other
      assets
              
              
              35,131
              
              
              
              42,287Total
      assets
              
              $
              4,043,083
              
              
              $
              4,439,838Liabilities
      and Shareholders’ EquityLiabilities:Deposit
      accounts
              
              $
              2,798,692
              
              
              $
              2,931,040Federal
      Home Loan Bank advances and other borrowings
              
              
              1,053,437
              
              
              
              1,205,633Accounts
      payable and other liabilities
              
              
              34,739
              
              
              
              26,996Junior
      subordinated debentures
              
              
              86,600
              
              
              
              86,600Total
      liabilities
              
              
              3,973,468
              
              
              
              4,250,269Commitments
      and contingenciesShareholders’
      equity:Preferred
      stock, 5,000,000 shares authorized, none issued
              
              
              —
              
              
              
              —Contributed
      capital - common stock, $.01 par value; 20,000,000 shares authorized,
      9,146,256 and 9,146,256 issued as of September 30, 2009 and December 31,
      2008, respectively
              
              
              85,241
              
              
              
              85,407Retained
      earnings
              
              
              111,556
              
              
              
              222,483Accumulated
      other comprehensive loss, net
              
              
              (12,060
              )
              
              
              (2,682
              )184,737
              
              
              
              305,208Less
      treasury stock, at cost 4,068,174 and 4,126,116 shares as ofSeptember
      30, 2009 and December 31, 2008, respectively
              
              
              (115,122
              )
              
              
              (115,639
              )Total
      shareholders' equity
              
              
              69,615
              
              
              
              189,569Total
      liabilities and shareholders' equity
              
              $
              4,043,083
              
              
              $
              4,439,838
  See
accompanying notes to the unaudited consolidated financial
statements.
  -4-
 Table of Contents
 
 IMPERIAL CAPITAL BANCORP, INC. AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS(Unaudited)
 
 For
      the Three Months Ended September 30,
              
              
              For
      the Nine Months EndedSeptember
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008(in
      thousands, except per share data)Interest
      income:Loans,
      including fees
              
              $
              35,588
              
              
              $
              46,686
              
              
              $
              114,438
              
              
              $
              151,442Cash
      and investment securities
              
              
              18,313
              
              
              
              22,723
              
              
              
              58,099
              
              
              
              40,418Total
      interest income
              
              
              53,901
              
              
              
              69,409
              
              
              
              172,537
              
              
              
              191,860Interest
      expense:Deposit
      accounts
              
              
              21,373
              
              
              
              24,984
              
              
              
              74,499
              
              
              
              74,369Federal
      Home Loan Bank advances and other borrowings
              
              
              12,026
              
              
              
              13,775
              
              
              
              37,063
              
              
              
              38,187Junior
      subordinated debentures
              
              
              1,500
              
              
              
              1,753
              
              
              
              4,708
              
              
              
              5,556Total
      interest expense
              
              
              34,899
              
              
              
              40,512
              
              
              
              116,270
              
              
              
              118,112Net
      interest income before provision for loan losses
              
              
              19,002
              
              
              
              28,897
              
              
              
              56,267
              
              
              
              73,748Provision
      for loan losses
              
              
              24,875
              
              
              
              10,125
              
              
              
              83,677
              
              
              
              20,625Net
      interest (expense) income after provision for loan losses
              
              
              (5,873
              )
              
              
              18,772
              
              
              
              (27,410
              )
              
              
              53,123Non-interest
      income (loss):Total
      other-than-temporary impairment of securities
              
              
              (5,260
              )
              
              
              (4,590
              )
              
              
              (17,580
              )
              
              
              (4,590
              )Portion
      of losses recognized in other comprehensive loss
              
              
              4,389
              
              
              
              —
              
              
              
              13,103
              
              
              
              —Net
      impairment loss recognized in earnings
              
              
              (871
              )
              
              
              (4,590
              )
              
              
              (4,477
              )
              
              
              (4,590
              )Late
      and collection fees
              
              
              172
              
              
              
              225
              
              
              
              590
              
              
              
              640Other
              
              
              (1,385
              )
              
              
              (57
              )
              
              
              1,757
              
              
              
              (1,353
              )Total
      other non-interest income (loss)
              
              
              (1,213
              )
              
              
              168
              
              
              
              2,347
              
              
              
              (713
              )Total
      non-interest (loss) income
              
              
              (2,084
              )
              
              
              (4,422
              )
              
              
              (2,130
              )
              
              
              (5,303
              )Non-interest
      expense:Compensation
      and benefits
              
              
              3,540
              
              
              
              5,988
              
              
              
              13,550
              
              
              
              18,547Occupancy
      and equipment
              
              
              1,570
              
              
              
              1,885
              
              
              
              5,014
              
              
              
              5,741Other
              
              
              12,846
              
              
              
              4,973
              
              
              
              32,119
              
              
              
              14,738Total
      general and administrative
              
              
              17,956
              
              
              
              12,846
              
              
              
              50,683
              
              
              
              39,026Real
      estate and other assets owned expense, net
              
              
              1,779
              
              
              
              436
              
              
              
              4,240
              
              
              
              1,123Provision
      for losses on real estate and other assets owned
              
              
              2,823
              
              
              
              185
              
              
              
              8,059
              
              
              
              1,290Loss
      on sale of real estate and other assets owned, net
              
              
              142
              
              
              
              —
              
              
              
              337
              
              
              
              463Total
      real estate and other assets owned expense, net
              
              
              4,744
              
              
              
              621
              
              
              
              12,636
              
              
              
              2,876Total
      non-interest expense
              
              
              22,700
              
              
              
              13,467
              
              
              
              63,319
              
              
              
              41,902(Loss)
      income before provision for income taxes
              
              
              (30,657
              )
              
              
              883
              
              
              
              (92,859
              )
              
              
              5,918Provision
      for income taxes
              
              
              —
              
              
              
              350
              
              
              
              19,168
              
              
              
              2,338NET
      (LOSS) INCOME
              
              $
              (30,657
              )
              
              $
              533
              
              
              $
              (112,027
              )
              
              $
              3,580Basic
      (losses) earnings per share
              
              $
              (5.65
              )
              
              $
              0.10
              
              
              $
              (20.64
              )
              
              $
              0.66Diluted
      (losses) earnings per share
              
              $
              (5.65
              )
              
              $
              0.10
              
              
              $
              (20.64
              )
              
              $
              0.66Dividends
      declared per share of common stock
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              0.16
 
 See
accompanying notes to the unaudited consolidated financial
statements.
  -5-
 Table of Contents
  IMPERIAL CAPITAL BANCORP, INC. AND
    SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)For
      the Nine Months EndedSeptember
      30,2009
              
              
              2008(in
      thousands)Cash
      Flows From Operating Activities:Net
      (Loss) Income
              
              $
              (112,027
              )
              
              $
              3,580Adjustments
      to reconcile net (loss) income to net cash provided by operating
      activities:Depreciation
      and amortization of premises and equipment
              
              
              1,833
              
              
              
              2,144Amortization
      of premium on purchased loans
              
              
              1,151
              
              
              
              2,701Accretion
      of deferred loan origination fees, net of costs
              
              
              (1,103
              )
              
              
              (1,236
              )Accretion
      of discounts on investment securities, net
              
              
              (11,676
              )
              
              
              (8,757
              )Other-than-temporary
      impairment on investment securities
              
              
              4,477
              
              
              
              4,590Provision
      for loan losses
              
              
              83,677
              
              
              
              20,625Provision
      for losses on other real estate and other assets owned
              
              
              8,059
              
              
              
              1,290Deferred
      income tax expense (benefit)
              
              
              23,621
              
              
              
              —Other,
      net
              
              
              (2,685
              )
              
              
              (1,565
              )Decrease
      (increase) in interest receivable
              
              
              2,845
              
              
              
              (858
              )Decrease
      in other assets
              
              
              7,156
              
              
              
              2,681Increase
      in accounts payable and other liabilities
              
              
              7,743
              
              
              
              3,671Net cash provided by operating
      activities
              
              
              13,071
              
              
              
              28,866Cash
      Flows From Investing Activities:Purchases
      of investment securities available-for-sale
              
              
              (381,919
              )
              
              
              (10,198
              )Proceeds
      from sales, maturities and calls of investment securities
      available-for-sale
              
              
              294,874
              
              
              
              22,241Purchases
      of investment securities held-to-maturity
              
              
              —
              
              
              
              (861,633
              )Proceeds
      from the maturity and redemption of investment securities
      held-to-maturity
              
              
              133,561
              
              
              
              70,626Increase
      in stock in Federal Home Loan Bank
              
              
              —
              
              
              
              (6,764
              )Purchase
      of loans
              
              
              —
              
              
              
              (5,892
              )Proceeds
      from sale of loans
              
              
              16,742
              
              
              
              53,645Decrease
      in loans, net
              
              
              98,179
              
              
              
              213,529Proceeds
      from sale of other real estate owned
              
              
              9,935
              
              
              
              6,135Cash
      paid for capital expenditures
              
              
              (346
              )
              
              
              (1,809
              )Proceeds
      from sale of equipment
              
              
              83
              
              
              
              183Net cash provided by (used in)
      investing activities
              
              
              171,109
              
              
              
              (519,937
              )Cash
      Flows From Financing Activities:Proceeds
      and excess tax benefits from exercise of employee stock
      options
              
              
              —
              
              
              
              71Cash
      paid to acquire treasury stock
              
              
              —
              
              
              
              (1,982
              )Cash
      dividends paid
              
              
              —
              
              
              
              (828
              )(Decrease)
      increase in deposit accounts
              
              
              (132,348
              )
              
              
              389,955Net
      proceeds from short-term borrowings
              
              
              —
              
              
              
              (100,000
              )Proceeds
      from long-term borrowings
              
              
              —
              
              
              
              470,000Repayments
      of long-term borrowings
              
              
              (152,196
              )
              
              
              (207,332
              )Net cash (used in) provided by
      financing activities
              
              
              (284,544
              )
              
              
              549,884Net (decrease) increase in cash
      and cash equivalents
              
              
              (100,364
              )
              
              
              58,813Cash and cash equivalents,
      beginning of period
              
              
              403,119
              
              
              
              8,944Cash and cash equivalents, end
      of period
              
              $
              302,755
              
              
              $
              67,757Supplemental
      Cash Flow Information:Cash
      paid during the period for interest
              
              $
              112,024
              
              
              $
              112,301Cash
      paid during the period for income taxes
              
              $
              149
              
              
              $
              1,001Non-Cash
      Investing and Financing Transactions:Loans
      transferred to other real estate owned
              
              $
              69,203
              
              
              $
              15,699Cash
      dividends declared but not yet paid
              
              $
              —
              
              
              $
              —
 
 See
accompanying notes to the unaudited consolidated financial
statements.
  -6-
 Table of Contents
  IMPERIAL CAPITAL BANCORP, INC. AND SUBSIDIARIES
   NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 NOTE
1 – BASIS OF PRESENTATION AND ORGANIZATION
  The
unaudited consolidated financial statements of Imperial Capital Bancorp, Inc.
and subsidiaries (the “Company”) included herein reflect all normal recurring
adjustments which are, in the opinion of management, necessary to present fairly
the results of operations and financial position of the Company, as of the dates
and for the interim periods indicated.  The unaudited consolidated
financial statements include the accounts of Imperial Capital Bancorp, Inc. and
its wholly-owned subsidiaries, Imperial Capital Bank (the “Bank”) and Imperial
Capital Real Estate Investment Trust (“Imperial Capital REIT”).
 
 All
intercompany transactions and balances have been eliminated.  Certain
information and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission.  Certain amounts in prior periods
have been reclassified to conform to the presentation in the current
periods.  The results of operations for the three and nine months
ended September 30, 2009 are not necessarily indicative of the results of
operations for the remainder of the year.
 
 These
unaudited consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in our annual
report on Form 10-K for the year ended December 31, 2008.
 
 NOTE
2 – REGULATORY DEVELOPMENTS AND GOING CONCERN CONSIDERATIONS
 
 The Bank
is currently operating under a Cease and Desist Order (the “Order”) with the
Federal Deposit Insurance Corporation (“FDIC”) and the California Department of
Financial Institutions (“DFI”).  Among other things, the Order
requires the Bank to take certain measures in the areas of management, capital,
loan loss allowance determination, risk management, liquidity management, board
oversight and monitoring of compliance, and restricts payment of dividends and
the opening of branch or other Bank offices.  The Order further
required the Company to increase and hold the Bank’s Tier 1 leverage ratio above
nine percent and the Bank’s Total Risk-Based Capital ratio above thirteen
percent by August 11, 2009 and for the life of the Order.  As of
September 30, 2009, the Bank had a Tier 1 leverage ratio of 3.8% and the Bank’s
Total Risk-Based Capital ratio was 6.1%.  As discussed below, the FDIC
did not accept the Bank’s capital restoration plan and the Bank recently
resubmitted a revised capital restoration plan to the FDIC.  The Bank
also submitted to the regulators within the prescribed time periods a revised
policy for determining the allowance for loan losses, plans for reducing
commercial real estate loan concentrations and brokered deposits, a liquidity
plan, strategic business plan and profitability plan. The Order will remain in
effect until modified or terminated by the FDIC and the DFI.  With the
exception of the capital requirements discussed above, the Company is in
compliance with the remaining requirements set forth within the
Order.
  -7-
 Table of Contents
 
 The Bank
is also currently operating under a Supervisory Prompt Corrective Action
Directive (the “Directive”) which it received from the FDIC on October 14,
2009.  The Bank was also recently notified that the FDIC did not
accept the Bank’s capital restoration plan, which the Bank was required to
submit to the FDIC due to the Bank’s “undercapitalized” status under regulatory
capital guidelines.  The Bank has recently resubmitted a revised
capital restoration plan to the FDIC.
 
 The
Directive provided that within 30 days of the effective date of the Directive
(i.e., by November 12, 2009), the Bank was required to: (1) sell enough voting
shares or obligations of the Bank so that the Bank will be “adequately
capitalized” under regulatory capital guidelines; and/or (2) accept an offer to
be acquired by a depository institution holding company or combine with another
insured depository institution.  As of the date of this filing
(November 16, 2009), the Bank has been unsuccessful in its efforts to comply
with this requirement.
 
 The
Directive also prohibits the Bank from: (1) accepting, renewing or rolling over
any brokered deposits; (2) paying interest on deposits in excess of prescribed
limits; (3) allowing its average total assets during any calendar quarter to
exceed its average total assets during the preceding calendar quarter; (4)
making any capital distributions or dividend payments to the Company or any
affiliate of the Bank or the Company; and (5) establishing or acquiring a new
branch and requires the Bank to obtain the approval of the FDIC prior to
relocating, selling or disposing of any existing branch.  In addition,
the Directive provides that the Bank may not pay any bonus to, or increase the
compensation of, any director or officer of the Bank without the prior approval
of the FDIC, and the Bank must comply with Section 23A of the Federal Reserve
Act without the exemption for transactions with certain affiliated institutions.
The Bank was already substantially subject to each of these prohibitions prior
to the issuance of the Directive, and since earlier this year, key components of
the Bank’s business strategy have included the reduction in its asset base and
reliance on brokered deposits.
 
 On
November 6, 2009, the Bank received a notification from the DFI (the “DFI
Notification”) stating that the Bank is in critical condition and that the DFI
may take extreme action against the Bank unless the Bank promptly either
increases its capital or, in the alternative, merges or sells its business to
another depository institution.  The DFI Notification provides that if
the Bank is to comply with the DFI Notification by increasing its capital, the
Bank must, by December 14, 2009, increase its tangible shareholders’ equity by
the greater of (i) $200.0 million or (ii) such amount as may be necessary to
make tangible shareholders’ equity equal to at least 9% of total tangible assets
of the Bank.  As reported in the Bank’s September 30, 2009
Consolidated Report of Condition and Income (Call Report), as of September 30,
2009, the Bank’s tangible shareholders’ equity was $146.0 million and 9% of
adjusted total tangible assets amounted to $364.2
million.  Accordingly, the amount of additional tangible shareholders’
equity needed to comply with the capital demand requirement of the DFI
Notification as of September 30, 2009 was $218.2 million.
  The
Bank’s regulatory capital position has fallen below the level necessary to be
considered “adequately capitalized” and was categorized as “undercapitalized” as
of September 30, 2009 under the applicable regulatory
framework.  Undercapitalized banks may not accept, renew or rollover
brokered deposits or solicit deposits yielding more than 75 basis points over
prevailing rates in either the Bank’s market area or the area where deposits are
solicited.  As of September 30, 2009, the Company had brokered
deposits of $659.3 million, of which $164.6 million mature within the next
twelve months.
 
 -8-
 Table of Contents
 
 As a
result of being undercapitalized, the Bank is subject to certain additional
regulatory restrictions.  These restrictions are generally consistent
with the restrictions identified within the Order and the Directive and include,
among others, that the Bank generally may not make any capital distributions,
must submit an acceptable capital restoration plan to the FDIC, may not increase
its average total assets during a calendar quarter in excess of its average
total assets during the preceding calendar quarter unless any increase in total
assets is consistent with the capital restoration plan approved by the FDIC and
the Bank’s ratio of tangible equity to total assets increases during the
calendar quarter at a rate sufficient to enable the Bank to become adequately
capitalized within a reasonable time, and may not acquire a business, establish
or acquire a branch office or engage in a new line of business without
regulatory approval. In addition, as part of the required capital restoration
plan, the Company must guarantee that the Bank will return to adequately
capitalized status and provide appropriate assurances of performance of that
guarantee.  Because the Bank’s  capital restoration plan was
not accepted by the FDIC, the Bank is currently treated as if it were
“significantly undercapitalized”.  Broad authority is granted to bank
regulatory agencies with respect to "significantly undercapitalized" banks,
including forced mergers, growth restrictions, ordering new elections for
directors, forcing divestiture by their holding companies, if any, requiring
management changes, and prohibiting the payment of bonuses to senior
management.
 
 On July
28, 2009, the Company entered into a written agreement (the “FRB Agreement”)
with the Federal Reserve Bank of San Francisco (the “FRB San Francisco”) and the
DFI.  The FRB Agreement requires the Company to obtain regulatory
approval before paying dividends, receiving dividends from the Bank, making
payments on subordinated debentures or trust preferred securities, incurring
debt or purchasing/redeeming Company stock. The FRB Agreement requires the
Company to submit to the FRB San Francisco and the DFI a plan to maintain
adequate capital on a consolidated basis and at the Bank. This plan was combined
with the Bank’s capital restoration plan and was not accepted by the FRB San
Francisco.  The Company recently resubmitted a revised combined plan
to the FRB San Francisco.  The FRB Agreement also provides that the
Company may not appoint any new director or senior executive officer or change
the responsibilities of any current senior executive officers without notifying
the FRB San Francisco and the DFI.  The FRB Agreement further provides
that the Company may not make certain indemnification and severance payments
without complying with specified statutory restrictions, including prior written
approval of the FRB San Francisco and concurrence from the Federal Deposit
Insurance Corporation.  Other than the requirement that the Company
submit a capital plan and the making of the DFI as a party to the FRB Agreement,
the Company was previously subject to most of the restrictions set forth in the
FRB Agreement pursuant to prior notifications from the FRB San
Francisco.
 
 -9-
 Table of Contents
 
 It is
highly unlikely that the Company and the Bank will be able to comply fully with
the above mentioned regulatory actions or that its efforts to comply will not
have material and adverse effects on the operations and financial condition of
the Company. The Company and the Bank are diligently continuing to seek
qualified sources of outside capital. The Company and the Bank continue to
consult with the DFI, FRB San Francisco and FDIC on a regular basis concerning
the Company’s and Bank’s proposals to obtain outside capital that will be
acceptable to federal regulatory authorities, but there can be no assurance that
these actions will be successful, or that even if one or more of the Company’s
and Bank’s proposals are accepted by the Company’s and Bank’s federal
regulators, that these proposals will be successfully implemented. At this point
in time the Company believes that it is highly unlikely that it will be able to
obtain additional outside capital that does not include the provision of
substantial assistance by the FDIC or other federal governmental authorities.
The Bank’s failure to comply with the DFI Notification, the Supervisory Prompt
Corrective Action Directive or the Order to Cease and Desist, or the Company’s
failure to comply with the FRB Agreement, particularly if the Company is unable
to promptly raise sufficient capital for the Bank or find a buyer or merger
partner suitable to the regulators, could result in additional regulatory
actions.  As a result of the Bank’s financial condition, its
regulators are continually monitoring its liquidity and capital adequacy. Based
on their assessment of its ability to operate in a safe and sound manner, the
Bank’s regulators at any time may take other and further actions, including
placing the Bank into conservatorship or receivership, to protect the interests
of depositors insured by the FDIC.  If a receivership were to occur,
the Bank’s assets would likely be liquidated, including a sale of such assets to
another institution, and it would be unlikely that any assets would be
distributed to holders of the Company’s common stock or holders of trust
preferred securities issued by its trust subsidiaries.
 
 The above
factors, and, in particular, the Company’s ability to comply with the terms of
the Order and the Directive requiring increased capital requirements raise
substantial doubt about the Company's ability to continue as a going
concern.  The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts or classifications of liabilities that
might result from the outcome of this uncertainty.
 
  NOTE
3 – ACCOUNTING FOR STOCK-BASED COMPENSATION
  Total
stock-based compensation expense included in our consolidated statements of
operations for the three and nine months ended September 30, 2009 was
approximately $67,000, or $0.01 per diluted share, and $214,000, or $0.04 per
diluted share, respectively.  For the three and nine months ended
September 30, 2008, these amounts were $74,000 ($64,000, net of tax or $0.01 per
diluted share) and $241,000 ($210,000, net of tax or $0.04 per diluted share),
respectively.  Unrecognized stock-based compensation expense related
to stock options was approximately $173,000 and $501,000, respectively, at
September 30, 2009 and 2008.  The weighted-average period over which
the unrecognized expense was expected to be recognized was 0.7 years and 1.7
years at September 30, 2009 and 2008, respectively.
 
 The fair
value of each option grant is estimated on the date of grant using a
Black-Scholes option pricing model.  No options were granted during
the nine months ended September 30, 2009 and 2008.
  -10-
 Table of Contents
  NOTE
4 – INVESTMENT SECURITIES
  The
amortized cost and fair value of investment securities as of September 30, 2009
and December 31, 2008 are as follows:
 
 Amortized
              
              
              Fair
              
              
              Gross
      UnrealizedCost
              
              
              Value
              
              
              Gains
              
              
              Losses(in
      thousands)September
      30, 2009:Investment securities
      available-for-sale:U.S. Treasury and other U.S.
      government agency securities
              
              $
              59,820
              
              
              $
              59,946
              
              
              $
              126
              
              
              $
              —Residential collateralized
      mortgage obligations
              
              
              172,512
              
              
              
              170,986
              
              
              
              1,364
              
              
              
              2,890Corporate
      bonds
              
              
              8,907
              
              
              
              6,466
              
              
              
              —
              
              
              
              2,441Residual interest in
      securitized
      loans
              
              
              509
              
              
              
              509
              
              
              
              —
              
              
              
              —Equity
      securities
              
              
              424
              
              
              
              437
              
              
              
              95
              
              
              
              82Total investment securities
      available-for-sale
              
              $
              242,172
              
              
              $
              238,344
              
              
              $
              1,585
              
              
              $
              5,413Investment securities
      held-to-maturity:Residential collateralized
      mortgage obligations
              
              
              709,398
              
              
              
              616,398
              
              
              
              17,698
              
              
              
              110,698Residential mortgage-backed
      securities
              
              
              97,093
              
              
              
              99,058
              
              
              
              1,991
              
              
              
              26Total investment securities
      held-to-maturity
              
              $
              806,491
              
              
              $
              715,456
              
              
              $
              19,689
              
              
              $
              110,724December
      31, 2008:Investment securities
      available-for-sale:U.S. agency
      securities
              
              $
              20,052
              
              
              $
              20,192
              
              
              $
              140
              
              
              $
              —Residential collateralized
      mortgage obligations
              
              
              116,467
              
              
              
              115,664
              
              
              
              2,999
              
              
              
              3,802Residential mortgage-backed
      securities
              
              
              3,740
              
              
              
              3,947
              
              
              
              207
              
              
              
              —Corporate
      bonds
              
              
              9,894
              
              
              
              6,106
              
              
              
              2
              
              
              
              3,790Residual interest in
      securitized
      loans
              
              
              695
              
              
              
              695
              
              
              
              —
              
              
              
              —Equity
      securities
              
              
              422
              
              
              
              195
              
              
              
              58
              
              
              
              285Total investment securities
      available-for-sale
              
              $
              151,270
              
              
              $
              146,799
              
              
              $
              3,406
              
              
              $
              7,877Investment securities
      held-to-maturity:Residential collateralized
      mortgage obligations
              
              
              817,015
              
              
              
              591,527
              
              
              
              9,129
              
              
              
              234,617Residential mortgage-backed
      securities
              
              
              125,671
              
              
              
              124,849
              
              
              
              401
              
              
              
              1,223Total investment securities
      held-to-maturity
              
              $
              942,686
              
              
              $
              716,376
              
              
              $
              9,530
              
              
              $
              235,840
 
 The
amortized cost and fair value of securities at September 30, 2009 are presented
below by contractual maturity.  Mortgage-backed securities and
collateralized mortgage obligations (“CMOs”) are included in maturity categories
based on their stated maturity date.  Expected maturities may differ
from contractual maturities because issuers may have the right to prepay
obligations.  Equity securities classified as available-for-sale that
have no maturity are included in the due in one year or less
column.
 
 Available-for-Sale
              
              
              Held-to-MaturityAmortized
                Cost
              
              
              Estimated
                Fair
      Value
              
              
              Amortized
                Cost
              
              
              Estimated
                Fair
      Value(in
      thousands)Due
      in one year or less
              
              $
              59,833
              
              
              $
              60,043
              
              
              $
              —
              
              
              $
              —Due
      after one year through five years
              
              
              919
              
              
              
              849
              
              
              
              —
              
              
              
              —Due
      after five years through ten years
              
              
              —
              
              
              
              —
              
              
              
              1,056
              
              
              
              890Due
      after ten years
              
              
              181,420
              
              
              
              177,452
              
              
              
              805,435
              
              
              
              714,566$
              242,172
              
              
              $
              238,344
              
              
              $
              806,491
              
              
              $
              715,456
 
 At
September 30, 2009, the remaining contractual maturity and weighted average life
of the mortgage-backed securities held-to-maturity was approximately 24.9 and
3.6 years, respectively. Additionally, the remaining contractual maturity and
weighted average life of the collateralized mortgage obligations
held-to-maturity was approximately 26.8 and 5.5 years, respectively, at
September 30, 2009. The weighted average life of mortgage-backed securities and
collateralized mortgage obligations differs from the contractual maturity due to
anticipated principal prepayments.
 
 -11-
 Table of Contents
 
 A total
of 96 securities and 101 securities had unrealized losses at September 30, 2009
and December 31, 2008, respectively. These securities, with unrealized losses
segregated by length of impairment, were as follows:
 
 Less
      than 12 months
              
              
              More
      than 12 months
              
              
              TotalEstimated
                Fair
      Value
              
              
              Unrealized
                Losses
              
              
              Estimated
                Fair
      Value
              
              
              Unrealized
                Losses
              
              
              Estimated
                Fair
      Value
              
              
              Unrealized
                Losses(in
      thousands)September
      30, 2009:Investment
      securities available-for-sale:Residential collateralized
      mortgage obligations
              
              $
              46,768
              
              
              $
              526
              
              
              $
              9,789
              
              
              $
              2,364
              
              
              $
              56,557
              
              
              $
              2,890Corporate bonds
              
              
              —
              
              
              
              —
              
              
              
              6,466
              
              
              
              2,441
              
              
              
              6,466
              
              
              
              2,441Equity
    securities
              
              
              —
              
              
              
              —
              
              
              
              340
              
              
              
              82
              
              
              
              340
              
              
              
              82Total investment securities
      available-for-sale
              
              $
              46,768
              
              
              $
              526
              
              
              $
              16,595
              
              
              $
              4,887
              
              
              $
              63,363
              
              
              $
              5,413Investment
      securities held-to-maturity:Residential collateralized
      mortgage obligations
              
              $
              104,938
              
              
              $
              16,903
              
              
              $
              350,492
              
              
              $
              93,795
              
              
              $
              455,430
              
              
              $
              110,698Residential mortgage-backed
      securities
              
              
              8,827
              
              
              
              26
              
              
              
              —
              
              
              
              —
              
              
              
              8,827
              
              
              
              26Total investment securities
      held-to-maturity
              
              $
              113,765
              
              
              $
              16,929
              
              
              $
              350,492
              
              
              $
              93,795
              
              
              $
              464,257
              
              
              $
              110,724
 
 December
      31, 2008:Investment
      securities available-for-sale:Residential collateralized
      mortgage obligations
              
              $
              8,915
              
              
              $
              3,802
              
              
              $
              —
              
              
              $
              —
              
              
              $
              8,915
              
              
              $
              3,802Corporate bonds
              
              
              3,211
              
              
              
              2,654
              
              
              
              1,074
              
              
              
              1,136
              
              
              
              4,285
              
              
              
              3,790Equity
    securities
              
              
              136
              
              
              
              275
              
              
              
              —
              
              
              
              10
              
              
              
              136
              
              
              
              285Total investment securities
      available-for-sale
              
              $
              12,262
              
              
              $
              6,731
              
              
              $
              1,074
              
              
              $
              1,146
              
              
              $
              13,336
              
              
              $
              7,877Investment
      securities held-to-maturity:Residential collateralized
      mortgage obligations
              
              $
              548,709
              
              
              $
              234,617
              
              
              $
              —
              
              
              $
              —
              
              
              $
              548,709
              
              
              $
              234,617Residential mortgage-backed
      securities
              
              
              76,430
              
              
              
              1,223
              
              
              
              —
              
              
              
              —
              
              
              
              76,430
              
              
              
              1,223Total investment securities
      held-to-maturity
              
              $
              625,139
              
              
              $
              235,840
              
              
              $
              —
              
              
              $
              —
              
              
              $
              625,139
              
              
              $
              235,840
 
 The
Company adopted Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 320-10-65-1, “Recognition and Presentation of
Other-Than-Temporary Impairments”, effective April 1, 2009.  FASB ASC
320-10-65-1 (i) changed previous guidance for debt securities in determining
when an impairment is other than temporary and (ii) replaced the previous
requirement that the entity’s management assert it has both the intent and
ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security; and (b)
it is more likely than not it will not have to sell the security before recovery
of its cost basis. Under FASB ASC 320-65-10-1, declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses
to the extent the impairment is related to credit losses. The amount of the
impairment related to other factors is recognized in other comprehensive
income.
 
 In
connection with the adoption of FASB ASC 320-65-10-1, the Company recorded a
$1.1 million cumulative effect adjustment to beginning retained earnings related
to the non-credit related portion of an other-than-temporary impairment (“OTTI”)
charge recorded in earnings during the year ended December 31, 2008 on an
available-for-sale corporate sponsored CMO.  The corresponding entry
to this adjustment was recorded to accumulated other comprehensive
loss.
 
 -12-
 Table of Contents
 
 The
Company recognized a $3.2 million OTTI during the three months ended September
30, 2009 on three held-to-maturity corporate sponsored CMOs, of which $425,000
was identified as credit related and was recorded in earnings.  During
the nine months ended September 30, 2009, the Company recognized a $14.5 million
OTTI on six held-to-maturity corporate sponsored CMOs, of which $3.0 million was
identified as credit related and was recorded in earnings.  The
Company also recognized a $2.1 million OTTI during the three months ended
September 30, 2009 on two available-for-sale corporate sponsored CMOs, of which
$446,000 was identified as credit related and was recorded in
earnings.  These OTTI charges were determined based on anticipated
adverse changes to the projected cash flows for each of these securities caused
by, among other things, an increase in projected collateral losses, a change in
historical prepayment speeds, and a deterioration in the current level of
subordination.
 
 The
Company also recognized a $1.0 million OTTI during the nine months ended
September 30, 2009 on an available-for-sale corporate bond.  The
entire $1.0 million was identified as a credit related OTTI charge and,
accordingly, was recognized in earnings.  This OTTI was primarily due
to a downgrade in the credit rating of the bond to below investment grade and a
substantial deterioration in the underlying collateral, which primarily consists
of trust preferred securities issued by banks and insurance companies
geographically dispersed across the United States.
 
 As a part
of the Company’s OTTI assessment, management considers information available
about the performance of the underlying collateral, including credit
enhancements, default rates, loss severities, delinquency rates, vintage, as
well as rating agency reports and historical prepayment speeds.  As a
result, significant judgment is used in the Company’s analysis to determine the
expected cash flows for its impaired securities.  In determining the
component of the OTTI related to credit losses, the Company compares the
amortized cost basis of each other-than-temporarily impaired security to the
present value of its expected cash flows, discounted using its effective
interest rate implicit in the security at the date of acquisition.
 
 The
Company’s assessment that it has the ability to continue to hold impaired
investment securities along with its evaluation of their future performance, as
indicated by the criteria discussed above, provide the basis for it to conclude
that the remainder of its impaired securities are not other-than-temporarily
impaired.  In assessing whether it is more likely than not that the
Company will be required to sell any impaired security before its anticipated
recovery, which may be at their maturity, it considers the significance of each
investment, the amount of impairment, as well as the Company’s liquidity
position and the impact on the Company’s capital position.  As a
result of its analyses, the Company determined at September 30, 2009 that the
unrealized losses on its securities portfolio on which impairments have not been
recognized are temporary.
 
 Certain
of the OTTI amounts were related to credit losses and recognized into earnings,
with the remainder recognized in other comprehensive loss.  The table
below presents the rollforward of credit related other-than-temporary
impairments where a portion related to other factors was recognized in other
comprehensive loss for the three months and nine months ended September 30,
2009:
  -13-
 Table of Contents
  Three
      Months Ended September 30, 2009
              
              
              Nine
      Months Ended September 30, 2009(in
      thousands)Beginning
      Balance
              
              $
              2,680
              
              
              $
              100Additions
      for credit losses on securities for which an OTTI was not previously
      recognized
              
              
              703
              
              
              
              3,283Additions
      for additional credit losses on securities for which an OTTI was
      previously recognized
              
              
              168
              
              
              
              168Balance
      - September 30, 2009
              
              $
              3,551
              
              
              $
              3,551
 
 The table
below presents a summary of the significant inputs considered in determining the
measurement of the credit loss component recognized in earnings for the six
held-to-maturity and two available-for-sale residential CMOs at September 30,
2009:
 
 Held-to-Maturity
              
              
              Available-for-Sale(dollars
      in thousands)CMOs
      current face amount
              
              $
              55,095
              
              
              $
              8,582Credit
      enhancement (1):Weighted
      average (2)
              
              
              8.3
              %
              
              
              5.1
              %Projected
      CPR (3):Weighted
      average (2)
              
              
              8.2
              %
              
              
              11.4
              %Projected
      collateral loss:Weighted
      average (2)
              
              
              12.8
              %
              
              
              20.3
              %60+
      days delinquent (4):Weighted
      average (2)
              
              
              16.0
              %
              
              
              25.2
              %
 ____________
 (1)
              Represents
      current level of protection (subordination) for the securities, expressed
      as a percentage of total current underlying loan
  balance.
 
 (2)
              Calculated
      by weighting the relevant input/assumptions for each individual security
      by current outstanding face of the
security.
 
 (3)
              CPR
      – constant prepayment rate based on six to twelve month historical
      performance.
 
 (4)
              Includes
      underlying loans 60 or more days delinquent, foreclosed loans and other
      real estate owned
 
 During
the nine months ended September 30, 2009, the Company received gross proceeds of
$102.1 million, in connection with the sale of securities
available-for-sale.  The gross realized gain on these sales was $4.2
million for the nine months ended September 30, 2009.  During the same
period last year, there were no securities sold prior to their maturity or call
date and there were no realized gains or losses recognized on the sale of
investment securities.
  -14-
 Table of Contents
  The
valuation of the Company’s investment securities and the determination of any
OTTI with respect to such securities is highly complex and involves a
comprehensive process, including quantitative modeling and significant
judgment.  See Part II, Item 1A, “Risk Factors – The valuation of the
Company’s investment securities and the determination of any
other-than-temporary impairment with respect to these securities is highly
subjective and our regulators may not agree with our analyses.”
 
  NOTE
5 – EARNINGS (LOSSES) PER SHARE
  Basic
Earnings (Losses) Per Share (“Basic EPS”) is computed by dividing net income
(loss) by the weighted-average number of common shares outstanding for the
period.  Diluted Earnings (Losses) Per Share (“Diluted EPS”) reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock which shared in the Company’s
earnings.  Stock options outstanding as of September 30, 2009 and 2008
were 455,316 and 535,649, respectively.  For the three and nine months
ended September 30, 2009, 455,316 of these options outstanding were excluded
from the diluted EPS computation as their effect was anti-dilutive, compared to
535,649 and 506,949, respectively, for the same periods last year.
 
 The
following is a reconciliation of the calculation of Basic EPS and Diluted
EPS:
  Net
      Income
              
              
              Weighted-
                Average
      Shares
                Outstanding
              
              
              Per
                Share
                Amount(in
      thousands, except per share data)For
      the Three Months Ended September 30,2009Basic
      EPS
              
              $
              (30,657
              )
              
              
              5,429
              
              
              $
              (5.65
              )Effect
      of dilutive stock options
              
              
              —
              
              
              
              —
              
              
              
              —Diluted
      EPS
              
              $
              (30,657
              )
              
              
              5,429
              
              
              $
              (5.65
              )2008Basic
      EPS
              
              $
              533
              
              
              
              5,429
              
              
              $
              0.10Effect
      of dilutive stock options
              
              
              —
              
              
              
              —
              
              
              
              —Diluted
      EPS
              
              $
              533
              
              
              
              5,429
              
              
              $
              0.10For
      the Nine Months Ended September 30,2009Basic
      EPS
              
              $
              (112,027
              )
              
              
              5,429
              
              
              $
              (20.64
              )Effect
      of dilutive stock options
              
              
              —
              
              
              
              —
              
              
              
              —Diluted
      EPS
              
              $
              (112,027
              )
              
              
              5,429
              
              
              $
              (20.64
              )2008Basic
      EPS
              
              $
              3,580
              
              
              
              5,428
              
              
              $
              0.66Effect
      of dilutive stock options
              
              
              —
              
              
              
              8
              
              
              
              —Diluted
      EPS
              
              $
              3,580
              
              
              
              5,436
              
              
              $
              0.66
  -15-
 Table of Contents
  NOTE
6 – COMPREHENSIVE INCOME (LOSS)
  Comprehensive
income (loss), which encompasses net income and the net change in unrealized
gains (losses) on investment securities available-for-sale and the non-credit
component of losses on other-than-temporarily impaired securities, is presented
below:
 
 Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008(in
      thousands)Net
      (Loss) Income
              
              $
              (30,657
              )
              
              $
              533
              
              
              $
              (112,027
              )
              
              $
              3,580Other
      comprehensive (loss) income:Change
      in net unrealized gains (losses) on investment securities
      available-for-sale, net of tax benefit (expense) of $— and $642 for the
      three months ended September 30, 2009 and 2008, respectively, and $— and
      $1,999 for the nine months ended September 30, 2009 and 2008,
      respectively.
              
              
              4,644
              
              
              
              (963
              )
              
              
              4,684
              
              
              
              (2,999
              )Reclassification
      for net sales included in losses, net of tax (benefit) expense of $— and
      ($85) for the three months ended September 30, 2009 and 2008,
      respectively, and $— and $40 for the nine months ended September 30, 2009
      and 2008, respectively.
              
              
              —
              
              
              
              127
              
              
              
              (4,228
              )
              
              
              (60
              )Reclassification
      adjustment for net losses included in earnings for other-than-temporary
      impairments on available-for-sale securities.
              
              
              446
              
              
              
              —
              
              
              
              1,472
              
              
              
              —Other-than-temporary
      impairment on investment securities held-to-maturity for which a
      credit-related portion was recognized in earnings.
              
              
              (3,208
              )
              
              
              —
              
              
              
              (14,502
              )
              
              
              —Reclassification
      adjustment for accretion of non-credit related portion of
      other-than-temporary impairment on held-to-maturity
      securities.
              
              
              191
              
              
              
              —
              
              
              
              191
              
              
              
              —Reclassification
      adjustment for net losses included in earnings for other-than-temporary
      impairments on held-to-maturity securities.
              
              
              425
              
              
              
              —
              
              
              
              3,005
              
              
              
              —Comprehensive
      (Loss) Income
              
              $
              (28,159
              )
              
              $
              (303
              )
              
              $
              (121,405
              )
              
              $
              521
 
  NOTE
7 – IMPAIRED LOANS RECEIVABLE
  As of
September 30, 2009 and December 31, 2008, the recorded investment in impaired
loans was $298.6 million and $162.6 million, respectively.  The
average recorded investment in impaired loans was $291.1 million and $244.7
million, respectively, for the three and nine months ended September 30, 2009,
and $149.0 million and $108.3 million, respectively, for the same periods last
year. Interest income recognized on impaired loans totaled $273 and
$140,000 respectively, for the three and nine months ended September 30,
2009, as compared to $140,000 and $500,000, respectively, for the same periods
last year.  As of September 30, 2009, there were $28.0 million of
impaired loans with a valuation allowance of $6.9 million, and $270.6 million of
impaired loans with no valuation allowance.  At December 31, 2008,
there were $2.8 million of impaired loans with a valuation allowance of
$783,000, and $159.8 million of impaired loans with no valuation
allowance.  The Company has previously recognized $77.7 million and
$13.3 million of charge-offs in connection with its impaired loans outstanding
at September 30, 2009 and 2008, respectively.
  -16-
 Table of Contents
 
 NOTE
8 – GOODWILL
  The
Company assesses goodwill for impairment on an annual basis, or on an interim
basis if events or circumstances indicate the fair value of the goodwill has
decreased below its carrying value. During the quarter ended September 30, 2009,
the Company evaluated its goodwill, and determined that no impairment was
required.  In connection with this assessment, the Company determined
its reporting units consistent with the segment reporting information disclosed
in Note 13 – “Business Segment Information” of this Form 10-Q, and utilized the
valuation techniques discussed in Note 10 – “Fair Value” of this Form 10-Q to
estimate the fair value of each reporting unit.
   NOTE
9 – CONSTRUCTION AND LAND DEVELOPMENT LOANS
  The
following table is a summary of information related to construction and land
development loans with an available interest reserve balance:
 
 September
      30, 2009
              
              
              December
      31, 2008(in
      thousands)Interest ReserveOutstanding
      Interest Reserve – Total
              
              $
              4,230
              
              
              $
              15,000Less:
      Interest Reserve – Non-Performing Loans
              
              
              (100
              )
              
              
              (726
              )Available
      Interest Reserves – Performing Loans
              
              $
              4,130
              
              
              $
              14,274Loan Balances with Interest
      ReservesOutstanding
      Loan Balance – Total
              
              $
              108,167
              
              
              $
              274,153Less:  Non-Performing
      Loans
              
              
              (7,826
              )
              
              
              (25,296
              )Outstanding
      Loan Balance – Performing Loans
              
              $
              100,341
              
              
              $
              248,857
 
 Interest
income is recognized and capitalized into the loan balance for performing
construction loans on monthly basis.  Performance of these loans is
monitored by the Bank’s Relationship Management Department, which obtains and
reviews the progress of projects through construction inspections, and the
tracking of sales and/or leasing reports.  Inspections typically occur
monthly, and for projects with longer durations, the Bank customarily performs
“audit” inspections to further monitor progress. The Bank maintains a dedicated
construction engineering staff to review third party construction inspections
and perform construction inspections for smaller loans.
 
 Construction
loans greater than $3.0 million are reviewed on a monthly basis by the Bank’s
Risk & Reserve Committee.  Loans exceeding $1.0 million are
reviewed at least quarterly.  All classified construction loans
exceeding $1.0 million are reviewed monthly.  The recognition of
interest income is immediately ceased for all construction loans that are
identified as non-performing based on the loan monitoring and progress reporting
discussed above.
 
 The Bank
has modified the loan terms for certain interest reserve related construction
loans.  These modifications were primarily granted to extend the
maturities of the loans due to delays in construction, slower absorption rates
than initially anticipated, or delays caused by a change in the use of the
property.  The Bank did not increase the amount of the interest
reserve in connection with any of these modifications, and the modifications
granted on these loans were consistent with those granted for similar
construction loans without interest reserves.
 
 -17-
 Table of Contents
 
 Loans
with interest reserves are underwritten to assess the anticipated value, and
debt service coverage ratio, where applicable, of the collateral upon completion
of construction or renovation and upon stabilization.  The
underwriting process also considers a borrower’s financial strength, and their
ability and relevant experience to execute the project and to achieve the
forecasted cash flows for the real estate. Given the uncertainty of future
interest rates, projects with interest reserves are underwritten assuming a
higher interest rate than comparable stabilized properties, which may be
underwritten to a lower actual fixed interest rate.
   NOTE
10 – FAIR VALUE
  The
Company adopted the provisions of FASB ASC 820-10 as of January 1, 2008, for
financial instruments.  Although the adoption of FASB ASC 820-10 did
not materially impact its financial condition or results of operations, the
Company is now required to provide additional disclosures as part of its
financial statements.
 
 The
Company also adopted FASB ASC 820-10-15-1A No. 157-2, "Effective Date of FASB
Statement No. 157," which deferred the application of FASB ASC 820-10 for
certain non-financial assets and non-financial liabilities, until January 1,
2009.  Items impacted by this deferral included goodwill and other
real estate and other assets owned (REO), all of which require fair value
measurements as a part of any necessary impairment analysis.
 
 FASB ASC
820-10 establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value.  These tiers include: Level 1,
defined as observable inputs such as quoted prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs
in which little or no market data exists, therefore requiring an entity to
develop its own assumptions.
 
 Investment
securities available-for sale are reported at fair value utilizing Level 1
inputs with respect to valuing equity securities with quoted prices on an active
market, Level 2 inputs for investment and debt securities, and Level 3 inputs
related to the valuation of the Company’s residual interest in securitized
loans.  Management determines the appropriate hierarchy for each
investment category based on its assessment regarding market activity of each
security and the relative quality and reliability of the market inputs utilized
to calculate fair value.  The valuation for investment and debt
securities utilizing Level 2 inputs were primarily determined by an independent
pricing service using matrix pricing, which is a mathematical technique widely
used in the industry to value securities without relying exclusively on quoted
market prices for the specific securities, but rather by relying on the
securities’ relationship to other benchmark quoted securities.  The
Company substantiates the price estimates received from this pricing service by
comparing those prices to prices provided from two independent pricing
sources.  The Company does not adjust the prices obtained from this
pricing service.
 
 -18-
 Table of Contents
 
 The
pricing service’s evaluation methodologies combine in-house modeling
techniques, information from extensive market sources, and a team of evaluators
who integrate observed transaction data, credit quality information, perceived
market movements, news, and other relevant information into its evaluations. The
objective is to detect and capture market activity, which typically relates only
to a fraction of the outstanding fixed income securities, and extrapolate that
information using models and methodologies to the population of bonds for which
market activity is not available.
 
 The
Company’s assets measured at fair value on a recurring basis subject to the
disclosure requirements of FASB ASC 820-10 were as follows:
  Assets
      and Liabilities Measured at Fair Value on a Recurring
BasisQuoted
      Prices in Active Markets for Identical Assets
                (Level
      1)
              
              
              Significant
      Other Observable Inputs (Level 2)
              
              
              Significant
      Unobservable Inputs (Level 3)
              
              
              Ending
      Balance(in
      thousands)AssetsSeptember
      30, 2009Investment
      securities – available-for-sale
              
              $
              437
              
              
              $
              237,398
              
              
              $
              509
              
              
              $
              238,344December
      31, 2008Investment
      securities – available-for-sale
              
              $
              59
              
              
              $
              146,045
              
              
              $
              695
              
              
              $
              146,799
  
  Changes
      in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring
      BasisBeginning
      Balance
              
              
              Total
      Realized and Unrealized Gains Included in Income
              
              
              Total
      Realized and Unrealized Gains
              
              
              Purchases,
      Sales, Other Settlements and Issuances, net
              
              
              Net
      Transfers In and/or Out of Level 3
              
              
              Ending
      BalanceNet
      Revaluation of Retained Interests(in
      thousands)AssetsSeptember
      30, 2009Investment
      securities – available-for-sale
              
              $
              695
              
              
              $
              —
              
              
              $
              —
              
              
              $
              (186
              )
              
              $
              —
              
              
              $
              509December
      31, 2008Investment
      securities – available-for-sale
              
              $
              1,318
              
              
              $
              —
              
              
              $
              —
              
              
              $
              (623
              )
              
              $
              —
              
              
              $
              695
  Certain
financial assets and financial liabilities are measured at fair value on a
non-recurring basis.  These instruments are not measured at fair value
on an ongoing basis but are subject to fair value adjustments in certain
circumstances, such as when there is evidence of impairment. Financial assets
and liabilities measured at fair value on a non-recurring basis during the
quarter ended September 30, 2009 include certain impaired loans reported at the
fair value of the underlying collateral if repayment is expected solely from the
collateral.  Collateral values are estimated using Level 3 inputs
based on limited observable market data and customized discounting
criteria.  During the current period, certain impaired loans were
remeasured and written down to their fair values through a specific valuation
allowance allocation of the allowance for loan losses based upon the fair value
of the underlying collateral.  Impaired loans with a carrying value of
$120.0 million were written down by $24.1 million during the quarter ended
September 30, 2009 to a total reported fair value of $95.9
million.  Impaired loans with a carrying value of $218.0 million were
written down by $54.5 million during the nine months ended September 30, 2009 to
a total reported fair value of $163.5 million.
 
 -19-
 Table of Contents
 
 Consistent
with other segments of our loan portfolio, collateral dependent loans are
recognized as non-accrual and impaired when it becomes probable that we will be
unable to collect all amounts due in accordance with the contractual terms of
the loan agreement.  Appraisals are generally ordered for material
non-performing loans and all non-performing loans where foreclosure appears to
be probable.  Collateral dependent impaired loans are written-off when
a loss is confirmed by an external appraisal or other valuation process,
including internal valuations, brokers’ opinions, comparable sales analyses or
other valuation techniques.
 
 Certain
non-financial assets measured at fair value on a non-recurring basis include
REO, non-financial assets and non-financial liabilities measured at fair value
in the second step of a goodwill impairment test, and intangible assets and
other non-financial long-lived assets measured at fair value for impairment
assessment.  During the three and nine months ended September 30,
2009, certain other real estate owned, upon initial recognition, were remeasured
and reported at fair value through a charge-off of $2.5 million and $6.9
million, respectively, to the allowance for loan losses based upon the fair
value of the foreclosed asset less estimated selling costs.  During
the three and nine months ended September 30, 2009, REO valued subsequent to its
initial recognition, were remeasured and reported at fair value through a
charge-off of $2.8 million and $8.1 million, respectively, to the provision for
losses on REO.  The fair value of REO is estimated using Level 3
inputs based on limited observable market data and customized discounting
criteria.  REO measured at fair value totaled $88.8 million at
September 30, 2009.
 
 The
Company’s assets measured at fair value on a non-recurring basis were as
follows:
  Assets
      and Liabilities Measured at Fair Value on a Non-Recurring
      BasisQuoted
      Prices in Active Markets for Identical Assets
                (Level
      1)
              
              
              Significant
      Other Observable Inputs (Level 2)
              
              
              Significant
      Unobservable Inputs (Level 3)
              
              
              Ending
      Balance(in
      thousands)AssetsSeptember
      30, 2009Impaired
      loans
              
              $
              —
              
              
              $
              —
              
              
              $
              291,755
              
              
              $
              291,755Other
      real estate owned
              
              $
              —
              
              
              $
              —
              
              
              $
              88,793
              
              
              $
              88,793Investment
      securities – held-to-maturity
              
              $
              —
              
              
              $
              38,803
              
              
              $
              —
              
              
              $
              38,803December
      31, 2008Impaired
      loans
              
              $
              —
              
              
              $
              —
              
              
              $
              161,793
              
              
              $
              161,793Other
      real estate and other assets owned
              
              $
              —
              
              
              $
              —
              
              
              $
              38,031
              
              
              $
              38,031
  -20-
 Table of Contents
 
 Fair
value estimates are based on judgments regarding credit risk, expectations of
future economic conditions, normal cost of administration of these instruments
and other risk characteristics, including interest rate risk and prepayment
risk. These estimates are subjective in nature, involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. The
fair value estimates presented do not include the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.
 
 Effective
April 1, 2009, the Company adopted FASB ASC 825-10-65-1, “Interim Disclosures
about Fair Value of Financial Instruments”, which requires disclosures about
fair value of financial instruments for interim reporting periods of publicly
traded companies, as well as in annual financial statements.  Although
the adoption of FASB ASC 825-10-65-1 did not materially impact its financial
condition or results of operations, the Company is now required to provide
additional disclosures as part of its financial statements.
 
 We use
the following methods and assumptions to estimate the fair value of each class
of financial instruments for which it is practicable to estimate
value:
 
 Cash and Cash Equivalents —The carrying values reported in the balance sheet approximate fair values
due to the short-term nature of the assets.
 
 Investment Securities —Fair
values are based on bid prices and quotations published and/or received from
established securities dealers.  In those situations where quotations
are not available, values are determined using present value of estimated future
cash flows.
 
 Stock in Federal Home Loan Bank —The carrying value approximates fair value based on the redemption
provisions of the FHLB.
 
 Loans —The fair value is
estimated using market quotes for similar assets or the present value of future
cash flows, discounted using the current rate at which similar loans would be
made to borrowers with similar credit ratings and for the same maturities and
giving consideration to estimated prepayment risk and credit risk.
 
 Accrued Interest Receivable —
The carrying values reported in the balance sheet approximate the fair values
due to the short-term nature of the asset.
 
 Deposit Accounts —The fair
value of demand deposit, money market and passbook accounts is estimated to be
the amount payable on demand due to the short-term nature of these deposits. The
fair values for time certificates, both over and under $100,000, are estimated
by discounting the expected cash flows at current market rates over expected
maturities.
 
 Federal Home Loan Bank Advances and
Other Borrowings—The fair value is
estimated by discounting the expected cash flows at current market rates over
contractual maturities.
 
 Junior Subordinated
Debentures — The
fair value is estimated using the present value of future cash flows, discounted
using the current rate at which a similar debenture would be
issued.
 
 -21-
 Table of Contents
 
 The
carrying amounts and estimated fair values of our financial instruments are as
follows:
 
 September
      30, 2009
              
              
              December
      31, 2008Cost
      or
                CarryingAmount
              
              
              Estimated
                Fair
      Value
              
              
              Cost
      or
                CarryingAmount
              
              
              Estimated
                Fair
      Value(in
      thousands)Financial
      assets:Cash
      and cash equivalents
              
              $
              302,755
              
              
              $
              302,755
              
              
              $
              403,119
              
              
              $
              403,119Investment
      securities available-for-sale
              
              
              238,344
              
              
              
              238,344
              
              
              
              146,799
              
              
              
              146,799Investment
      securities held-to-maturity
              
              
              806,491
              
              
              
              715,456
              
              
              
              942,686
              
              
              
              716,376Stock
      in Federal Home Loan Bank
              
              
              63,498
              
              
              
              63,498
              
              
              
              63,498
              
              
              
              63,498Loans,
      net
              
              
              2,481,150
              
              
              
              2,238,116
              
              
              
              2,748,956
              
              
              
              2,660,800Accrued
      interest receivable
              
              
              18,460
              
              
              
              18,458
              
              
              
              21,305
              
              
              
              21,305Financial
      liabilities:Deposit
      accounts
              
              $
              2,798,692
              
              
              $
              2,830,684
              
              
              $
              2,931,040
              
              
              $
              2,966,946Federal
      Home Loan Bank advances and other borrowings
              
              
              1,053,437
              
              
              
              1,110,578
              
              
              
              1,205,633
              
              
              
              1,278,496Junior
      subordinated
      debentures
              
              
              86,600
              
              
              
              12,990
              
              
              
              86,600
              
              
              
              58,216
  
 NOTE
11 – INCOME TAXES
  The
Company accounts for income taxes in accordance with FASB ASC 740-10,
“Accounting for Income Taxes”, which requires an asset and liability approach
for the financial accounting and reporting of income taxes.  Under
this method, deferred income taxes are recognized for the expected future tax
consequences of differences between the tax bases of assets and liabilities and
their reported amounts in the consolidated financial
statements.  These balances are measured using the enacted tax rates
expected to apply in the year(s) in which these temporary differences are
expected to reverse.  The effect on deferred income taxes of a change
in tax rates is recognized in income in the period when the change is
enacted.
 
 Significant
components of our deferred tax assets and liabilities are as
follows:
 
 September
      30,
              
              
              December
      31,2009
              
              
              2008(in
      thousands)Components
      of the deferred tax asset:Allowance
      for loan losses
              
              $
              30,713
              
              
              $
              21,207Net
      operating loss carryforward
              
              
              24,528
              
              
              
              3,231Other
              
              
              20,683
              
              
              
              15,222Valuation
      allowance
              
              
              (62,475
              )
              
              
              (2,100
              )Total
      deferred tax assets
              
              
              13,449
              
              
              
              37,560Components
      of the deferred tax liability:Total
      deferred tax liabilities
              
              
              13,449
              
              
              
              15,222Net
      deferred tax asset
              
              $
              —
              
              
              $
              22,338
  As of
September 30, 2009, the Company established a valuation allowance on the entire
balance of its net deferred tax asset due to uncertainty related to our ability
to realize the Company’s remaining deferred tax assets.  As a result,
the Company increased its tax valuation allowance from $2.1 million at December
31, 2008 to $62.5 million at September 30, 2009.  Management will
continue to evaluate the potential realizability of these deferred tax assets
and will continue to maintain a valuation allowance to the extent it is
determined that it is more likely than not that these assets will not be
realized.
 
 -22-
 Table of Contents
 
 As more
fully discussed in Note 14 – “Subsequent Events,” on November 6, 2009, the
Worker, Homeownership, and Business Assistance Act of 2009 (the “Act”) was
enacted into legislation.  The Act allows corporate taxpayers with net
operating losses (“NOLs”) in 2008 or 2009 to elect to carry back such NOLs up to
five years.  Previously, corporations, other than certain eligible
small businesses, generally were permitted to carry NOLs back only two years
with excess carry forwards up to twenty years. It is
currently estimated that the impact will positively affect the Company’s net
operating results by approximately $15 million to $20
million.
  NOTE
12 – NEW ACCOUNTING PRONOUNCEMENTS
  In June
2009, the FASB issued Accounting Standards Update 2009-01, “Topic 105 –
Generally Accepted Accounting Principles – FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles”,
which pertains to the authority of United States generally accepted accounting
principles.  With the issuance of this standard, the FASB Accounting
Standards Codification (“Codification”) became the sole source of authoritative
U.S. generally accepted accounting principles recognized by the FASB to be
applied by nongovernmental entities.  Rules and interpretive releases
of the Securities and Exchange Commission (“SEC”) under authority of the federal
securities laws are also sources of authoritative GAAP for SEC
registrants.  Upon issuance, the Codification superseded all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification then became non-authoritative.  This standard is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009.  The adoption of this standard did not have
a material impact on the Company’s financial position or results of
operations.
 
 In
December 2007, the FASB issued ASC 805 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. ASC 805 clarifies that a noncontrolling
interest in a subsidiary, which is sometimes referred to as minority interest,
is an ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, ASC 805 requires consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated income
statement, of the amounts of consolidated net income attributable to the parent
and to the noncontrolling interest. ASC 805 was effective for the Company on
January 1, 2009 and did not have a significant impact on the Company’s financial
condition or results of operations.
 
 In March
2008, the FASB issued ASC 815, "Disclosures About Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No.133."  ASC 815
provides greater transparency about (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedge items are
accounted for, and (iii) how derivative instruments and related hedged items
affect an entity's financial position, results of operations and cash
flows.  To meet those objectives, ASC 815 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements. ASC 815 was effective for the Company on January 1, 2009
and did not have a significant impact on the Company's financial condition or
results of operations.
 
 -23-
 Table of Contents
 
 In April
2009, the FASB issued FASB ASC 820-10-65-4, “Fair Value Measurement and
Disclosure,” which provides additional guidance for estimating fair value when
the volume and level of activity for the asset or liability have significantly
decreased. The standard also includes guidance on identifying circumstances that
indicate a transaction is not orderly. It became effective for interim and
annual periods ending after June 15, 2009, and shall be applied
prospectively.  The adoption of this standard did not have a material
impact on the Company’s financial condition or results of
operation.
  In April
2009, the FASB issued FASB ASC 825, “Financial Instruments” to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial
statements.  In addition, the standard requires those disclosures in
summarized financial information at interim reporting periods.  The
standard became effective for interim periods ending after June 15, 2009, with
earlier adoption permitted for periods ending after March 15,
2009.  The standard did not have a material impact on the Company’s
financial condition or results of operation because it is a disclosure
standard.
  In April
2009, the FASB issued FASB ASC 320-10-65, “Debt and Equity Securities,” which
amends other-than-temporary impairment guidance for debt securities to make
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities. The standard
does not amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities.  This standard
became effective for interim and annual periods ending after June 15, 2009, with
earlier adoption permitted for periods ending after March 15, 2009. Refer to
Note 4 – “Investment Securities” for further discussion regarding the impact of
the adoption of this standard.
  In May
2009, the FASB issued FASB ASC 855-10, “Subsequent Events,” which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or available
to be issued.  This standard defines (i) the period after the balance
sheet date during which a reporting entity’s management should evaluate events
or transactions that may occur for potential recognition or disclosure in the
financial statements (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and (iii) the disclosures an entity should make about
events or transactions that occurred after the balance sheet date. This standard
became effective for the Company’s financial statements for periods ending after
June 15, 2009. This standard did not have a significant impact on the Company’s
financial condition or results of operation.
  -24-
 Table of Contents
 
 In June
2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial
Assets—An Amendment of FASB Statement 140" and SFAS No. 167, "Amendments to
FASB Interpretation No. 46(R)". These statements (which have not yet been
included in the Codification) eliminated the concept of a qualifying special
purpose entity (“QSPE”), created more stringent conditions for reporting a
transfer of a portion of a financial asset as a sale, clarified other
sale-accounting criteria, and changed the initial measurement of a transferor's
interest in transferred financial assets. Former QSPEs will be evaluated for
consolidation based on the provisions of FASB ASC 810-10-25, which changes the
approach to determining a variable interest entity's (“VIE”) primary beneficiary
and requires companies to more frequently reassess whether they must consolidate
or deconsolidate VIEs. The accounting standard requires a qualitative, rather
than quantitative, analysis to determine the primary beneficiary of a VIE for
consolidation purposes. The primary beneficiary of a VIE is the enterprise that
has (a) the power to direct the VIE activities that most significantly
affect the VIE's economic performance, and (b) the right to receive
benefits of the VIE that could potentially be significant to the VIE or the
obligation to absorb losses of the VIE that could potentially be significant to
the VIE. These statements are effective for fiscal years and interim periods
ending after November 15, 2009. The Company is currently evaluating the
impact of these new pronouncements on its financial statements. While management
of the Company has not completed its evaluation, the Company may be required to
consolidate certain trust assets and trust liabilities related to assets
previously sold to QSPEs. The Company does not expect the adoption of this
standard to have a material impact on its financial position or results of
operations.
   NOTE
13 – BUSINESS SEGMENT INFORMATION
  FASB ASC
280-10, “Disclosures About Segments of an Enterprise and Related Information”,
requires disclosure of segment information in a manner consistent with the
“management approach”.  The management approach is based on the way
the chief operating decision-maker organizes segments within a company for
making operating decisions and assessing performance.
 
 The main
factors used to identify operating segments are the specific product and
business lines of the various operating segments of the Company. Operating
segments are organized separately by product and service offered. We have
identified one operating segment that meets the criteria of being a reportable
segment in accordance with the provisions of FASB ASC 280-10. This reportable
segment is the origination and purchase of loans, which by its legal form, is
identified as operations of the Bank and Imperial Capital REIT. This segment
derives the majority of its revenue by originating and purchasing loans. Other
operating segments of the Company that did not meet the criteria of being a
reportable segment in accordance with FASB ASC 280-10, and have been aggregated
and reported as “All Other”. Substantially all of the transactions from the
Company’s operating segments occur in the United States.
  -25-
 Table of Contents
  Transactions
between the reportable segment of the Company and its other operating segments
are made at terms which approximate arm’s-length transactions and in accordance
with accounting principles generally accepted in the United States. There is no
significant difference between the measurement of the reportable segments
profits and losses disclosed below and the measurement of profits and losses in
the Company’s consolidated statements of income. Accounting allocations are made
in the same manner for all operating segments.
 
 Lending
      Operations
              
              
              All
      Other
              
              
              Consolidated(in
      thousands)For
      the three months ended September 30,2009Revenues
      from external customers
              
              $
              51,284
              
              
              $
              533
              
              
              $
              51,817Total
      interest income
              
              
              53,857
              
              
              
              44
              
              
              
              53,901Total
      interest expense
              
              
              33,399
              
              
              
              1,500
              
              
              
              34,899Net
      loss
              
              
              (29,235
              )
              
              
              (1,422
              )
              
              
              (30,657
              )2008Revenues
      from external customers
              
              $
              65,406
              
              
              $
              (419
              )
              
              $
              64,987Total
      interest income
              
              
              69,357
              
              
              
              52
              
              
              
              69,409Total
      interest expense
              
              
              38,759
              
              
              
              1,753
              
              
              
              40,512Net
      income (loss)
              
              
              2,369
              
              
              
              (1,836
              )
              
              
              533For
      the nine months ended September 30,2009Revenues
      from external customers
              
              $
              169,509
              
              
              $
              898
              
              
              $
              170,407Total
      interest income
              
              
              172,401
              
              
              
              136
              
              
              
              172,537Total
      interest expense
              
              
              111,562
              
              
              
              4,708
              
              
              
              116,270Net
      loss
              
              
              (100,019
              )
              
              
              (12,008
              )
              
              
              (112,027
              )2008Revenues
      from external customers
              
              $
              187,409
              
              
              $
              (852
              )
              
              $
              186,557Total
      interest income
              
              
              191,697
              
              
              
              163
              
              
              
              191,860Total
      interest expense
              
              
              112,556
              
              
              
              5,556
              
              
              
              118,112Net
      income (loss)
              
              
              9,122
              
              
              
              (5,542
              )
              
              
              3,580
 
  NOTE
14 – SUBSEQUENT EVENTS
  On
October 14, 2009, the Bank received a Supervisory Prompt Corrective Action
Directive from the FDIC.  The Bank was also recently notified that the
FDIC did not accept the Bank’s capital restoration plan, which the Bank was
required to submit to the FDIC due to the Bank’s “undercapitalized” status under
regulatory capital guidelines.  The Bank has recently resubmitted a
revised capital restoration plan to the FDIC.
 
 On
November 6, 2009, the Bank received a notification from the DFI stating that the
Bank is in critical condition and that the DFI may take extreme action against
the Bank unless the Bank promptly either increases its capital or, in the
alternative, merges or sells its business to another depository
institution.  The DFI Notification provides that if the Bank is to
comply with the DFI Notification by increasing its capital, the Bank must, by
December 14, 2009, increase its tangible shareholders’ equity by the greater of
(i) $200.0 million or (ii) such amount as may be necessary to make tangible
shareholders’ equity equal to at least 9% of total tangible assets of the
Bank.
 
 -26-
 Table of Contents
 
 For
additional information regarding the above matters, see Note 2 – “Regulatory
Developments and Going Concern Considerations.”
  November
6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 (the
“Act”) was enacted into legislation.  The Act allows corporate
taxpayers with NOLs in 2008 or 2009 to elect to carry back such NOLs up to five
years.  Previously, corporations, other than certain eligible small
businesses, generally were permitted to carry NOLs back only two years with
excess carry forwards up to twenty years.  This election applies with
respect to NOLs incurred during 2008 or 2009, but not both years.  In
addition, 2008 or 2009 NOLs can be used to offset only fifty percent of the
taxable income earned in the fifth prior taxable year.  Management is
evaluating the impact that this legislation will have on the Company’s results
during the fourth quarter of this year. It is
currently estimated that the impact will positively affect the Company’s net
operating results by approximately $15 million to $20
million.
  The
Company evaluated subsequent events through November 16, 2009, which is the date
these financial statements were issued.
  -27-
 Table of Contents
  Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
 
 The
following discussion and analysis is intended to identify the major factors that
affected our financial condition and results of operations as of and for the
three and nine months ended September 30, 2009.
 
 Operating
Strategy
 
 Our
financial performance continues to be negatively impacted by national economic
conditions and the deterioration of real estate and credit related
markets.  During the quarter ended September 30, 2009, we recorded a
net loss of $30.7 million, primarily related to a $24.9 million provision for
loan losses that was recorded as a result of the elevated levels in our
non-performing loans and other loans of concern, and an increase in non-interest
expense caused by additional costs associated with FDIC insurance and other real
estate owned.  Our ability to decrease our levels of non-performing
assets is dependent upon market conditions as many of our borrowers rely on an
active real estate market as a source of repayment, particularly our
construction loan borrowers, and the sale of loans in this market is difficult.
If the real estate market does not improve, our level of non-performing assets
may continue to increase.
 
 In
response to these financial challenges and the increased regulatory supervision
to which we are subject (see Note 2 – “Regulatory Developments and Going Concern
Considerations” and Note 14 – “Subsequent Events” in the Notes to the Unaudited
Consolidated Financial Statements in this Form 10-Q), we have taken and are
continuing to take a number of tactical actions aimed at preserving existing
capital, reducing our lending exposures and associated capital requirements and
increasing liquidity. The tactical actions taken include, but are not limited to
the following: ceasing loan originations in order to focus on managing our
problem assets, growing retail deposits, reducing brokered deposits, seeking
commercial loan participation and sales arrangements with other lenders or
private equity sources, and reducing personnel and other operating costs. Our
goal is to return to profitability by reducing our size, stabilizing our losses,
managing our problematic assets and reducing overall expenses.
 
 We are
currently focused on the following four primary objectives as a basis for
long-term success of our franchise including improving our asset quality,
reducing our asset base and improving our regulatory capital ratios, continuing
our expense control, and reducing our reliance on wholesale funding
sources.  With respect to these initiatives, since December 31, 2008,
we have reduced our loan portfolio by $245.2 million, or 8.8%, as well as our
Federal Home Loan Bank (“FHLB”) advances and other borrowings by $152.2 million,
or 12.6%, and  deposits by $132.3 million, or 4.5%, which included an
$80.6 million, or 10.9% decline in brokered deposits.  As of September
30, 2009, the Company had brokered deposits of $659.3 million, of which $164.6
million mature within the next twelve months.
 
 -28-
 Table of Contents
 
 We are
also diligently continuing to seek qualified sources of outside capital. The
Company and the Bank continue to consult with the DFI, FRB San Francisco and
FDIC on a regular basis concerning the Company’s and Bank’s proposals to obtain
outside capital that will be acceptable to federal regulatory authorities, but
there can be no assurance that these actions will be successful, or that even if
one or more of the Company’s and Bank’s proposals are accepted by the Company’s
and Bank’s federal regulators, that these proposals will be successfully
implemented. At this point in time the Company believes that it is highly
unlikely that it will be able to obtain additional outside capital that does not
include the provision of substantial assistance by the FDIC or other federal
governmental authorities. The Bank’s failure to comply with the DFI
Notification, the Supervisory Prompt Corrective Action Directive or the Order to
Cease and Desist, or the Company’s failure to comply with the FRB Agreement,
particularly if the Company is unable to promptly raise sufficient capital for
the Bank or find a buyer or merger partner suitable to the regulators, could
result in additional regulatory actions.  As a result of the Bank’s
financial condition, its regulators are continually monitoring its liquidity and
capital adequacy. Based on their assessment of its ability to operate in a safe
and sound manner, the Bank’s regulators at any time may take other and further
actions, including placing the Bank into conservatorship or receivership, to
protect the interests of depositors insured by the FDIC.  If a
receivership were to occur, the Bank’s assets would likely be liquidated,
including a sale of such assets to another institution, and it would be unlikely
that any assets would be distributed to holders of the Company’s common stock or
holders of trust preferred securities issued by its trust
subsidiaries.
 
 For
further discussion, refer to the section captioned “Operating Strategy” within
Management’s Discussion and Analysis of Financial Condition and Results of
Operations included in the Company’s Form 10-K for the year ended December 31,
2008.
 
 Application
of Critical Accounting Policies and Accounting Estimates
 The
accounting and reporting policies followed by us conform, in all material
respects, to accounting principles generally accepted in the United States
(“GAAP”) and to general practices within the financial services
industry.  The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. While we
base our estimates on historical experience, current information and other
factors deemed to be relevant, actual results could differ from those
estimates.
 
 We
consider accounting estimates to be critical to reported financial results if
(i) the accounting estimate requires management to make assumptions about
matters that are highly uncertain and (ii) different estimates that management
reasonably could have used for the accounting estimate in the current period, or
changes in the accounting estimate that are reasonably likely to occur from
period to period, could have a material impact on our financial
statements.  Accounting policies related to the allowance for loan
losses and investments accounted for under Statement of Position 03-3 are
considered to be critical, as these policies involve considerable subjective
judgment and estimation by management.  We also consider our
accounting polices related to REO to be critical due to the potential
significance of these activities and the estimates involved.
  -29-
 Table of Contents
 
 For
additional information regarding critical accounting policies, refer to
Note 1 – “Organization and Summary of Significant Accounting Policies” in
the Notes to Consolidated Financial Statements and the sections captioned
“Application of Critical Accounting Policies and Accounting Estimates” and
“Allowance for Loan Losses and Non-performing Assets” in Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
Company’s Form 10-K for the year ended December 31, 2008.  There have
been no significant changes in the Company's application of accounting policies
since December 31, 2008.
 
 RESULTS
OF OPERATIONS
 
 Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008
  
 Executive
Summary
  Consolidated
net loss was $30.7 million, or $5.65 per diluted share, for the three months
ended September 30, 2009, compared to net income of $533,000, or $0.10 per
diluted share for the same period last year.  The decline in net
income during the current period was primarily caused by a $14.8 million
increase in provision for loan losses recorded in connection with the increase
in our non-performing loans and other loans of concern.  Our quarterly
results were also negatively impacted by an increase of $9.2 million in
non-interest expense caused primarily by an increase in our accrual for FDIC
quarterly insurance premiums and an increase in the costs incurred in connection
with our portfolio of other real estate owned.
 
 Net
interest income before provision for loan losses decreased 34.2% to $19.0
million for the quarter ended September 30, 2009, compared to $28.9 million for
the same period last year.  The decrease was primarily due to a
decline in interest earned on our loan portfolio, partially offset by a decline
in our cost of funds.
 
 The
provision for loan losses was $24.9 million and $10.1 million, respectively, for
the quarters ended September 30, 2009 and 2008.  The provision for
loan losses recorded during the quarter was primarily due to the increase in our
non-performing loans and other loans of concern.  Non-performing loans
as of September 30, 2009 were $298.6 million, compared to $154.9 million at
December 31, 2008.  The increase in non-performing loans was caused by
net increases of $76.8 million in multi-family loans, $52.7 million in
commercial real estate loans, $39.5 million in commercial and multi-family
construction loans, $4.6 million in land development related loans and $2.2
million in other loans, partially offset by a decrease of $32.0 million in
residential and condominium conversion construction loans primarily due to
charge-offs and the migration to other real estate owned
status.  Other loans of concern consist of performing loans which have
known information that has caused management to be concerned about the
borrower’s ability to comply with present loan repayment terms.  Other
loans of concern as of September 30, 2009 were $277.5 million, compared to
$114.6 million at December 31, 2008.  The increase was primarily
caused by the net addition of $63.9 million of multi-family real estate loans,
$55.6 million of construction and land development related loans and $42.9
million of commercial real estate loans.
 
 -30-
 Table of Contents
 
 The
(loss) return on average assets was (2.93%) for the three months ended September
30, 2009, compared to 0.05% for the same period last year.  The (loss)
return on average shareholders’ equity was (131.30%) for the three months ended
September 30, 2009, compared to 0.94% for the same period last
year.
 
 There
were no loan originations for the quarter ended September 30, 2009, compared to
$102.5 million for the same period last year.  Loan originations for
the third quarter of last year consisted of $45.3 million of commercial real
estate loans, $22.0 million of small balance multi-family real estate loans, and
$35.2 million of entertainment finance loans.  The lack of loan
production during the current period related to the Bank’s strategic objective
to reduce our asset base and focus on managing our problem assets.  In
addition, the Bank is currently restricted in its ability to grow as a result of
its “undercapitalized” status.  See Note 1 – “Basis of Presentation
and Organization” in the Notes to the Unaudited Consolidated Financial
Statements included in this Form 10-Q.
  Net
Interest Income and Margin
 
 The
following table presents for the three months ended September 30, 2009 and 2008,
our condensed average balance sheet information, together with interest income
and yields earned on average interest earning assets and interest expense and
rates paid on average interest bearing liabilities.  Average balances
are computed using daily average balances.  Nonaccrual loans are
included in loans receivable.
 
 For
      the Three Months Ended September 30,2009
              
              
              2008Average
      Balance
              
              
              Income/Expense
              
              
              Yield/Rate
              
              
              Average
      Balance
              
              
              Income/Expense
              
              
              Yield/Rate(dollars
      in thousands)AssetsCash
      and investment securities
              
              $
              1,493,607
              
              
              $
              18,313
              
              
              
              4.86
              %
              
              $
              1,135,036
              
              
              $
              22,723
              
              
              
              7.96
              %Loans
      receivable
              
              
              2,606,441
              
              
              
              35,588
              
              
              
              5.42
              %
              
              
              2,941,143
              
              
              
              46,686
              
              
              
              6.31
              %Total
      interest earning assets
              
              
              4,100,048
              
              
              $
              53,901
              
              
              
              5.22
              %
              
              
              4,076,179
              
              
              $
              69,409
              
              
              
              6.77
              %Non-interest
      earning assets
              
              
              129,207
              
              
              
              
              
              
              
              
              
              
              
              82,437Allowance
      for loan losses
              
              
              (79,529
              )
              
              
              
              
              
              
              
              
              
              
              (53,841
              )Total
      assets
              
              $
              4,149,726
              
              
              
              
              
              
              
              
              
              
              $
              4,104,775Liabilities
      and Shareholders’ EquityInterest
      bearing deposit accounts:Interest
      bearing demand
              
              $
              49,036
              
              
              $
              121
              
              
              
              0.98
              %
              
              $
              37,606
              
              
              $
              286
              
              
              
              3.03
              %Money
      market and passbook
              
              
              456,395
              
              
              
              1,724
              
              
              
              1.50
              %
              
              
              321,492
              
              
              
              2,932
              
              
              
              3.63
              %Time
      certificates
              
              
              2,334,285
              
              
              
              19,528
              
              
              
              3.32
              %
              
              
              2,125,627
              
              
              
              21,766
              
              
              
              4.07
              %Total interest bearing deposit
      accounts
              
              
              2,839,716
              
              
              
              21,373
              
              
              
              2.99
              %
              
              
              2,484,725
              
              
              
              24,984
              
              
              
              4.00
              %FHLB
      advances and other borrowings
              
              
              1,076,402
              
              
              
              12,026
              
              
              
              4.43
              %
              
              
              1,253,010
              
              
              
              13,775
              
              
              
              4.37
              %Junior
      subordinated debentures
              
              
              86,600
              
              
              
              1,500
              
              
              
              6.87
              %
              
              
              86,600
              
              
              
              1,753
              
              
              
              8.05
              %Total
      interest bearing liabilities
              
              
              4,002,718
              
              
              $
              34,899
              
              
              
              3.46
              %
              
              
              3,824,335
              
              
              $
              40,512
              
              
              
              4.21
              %Non-interest
      bearing demand accounts
              
              
              8,539
              
              
              
              
              
              
              
              
              
              
              
              9,008Other
      non-interest bearing liabilities
              
              
              45,836
              
              
              
              
              
              
              
              
              
              
              
              45,320Shareholders’
      equity
              
              
              92,633
              
              
              
              
              
              
              
              
              
              
              
              226,112Total liabilities andshareholders’
      equity
              
              $
              4,149,726
              
              
              
              
              
              
              
              
              
              
              $
              4,104,775Net
      interest spread (1)
              
              
              
              
              
              
              
              
              
              
              1.76
              %
              
              
              
              
              
              
              
              
              
              
              2.56
              %Net
      interest income before provisionfor
      loan losses
              
              
              
              
              
              $
              19,002
              
              
              
              
              
              
              
              
              
              
              $
              28,897Net
      interest margin (2)
              
              
              
              
              
              
              
              
              
              
              1.84
              %
              
              
              
              
              
              
              
              
              
              
              2.82
              %
 ____________
 (1)
              Average
      yield on interest earning assets minus average rate paid on interest
      bearing liabilities.
 (2)
              Net
      interest income divided by total average interest earning
      assets.
  -31-
 Table of Contents
  The
following table sets forth a summary of the changes in interest income and
interest expense resulting from changes in average interest earning asset and
interest bearing liability balances and changes in average interest
rates.  The change in interest due to both volume and rate has been
allocated to change due to volume and rate in proportion to the relationship of
absolute dollar amounts of each.
 
 For
      the Three Months EndedSeptember
      30, 2009 and 2008Increase
      (Decrease) Due to:Rate
              
              
              Volume
              
              
              Total(in
      thousands)Interest
      and fees earned from:Cash
      and investment securities
              
              $
              (10,379
              )
              
              $
              5,969
              
              
              $
              (4,410
              )Loans
              
              
              (6,142
              )
              
              
              (4,956
              )
              
              
              (11,098
              )Total
      (decrease) increase in interest income
              
              
              (16,521
              )
              
              
              1,013
              
              
              
              (15,508
              )Interest
      paid on:Deposit
      accounts
              
              
              (6,877
              )
              
              
              3,266
              
              
              
              (3,611
              )FHLB
      advances and other borrowings
              
              
              190
              
              
              
              (1,939
              )
              
              
              (1,749
              )Junior
      subordinated debentures
              
              
              (253
              )
              
              
              —
              
              
              
              (253
              )Total
      (decrease) increase in interest expense
              
              
              (6,940
              )
              
              
              1,327
              
              
              
              (5,613
              )Decrease
      in net interest income
              
              $
              (9,581
              )
              
              $
              (314
              )
              
              $
              (9,895
              )
 
 Total
interest income decreased $15.5 million to $53.9 million for the
current quarter as compared to $69.4 million for the same period last year.
The decrease in interest income was primarily attributable to a decline in
interest earned on our loan portfolio.  Our average loan yield
declined by 89 basis points compared to the same period last year, primarily
caused by adjustable rate loans repricing to lower current market interest
rates, an increase in the average balance of non-performing loans and a $334.7
million decrease in the average balance of our total loans receivable, primarily
due to reduced originations and an increase in charge-offs.  Total
interest income was further negatively impacted by a 310 basis point decline in
the average yield earned on cash and investment securities, partially offset by
a $358.6 million increase in the average balance of our cash and investment
securities.
 
 The
average balance of cash and investment securities was $1.5 billion during the
current quarter compared to $1.1 billion during the same period last
year.  The average balance of investment securities held-to-maturity
was $843.6 million and $955.4 million for the three months ended September 30,
2009 and 2008, respectively.  Investments held-to-maturity primarily
consist of corporate sponsored collateralized mortgage obligations (CMOs)
purchased during the second and third quarters of 2008.  At the time
of acquisition, these securities were AAA-rated.  As of September 30,
2009, approximately 95.8% of the securities had been downgraded by the
investment rating agencies to a level below investment grade.  Despite
these downgrades, we have currently experienced no disruption in our expected
cash flows on these securities; however, based on our current OTTI assessments,
we are projecting a disruption of future cash flows on only six of these
securities, which have an aggregate current face amount of $55.1 million as of
September 30, 2009.  The average balance of investment securities
available-for-sale was $357.8 million and $169.8 million for the three months
ended September 30, 2009 and 2008, respectively.  As discussed below
in the “Financial Condition” section, this increase primarily consisted of the
acquisition of U.S. Treasury and GNMA securities during the current
year.  The average balance of cash and cash equivalents increased to
$291.7 million for the quarter ended September 30, 2009 compared to $8.5 million
for the same period last year, due to efforts to maintain increased liquidity
levels in the current economic environment and the Bank’s financial
condition.  The average yield earned on cash and investment securities
decreased to 4.86% during the current quarter as compared to 7.96% for the same
period last year.  This decrease was primarily due to an increase in
the average balance of lower yielding cash and cash equivalents and U.S.
Treasury and GNMA available-for-sale securities acquired during the current
year.
 
 -32-
 Table of Contents
 
 The
average aggregate balance of our loan portfolio was $2.6 billion and $2.9
billion for the three months ended September 30, 2009 and 2008,
respectively.  Commercial real estate loans had an average aggregate
balance of $549.3 million during the quarter ended September 30, 2009 compared
to $574.1 million during the same period last year.  Construction and
land loans had an average aggregate balance of $353.2 million during the quarter
ended September 30, 2009 compared to $458.7 million during the same period last
year.  Multi-family real estate loans had an average aggregate balance
of $1.7 billion during the quarter ended September 30, 2009 compared to $1.8
billion during the same period last year.  Single-family residential
loans had an average aggregate balance of $10.1 million during the quarter ended
September 30, 2009 compared to $11.5 million during the same period last
year.  The average aggregate balance of entertainment finance loans
was $21.5 million and $63.1 million during the quarters ended September 30, 2009
and 2008, respectively.  The declines in the average loan balances
were due to loan paydowns, charge-offs incurred on non-performing loans, the
transfer of loans to other real estate owned and substantially reduced
origination levels.
 
 The
average yield earned on total loans decreased to 5.42% during the quarter ended
September 30, 2009 as compared to 6.31% during the same period last
year.  The decrease in yield was primarily due to adjustable rate
loans repricing to lower current market interest rates and an increase in the
average balance of non-performing loans.  The accrual of interest has
been suspended on all of our non-performing loans.  A significant
portion of our loan portfolio is comprised of adjustable rate loans indexed to
either six month LIBOR or the Prime Rate, most with interest rate floors and
caps below and above which the loan’s contractual interest rate may not
adjust.  Approximately 51.6% of our loan portfolio was adjustable at
September 30, 2009, and approximately 34.1% of the loan portfolio was comprised
of hybrid loans, which after an initial fixed rate period of three or five
years, will convert to an adjustable interest rate for the remaining term of the
loan.  As of September 30, 2009, our hybrid loans had a weighted
average of 2.1 years remaining until conversion to an adjustable rate
loan.  Our adjustable rate loans generally reprice on a quarterly or
semi-annual basis with increases generally limited to maximum adjustments of 2%
per year up to 5% for the life of the loan.  At September 30, 2009,
approximately $2.3 billion, or 89.7%, of our adjustable and hybrid loan
portfolio contained interest rate floors, below which the loans’ contractual
interest rate may not adjust.  The inability of our loans to adjust
downward can contribute to increased income in periods of declining interest
rates, and also assists us in our efforts to limit the risks to earnings
resulting from changes in interest rates, subject to the risk that borrowers may
refinance these loans during periods of declining interest rates.  At
September 30, 2009, the weighted average floor interest rate of these loans was
6.44%.  At that date, approximately $866.5 million, or 34.0%, of these
loans were at the floor interest rate.  At September 30, 2009, 56.9%
of the adjustable rate loans outstanding had a lifetime interest rate cap. The
weighted-average lifetime interest rate cap on our adjustable rate loan
portfolio was 11.70% at that date.  At September 30, 2009, none of
these loans were at their cap rate.
 
 -33-
 Table of Contents
 Total
interest expense decreased by $5.6 million to $34.9 million during the current
quarter, compared to $40.5 million for the same period last year.  The
decrease in interest expense was primarily attributable to a 75 basis point
decline in our average cost of funds, which was primarily caused by deposits
repricing to lower current market interest rates, partially offset by a $178.4
million increase in the average balance of interest bearing
liabilities.
 
 Our
average cost of funds decreased to 3.46% during the three months ended September
30, 2009, compared to 4.21% for the same period last year.  As
discussed above, the decrease in the average funding costs was primarily due to
deposits repricing to lower current market interest rates.  The
average rate paid on deposit accounts was 2.99% during the three months ended
September 30, 2009 as compared to 4.00% for the same period last
year.  The average balance of deposit accounts increased to $2.8
billion for the three months ended September 30, 2009 as compared to $2.5
billion for the same period last year.  The average rate paid on FHLB
advances and other borrowings was 4.43% during the three months ended September
30, 2009 compared to 4.37% for the same period last year.  FHLB
advances and other borrowings averaged $1.1 billion during the current quarter,
compared to $1.3 billion for the same period last year.
 
 Net
interest margin decreased to 1.84% for the three months ended September 30, 2009
as compared to 2.82% for the same period last year.  This decrease was
primarily caused by an 80 basis point decline in our net interest spread as
compared to the same period last year.
 
 Provision
for Loan Losses
 
 Management
believes the allowance for loan losses accounting policy is critical to the
portrayal and understanding of our financial condition and results of
operations. As such, selection and application of this “critical accounting
policy” involves judgments, estimates, and uncertainties that are susceptible to
change. In the event that different assumptions or conditions were to prevail,
and depending upon the severity of such changes, the possibility of materially
different financial condition or results of operations is a reasonable
likelihood.
 
 Management
periodically assesses the adequacy of the allowance for loan losses by reference
to many quantitative and qualitative factors that may be weighted differently at
various times depending on prevailing conditions. These factors include, among
other elements:
 
 •
              the
      risk characteristics of various classifications of
  loans;
 
 •
              general
      portfolio trends relative to asset and portfolio
  size;
 
 •
              asset
      categories;
 
 •
              potential
      credit and geographic
concentrations;
 
 •
              delinquency
      trends within the loan portfolio;
  -34-
 Table of Contents
  •
              changes
      in the volume and severity of past due loans, classified loans and other
      loans of concern;
 
 •
              historical
      loss experience and risks associated with changes in economic, social and
      business conditions; and
 
 •
              the
      underwriting standards in effect when the loan was
  made.
 
 Accordingly,
the calculation of the adequacy of the allowance for loan losses is not based
solely on the level of non-performing assets.  The quantitative
factors, included above, are utilized by our management to identify two
different risk groups (1) individual loans (loans with specifically identifiable
risks); and (2) homogeneous loans (groups of loan with similar
characteristics).  We base the allocation for individual loans on the
estimated collateral value if the loan is collateral dependent, as well as the
risk rating grades assigned to each of these loans as a result of our loan
management and review processes.  Loans evaluated individually
(primarily loans considered impaired or substandard) are allocated reserves
based on the estimated collateral values.  Homogenous groups of loans
are allocated reserves based on the loss ratio assigned to the pool based on its
collateral type and risk grade.  The loss ratio is determined based on
historical loss experience, augmented by the experience of management with
similar assets and our independent loan review process.
 
 The loan
review process begins at the loan’s origination where we obtain information
about the borrower and the real estate collateral, such as personal financial
statements, FICO scores, property rent rolls, property operating statements,
appraisals, market assessments, and other pertinent data.  Throughout
the loan life, we obtain updated information such as rent rolls, property cash
flow statements, personal financial statements, and for certain loans, updated
property inspection reports.  This information, at the individual
borrower and loan level, provides input into our risk profile of our borrowers,
and serves as the primary basis for each loan’s risk grade.
 
 Loss
ratios for all categories of loans are evaluated on a quarterly basis and are
primarily determined based on historical loss experience.  Loss ratios
associated with historical loss experience are determined based on a rolling
migration analysis of each loan category within our portfolio.  This
migration analysis estimates loss factors based on the performance of each loan
category over a twelve month time period.  These loss factors are then
adjusted for other identifiable risks specifically related to each loan category
or risk grade.  We utilize market and other economic data, which we
accumulate on a quarterly basis, to evaluate and identify the economic and real
estate related trends within each regional market that we operate.  In
addition to the information gathered from this data, we also typically consider
other risk factors, such as specific risks within a loan category, peer analysis
reports, and any other relevant trends or data, in determining any necessary
adjustments to our historical loss factors.  To the extent that known
risks or trends exist, the loss ratios are adjusted accordingly, and
incorporated into our assessment of the adequacy of our allowance for loan
losses.
 
 -35-
 Table of Contents
 
 The
qualitative factors, included above, are also utilized to identify other risks
inherent in the portfolio and to determine whether the estimated credit losses
associated with the current portfolio might differ from historical loss trends
or the loss ratios discussed above.  We estimate a range of exposure
for each applicable qualitative factor and evaluate the current condition and
trend of each factor.  Based on this evaluation, we assign a positive,
negative or neutral grade to each factor to determine whether the portion of the
qualitative reserve is in the high, middle or low end of the range for each
factor.  Because of the subjective nature of these factors and the
judgments required to determine the estimated ranges, the actual losses incurred
can vary significantly from the estimated amounts.
 
 Management
believes that our allowance for loan losses as of September 30, 2009 was
adequate to absorb the known and inherent risks of loss in the loan portfolio at
that date. While management believes the estimates and assumptions used in its
determination of the adequacy of the allowance are reasonable, there can be no
assurance that such estimates and assumptions will not be proven incorrect in
the future, or that the actual amount of future provisions will not exceed the
amount of past provisions or that any increased provisions that may be required
will not adversely impact our financial condition and results of operations. In
addition, the determination of the amount of the Bank’s allowance for loan
losses is subject to review by bank regulators, as part of the routine
examination process, which may result in the establishment of additional
reserves based upon their judgment of information available to them at the time
of their examination.
 
 The
provision for loan losses was $24.9 million and $10.1 million, respectively, for
the quarters ended September 30, 2009 and 2008.  The provision for
loan losses recorded during the quarter was primarily due to the increase in our
non-performing loans and other loans of concern.  The provision for
loan losses was recorded based on an analysis of the factors referred to
above.  Non-performing loans as of September 30, 2009 were $298.6
million, compared to $154.9 million at December 31, 2008.  The
increase in non-performing loans was caused by net increases of $76.8 million in
multi-family loans, $52.7 million in commercial real estate loans, $39.5 million
in commercial and multi-family construction loans, $4.6 million in land
development related loans and $2.2 million in other loans, partially offset by
decreases of $32.0 million in residential and condominium conversion
construction loans primarily due to charge-offs and migration to other real
estate owned status.  Other loans of concern as of September 30, 2009
were $277.5 million, compared to $114.6 million at December 31,
2008.  The increase during the current period was primarily caused by
the net addition of $63.9 million of multi-family real estate loans, $55.6
million of construction and land related loans and $42.9 million of commercial
real estate loans.  As a percentage of our total loan portfolio, the
amount of non-performing loans was 11.69% and 5.53% at September 30, 2009 and
December 31, 2008, respectively.
 
 We
continue to aggressively monitor our real estate loan portfolio, including our
construction and land loan portfolio.  Our construction and land loan
portfolio at September 30, 2009 totaled $333.3 million, of which $133.6 million
were residential and condominium conversion construction loans, $172.3 million
were commercial and other construction related loans and $27.4 million were land
development loans, representing 5.2%, 6.7% and 1.1%, respectively, of our total
loan portfolio.  Within the residential and condominium conversion
construction and land development loan portfolios, approximately 47.2%, 35.4%,
6.7% and 5.4% of the underlying collateral was located in California, New York,
Pennsylvania and Florida, respectively, while 29.5%, 24.9% and 16.6% within the
commercial and other construction related loans were located in California,
Texas and Arizona, respectively.  At September 30, 2009, we had $38.9
million, $55.7 million and $18.8 million of non-performing lending relationships
within our residential and condominium conversion construction loans, commercial
and other construction related loans and land development loans,
respectively.  Of these non-performing loans, twelve relationships,
with an aggregate balance of $47.3 million, were located in California
(primarily in Los Angeles, Orange County and the Central Valley).
 
 -36-
 Table of Contents
 
 The
allowance for loan losses as a percentage of our total loans was 2.87% at
September 30, 2009 compared to 1.81% at December 31, 2008.  We believe
that these reserves levels were adequate to support known and inherent losses in
our loan portfolio and for specific reserves as of September 30, 2009 and
December 31, 2008, respectively.  The allowance for loan losses is
impacted by inherent risk in the loan portfolio, including the level of our
non-performing loans and other loans of concern, as well as specific reserves
and charge-off activity.
  During
the quarter ended September 30, 2009, we had net loan charge-offs of $26.5
million as compared to $9.5 million during the same period last
year.  The current period charge-offs primarily consisted of $12.7
million of multi-family real estate loans, $9.4 million charge-offs related to
construction and land development loans and $3.9 million of commercial real
estate loans.  The charge-offs taken have reduced the balances on the
loans to the estimated value of the underlying real estate collateral based upon
recent appraisals.  See also – “Credit Risk”.
 
 Non-Interest
Income (Loss)
 
 Non-interest
loss was ($2.1 million) during the quarter ended September 30, 2009 as compared
to ($4.4 million) for the same period last year.  During the quarter,
we recognized a $425,000 impairment charge on our corporate sponsored CMOs
held-to-maturity, a $446,000 impairment booked on our corporate sponsored CMOs
available-for-sale, as well as a $1.9 million impairment charge recorded in
connection with our investments in low-income housing tax
credits.  Non-interest income typically consists of late fees and
other miscellaneous fees earned on customer accounts.
 
 Non-Interest
Expense
 
 Non-interest
expense totaled $22.7 million for the quarter ended September 30, 2009, compared
to $13.5 million for the same period last year.  The increase in
non-interest expense primarily related to a $7.9 million increase in other
general and administrative costs primarily related to an increase in our accrual
for FDIC quarterly insurance premiums due to an increase in our assessment
rates, and a $4.1 million increase in expenses associated with real estate owned
and other foreclosed assets.  The increase in expenses associated with
real estate owned primarily related to a $2.8 million provision recorded during
the quarter in connection with a decline in the estimated fair value of these
properties, as well as an increase of $1.3 million in operating costs incurred
related to other real estate owned, which was caused primarily by the increase
in foreclosed properties owned during the current period.  This
increase was partially offset by a $2.4 million decline in compensation and
benefits, which was primarily related to a workforce reduction.  Our
efficiency ratio (defined as general and administrative expenses as a percentage
of net revenue) was 106.1% for the quarter ended September 30, 2009, as compared
to 52.5% for the same period last year.  The increase in our
efficiency ratio was primarily caused by the $5.1 million increase in general
and administrative expenses and the $9.9 million decrease in net interest
income.
 
 -37-
 Table of Contents
 
 Provision
for Income Taxes
 
 Provision
for income taxes was zero and $350,000, respectively, for the quarters ended
September 30, 2009 and 2008.  During the current year, the Company
established a valuation allowance on its remaining net deferred tax assets due
to uncertainty related to our ability to realize these assets.  In
connection with management’s assessment of its deferred tax asset, it was
determined that it was more likely than not that these assets will not be
realized.
 
  Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
  
 Executive
Summary
  Consolidated
net loss was $112.0 million, or $20.64 per diluted share, for the nine months
ended September 30, 2009, compared to net income of $3.6 million, or $0.66 per
diluted share, for the same period last year.  The decline in net
income during the current period was primarily caused by a $63.1 million
increase in provision for loan losses recorded in connection with the increase
in our non-performing loans and other loans of concern and a $16.8 million
increase in provision for income taxes that was recorded to provide for a
valuation allowance against our remaining net deferred tax assets due to
uncertainty regarding the realizability of these assets.  Our results
were also negatively impacted by an increase of $21.4 million in non-interest
expense caused by an increase in our accrual for FDIC quarterly insurance
premiums and a special FDIC insurance assessment incurred during the current
period.
 
 Net
interest income before provision for loan losses decreased 23.7% to $56.3
million for the nine months ended September 30, 2009, compared to $73.7 million
for the same period last year.  This decrease was primarily due to a
decline in interest earned on our loan portfolio, partially offset by an
increase in interest income earned on our cash and investment securities and a
decrease in interest expense incurred on our interest bearing
liabilities.
 
 The
provision for loan losses was $83.7 million and $20.6 million, respectively, for
the nine months ended September 30, 2009 and 2008.  As discussed in
detail above, the increase in provision for loan losses during the current nine
month period was primarily due to the increase in our non-performing loans and
other loans of concern.
 
 The
(loss) return on average assets was (3.40%) for the nine months ended September
30, 2009, compared to 0.12% for the same period last year.  The (loss)
return on average shareholders’ equity was (100.68%) for the nine months ended
September 30, 2009, compared to 2.10% for the same period last
year.
 
 Loan
originations were $6.9 million for the nine months ended September 30, 2009,
compared to $278.1 million for the same period last year.  All of the
loans originated during the current nine month period were small balance
multi-family real estate loans.  Loan originations for the same period
last year consisted of $120.8 million of commercial real estate loans, $87.1
million of small balance multi-family real estate loans, and $70.1 million of
entertainment finance loans.
 
 -38-
 Table of Contents
 
 Net
Interest Income and Margin
 
 The
following table presents for the nine months ended September 30, 2009 and 2008,
our condensed average balance sheet information, together with interest income
and yields earned on average interest earning assets and interest expense and
rates paid on average interest bearing liabilities.  Average balances
are computed using daily average balances.  Nonaccrual loans are
included in loans receivable.
 
 For
      the Nine Months Ended September 30,2009
              
              
              2008Average
      Balance
              
              
              Income/Expense
              
              
              Yield/Rate
              
              
              Average
      Balance
              
              
              Income/Expense
              
              
              Yield/Rate(dollars
      in thousands)AssetsCash
      and investment securities
              
              $
              1,635,673
              
              
              $
              58,099
              
              
              
              4.75
              %
              
              $
              739,774
              
              
              $
              40,418
              
              
              
              7.30
              %Loans
      receivable
              
              
              2,698,102
              
              
              
              114,438
              
              
              
              5.67
              %
              
              
              3,055,638
              
              
              
              151,442
              
              
              
              6.62
              %Total
      interest earning assets
              
              
              4,333,775
              
              
              $
              172,537
              
              
              
              5.32
              %
              
              
              3,795,412
              
              
              $
              191,860
              
              
              
              6.75
              %Non-interest
      earning assets
              
              
              133,548
              
              
              
              
              
              
              
              
              
              
              
              81,452Allowance
      for loan losses
              
              
              (63,264
              )
              
              
              
              
              
              
              
              
              
              
              (50,049
              )Total
      assets
              
              $
              4,404,059
              
              
              
              
              
              
              
              
              
              
              $
              3,826,815Liabilities
      and Shareholders’ EquityInterest
      bearing deposit accounts:Interest
      bearing demand
              
              $
              52,586
              
              
              $
              583
              
              
              
              1.48
              %
              
              $
              32,981
              
              
              $
              776
              
              
              
              3.14
              %Money
      market and passbook
              
              
              483,096
              
              
              
              7,359
              
              
              
              2.04
              %
              
              
              281,335
              
              
              
              7,822
              
              
              
              3.71
              %Time
      certificates
              
              
              2,463,062
              
              
              
              66,557
              
              
              
              3.61
              %
              
              
              1,970,853
              
              
              
              65,771
              
              
              
              4.46
              %Total interest bearing deposit
      accounts
              
              
              2,998,744
              
              
              
              74,499
              
              
              
              3.32
              %
              
              
              2,285,169
              
              
              
              74,369
              
              
              
              4.35
              %FHLB
      advances and other borrowings
              
              
              1,118,861
              
              
              
              37,063
              
              
              
              4.43
              %
              
              
              1,178,684
              
              
              
              38,187
              
              
              
              4.33
              %Junior
      subordinated debentures
              
              
              86,600
              
              
              
              4,708
              
              
              
              7.27
              %
              
              
              86,600
              
              
              
              5,556
              
              
              
              8.57
              %Total
      interest bearing liabilities
              
              
              4,204,205
              
              
              $
              116,270
              
              
              
              3.70
              %
              
              
              3,550,453
              
              
              $
              118,112
              
              
              
              4.44
              %Non-interest
      bearing demand accounts
              
              
              9,424
              
              
              
              
              
              
              
              
              
              
              
              9,332Other
      non-interest bearing liabilities
              
              
              41,662
              
              
              
              
              
              
              
              
              
              
              
              39,531Shareholders’
      equity
              
              
              148,768
              
              
              
              
              
              
              
              
              
              
              
              227,499Total liabilities andshareholders’
      equity
              
              $
              4,404,059
              
              
              
              
              
              
              
              
              
              
              $
              3,826,815Net
      interest spread (1)
              
              
              
              
              
              
              
              
              
              
              1.62
              %
              
              
              
              
              
              
              
              
              
              
              2.31
              %Net
      interest income before provisionfor
      loan losses
              
              
              
              
              
              $
              56,267
              
              
              
              
              
              
              
              
              
              
              $
              73,748Net
      interest margin (2)
              
              
              
              
              
              
              
              
              
              
              1.74
              %
              
              
              
              
              
              
              
              
              
              
              2.60
              %
 ____________
 (1)
              Average
      yield on interest earning assets minus average rate paid on interest
      bearing liabilities.
 (2)
              Net
      interest income divided by total average interest earning
      assets.
 
 The
following table sets forth a summary of the changes in interest income and
interest expense resulting from changes in average interest earning asset and
interest bearing liability balances and changes in average interest
rates.  The change in interest due to both volume and rate has been
allocated to change due to volume and rate in proportion to the relationship of
absolute dollar amounts of each.
  -39-
 Table of Contents
  For
      the Nine Months EndedSeptember
      30, 2009 and 2008Increase
      (Decrease) Due to:Rate
              
              
              Volume
              
              
              Total(in
      thousands)Interest
      and fees earned from:Cash
      and investment securities
              
              $
              (17,943
              )
              
              $
              35,624
              
              
              $
              17,681Loans
              
              
              (20,384
              )
              
              
              (16,620
              )
              
              
              (37,004
              )Total
      (decrease) increase in interest income
              
              
              (38,327
              )
              
              
              19,004
              
              
              
              (19,323
              )Interest
      paid on:Deposit
      accounts
              
              
              (19,969
              )
              
              
              20,099
              
              
              
              130FHLB
      advances and other borrowings
              
              
              860
              
              
              
              (1,984
              )
              
              
              (1,124
              )Junior
      subordinated debentures
              
              
              (848
              )
              
              
              —
              
              
              
              (848
              )Total
      (decrease) increase in interest expense
              
              
              (19,957
              )
              
              
              18,115
              
              
              
              (1,842
              )(Decrease)
      increase in net interest income
              
              $
              (18,370
              )
              
              $
              889
              
              
              $
              (17,481
              )
 
 Total
interest income decreased $19.3 million to $172.5 million for the nine
months ended September 30, 2009 as compared to $191.9 million for the same
period last year. The decrease in interest income was primarily attributable to
a $357.5 million and 95 basis point decline in the average balance and yield
earned on total loans receivable, a 255 basis point decline in the average yield
earned on cash and investment securities and an increase in the average balance
of non-performing loans, partially offset by an $895.9 million increase in
the average balance on cash and investment securities.
 
 The
average balance of cash and investment securities increased to $1.6 billion for
the nine months ended September 30, 2009, as compared to $739.8 million during
the same period last year.  The average balance of our investment
securities held-to-maturity was $886.9 million during the nine months ended
September 30, 2009, as compared to $562.1 million for the same period last
year.  As previously discussed, this increase was primarily related to
the purchase of approximately $861.6 million of corporate sponsored CMOs during
the second and third quarters of 2008.  The average balance of cash
and cash equivalents was $397.7 million and $6.2 million during the nine months
ended September 30, 2009 and 2008, respectively.  This increase was
primarily related to the additional liquidity maintained on our balance sheet
compared to the same period last year.  The average balance of
investment securities available-for-sale was $350.4 million and $170.1 million
for the nine months ended September 30, 2009 and 2008,
respectively.  As discussed below in the “Financial Condition”
section, this increase primarily consisted of the acquisition of U.S. Treasury
and GNMA securities during the current period.  The average yield
earned on our cash and investment securities decreased to 4.75% during the nine
months ended September 30, 2009, as compared to 7.30% for the same period last
year.  The average yield earned during the nine months ended September
30, 2009 on our investment securities held-to-maturity was 7.64%, as compared to
7.76% for the same period last year.  This increase was offset by an
increase in the average balance of lower yielding cash and cash equivalents and
U.S. Treasury and GNMA available-for-sale securities acquired during the current
year as compared to the same period last year.
 
 -40-
 Table of Contents
 
 The
average aggregate balance of our loan portfolio was $2.7 billion and $3.1
billion, respectively, for the nine month periods ended September 30, 2009 and
2008.  Commercial real estate loans had an average aggregate balance
of $557.0 million during the nine months ended September 30, 2009 compared to
$597.6 million during the same period last year.  Construction and
land loans had an average aggregate balance of $375.2 million during the nine
months ended September 30, 2009 compared to $438.7 million during the same
period last year.  Multi-family real estate loans had an average
aggregate balance of $1.7 billion during the nine months ended September 30,
2009 compared to $1.9 billion during the same period last
year.  Single-family residential loans had an average aggregate
balance of $10.6 million during the nine months ended September 30, 2009
compared to $12.5 million during the same period last year.  The
average aggregate balance of entertainment finance loans was $39.8 million and
$66.5 million during the nine months ended September 30, 2009 and 2008,
respectively.  The declines in the average loan balances were due to
loan paydowns, charge-offs incurred on non-performing loans, the transfer of
loans to other real estate owned and substantially reduced origination
levels.
 
 The
average yield earned on total loans decreased to 5.67% during the nine months
ended September 30, 2009 as compared to 6.62% during the same period last
year.  The decrease in yield was primarily due to adjustable rate
loans repricing to lower current market interest rates and an increase in the
average balance of non-performing loans.  The accrual of interest has
been suspended on all of our non-performing loans.
 
 Total
interest expense decreased by $1.8 million to $116.3 million for the nine months
ended September 30, 2009, compared to $118.1 million for the same period last
year.  The decrease in interest expense was primarily attributable to
a 74 basis points decline in the average rate paid on interest bearing
liabilities, primarily caused by deposits repricing to lower current market
interest rates.  This decrease was partially offset by a $713.6
million increase in the average balance of interest bearing
deposits.
 
 Our
average cost of funds decreased to 3.70% during the nine months ended September
30, 2009, compared to 4.44% for the same period last year.  As
discussed above, the decrease in the average funding costs was primarily due to
deposits repricing to lower current market interest rates.  The
average rate paid on deposit accounts was 3.32% during the nine months ended
September 30, 2009, as compared to 4.35% for the same period last
year.  The average balance of deposit accounts increased by $713.6
million to $3.0 billion for the nine months ended September 30, 2009 as compared
to $2.3 billion for the same period last year.  The average rate paid
on FHLB advances and other borrowings was 4.43% during the nine months ended
September 30, 2009 compared to 4.33% for the same period last
year.  FHLB advances and other borrowings averaged $1.1 billion during
the nine month period ended September 30, 2009, compared to $1.2 billion for the
same period last year.
 
 Net
interest margin decreased to 1.74% for the nine months ended September 30, 2009
as compared to 2.60% for the same period last year.
 
 Provision
for Loan Losses
 
 The
consolidated provision for loan losses was $83.7 million and $20.6 million for
the nine months ended September 30, 2009 and 2008, respectively.  The
provision for loan losses was recorded based on an analysis of the factors
referred to above in the discussion regarding the three months ended September
30, 2009 and 2008.  During the nine months ended September 30, 2009
and 2008, we had net loan charge-offs of $61.1 million and $16.6 million,
respectively. The current period net charge-offs primarily consist of $31.1
million of construction and land related loans, $24.1 million of multi-family
residential loans and $5.0 million of commercial real estate
loans.  See management’s discussion of the provision for loan losses
for the three months ended September 30, 2009 and 2008 for additional discussion
regarding the provision for loan losses incurred during the current period and
the corresponding methodology.
 
 -41-
 Table of Contents
 
 Non-Interest
Income (Loss)
 
 Non-interest
loss was ($2.1 million) for the nine months ended September 30, 2009 as compared
to ($5.3 million) for the same period last year.  Non-interest loss
primarily consisted of a $4.5 million other-than-temporary impairment charge
recognized during the second and third quarters, a $1.9 million impairment
charge recorded in connection with our investments in low-income housing tax
credits and a $1.1 million fee incurred in connection with the early settlement
of our $30.0 million other borrowing during the first quarter of this
year.  These losses were partially offset by $4.2 million of gains
recognized during the first and second quarters in connection with the sale of
investment securities available-for-sale.
 
 Non-Interest
Expense
 
 Non-interest
expense totaled $63.3 million for the nine months ended September 30, 2009,
compared to $41.9 million for the same period last year.  The increase
in non-interest expense primarily related to a $17.4 million increase in other
general and administrative costs primarily related to an increase in our accrual
for FDIC quarterly insurance premiums and a special FDIC insurance assessment
that was accrued during the second quarter of this year, and a $9.8 million
increase in expenses associated with real estate owned and other foreclosed
assets.  This increase primarily related to an $8.1 million provision
recorded during the year in connection with a decline in the estimated fair
value of these properties, as well as an increase of $3.1 million in costs
incurred related to other real estate owned, which was caused primarily by the
increase in foreclosed properties owned during the current
period.  This increase was partially offset by a $5.0 million decline
in compensation and benefits, which was primarily related to a workforce
reduction.  Our efficiency ratio was 93.6% for the nine months ended
September 30, 2009, as compared to 57.0% for the same period last
year.  The increase in our efficiency ratio was primarily caused by
the $11.7 million increase in general and administrative expenses and the $17.5
million decrease in net interest income.
 
 Provision
for Income Taxes
 
 Provision
for income taxes was $19.2 million and $2.3 million, respectively, for the nine
months ended September 30, 2009 and 2008.  During the current year,
the Company established a valuation allowance on its remaining net deferred tax
assets due to uncertainty related to our ability to realize these
assets.  In connection with management’s assessment of its deferred
tax asset, it was determined that it was more likely than not that these assets
will not be realized.
  -42-
 Table of Contents
  FINANCIAL
CONDITION
  Total
assets decreased $396.8 million to $4.0 billion at September 30, 2009, compared
to $4.4 billion at December 31, 2008.  The decrease in total assets
was primarily due to a $245.2 million decrease in loans caused primarily by loan
paydowns received, charge-offs incurred on non-performing loans and the transfer
of loans to other real estate owned during the current year-to-date
period.  The decline in assets was further impacted by a decline in
our cash and cash equivalents caused by the reduction in our FHLB advances and
other borrowings and deposits.  FHLB advances and other borrowings and
deposits declined by $152.2 million and $132.3 million, respectively, during the
current period.  Investment securities held-to-maturity also declined
by $136.2 million caused by the normal amortization of these securities and the
impact of an OTTI charge incurred during the current year.  The
decrease in total assets was partially offset by a $91.5 million increase in
investment securities available-for-sale and a $50.8 million increase in other
real estate owned.  Additionally, brokered deposits decreased to
$659.3 million at September 30, 2009, compared to $739.9 million at December 31,
2008.  We expect these deposits to decline further as they continue to
mature in the future.  Approximately $164.6 million of our brokered
deposits mature within the next twelve months.  Management believes
that a significant portion of insured non-brokered time deposits will remain
with us upon maturity based on our historical experience regarding retention of
deposits.  At September 30, 2009, gross loans totaled $2.6 billion,
including approximately $2.5 billion of real estate loans, $15.1 million of
entertainment finance loans, and $10.6 million of other loans.
 
 The
Company recognized a $3.2 million OTTI during the three months ended September
30, 2009 on three held-to-maturity corporate sponsored CMOs, of which $425,000
was identified as credit related and was recorded in earnings.  During
the nine months ended September 30, 2009, the Company recognized a $14.5 million
OTTI on six held-to-maturity corporate sponsored CMOs, of which $3.0 million was
identified as credit related and was recorded in earnings.  The
Company also recognized a $2.1 million OTTI during the three months ended
September 30, 2009 on two available-for-sale corporate sponsored CMOs, of which
$446,000 was identified as credit related and was recorded in
earnings.  These OTTI charges were determined based on anticipated
adverse changes to the projected cash flows for each of these securities caused
by, among other things, an increase in projected collateral losses, a change in
historical prepayment speeds, and a deterioration in the current level of
subordination.
 
 The
Company also recognized a $1.0 million OTTI during the nine months ended
September 30, 2009 on an available-for-sale corporate bond.  The
entire $1.0 million was identified as a credit related OTTI charge and,
accordingly, was recognized in earnings.  This OTTI was primarily due
to a downgrade in the credit rating of the bond to below investment grade and a
substantial deterioration in the underlying collateral, which primarily consists
of trust preferred securities issued by banks and insurance companies
geographically dispersed across the United States.  As of September
30, 2009 and December 31, 2008, investment securities held-to-maturity had gross
unrealized losses of $110.7 million and $235.8 million,
respectively.  Management does not have the intent to sell the
securities classified as held-to-maturity nor is it more likely than not that
the Company will have to sell these securities before the recovery of their cost
basis or, in the case of securities accounted for under FASB ASC 310-30, the
contractually required payments less the nonaccretable
difference.  Furthermore, management also does not have the intent to
sell the securities classified as available-for-sale nor is it more likely than
not that the Company will have to sell these securities before the recovery of
their cost basis. The unrealized losses are largely due to increases in market
interest rates over the yields available at the time the underlying securities
were purchased. The fair value is expected to recover as these securities
approach their maturity date or repricing date or if market yields for such
investments decline.  Management does not believe any of our
securities, with the exception of the nonaccretable difference identified at
acquisition with respect to the investments accounted for under FASB ASC 310-30,
are impaired due to reasons of credit quality. Accordingly, management believes
the investment impairments are temporary.
  -43-
 Table of Contents
 
 CREDIT
RISK
 
 Non-performing
Assets, Other Loans of Concern and Allowance for Loan Losses
 
 The
following table sets forth our non-performing assets by category and troubled
debt restructurings as of the dates indicated.
 
 September
      30,2009
              
              
              December
      31,2008(dollars
      in thousands)Nonaccrual
      loans:Real
      estate
              
              $
              182,548
              
              
              $
              53,034Construction
      and land
              
              
              113,400
              
              
              
              101,357Entertainment
      finance
              
              
              2,656
              
              
              
              6Other
              
              
              —
              
              
              
              463Total
      nonaccrual loans
              
              
              298,604
              
              
              
              154,860Other
      real estate and other assets owned, net
              
              
              88,793
              
              
              
              38,031Total
      non-performing assets
              
              
              387,397
              
              
              
              192,891Performing
      troubled debt restructurings
              
              
              386
              
              
              
              7,965Total
      non-performing assets and performing troubled debt
      restructurings
              
              $
              387,783
              
              
              $
              200,856Nonaccrual
      loans to total loans
              
              
              11.69
              %
              
              
              5.53
              %Allowance
      for loan losses to nonaccrual loans
              
              
              24.51
              %
              
              
              32.66
              %Non-performing
      assets to total assets
              
              
              9.58
              %
              
              
              4.34
              %
 
 Non-performing
assets were $387.4 million and $192.9 million, representing 9.58% and 4.34% of
total assets as of September 30, 2009 and December 31, 2008,
respectively.  As of September 30, 2009, non-performing loans
primarily consisted of $38.9 million residential and condominium conversion
construction real estate loans, $18.8 million of land development loans, $55.7
million of other construction projects, $118.1 million of multi-family loans and
$64.1 million in commercial real estate loans.  The allowance for loan
loss coverage ratio (defined as the allowance for loan losses divided by
non-accrual loans) was 24.5% at September 30, 2009 as compared to 32.7% at
December 31, 2008.  In addition, our other real estate and other
assets owned increased to $88.8 million at September 30, 2009, as compared to
$38.0 million at December 31, 2008.  As of September 30, 2009, other
real estate and other assets owned consisted of $35.8 million of multi-family
real estate, $22.3 million of residential and condominium conversion
construction projects, $12.3 million of residential land development, $11.4
million of commercial and multi-family construction projects and $7.0 million of
commercial real estate loans.
 
 -44-
 Table of Contents
 
 The
majority of non-accrual loans are within our multi-family real estate loan
portfolio, our construction and land development loan portfolio and our
commercial real estate loan portfolio, which represented approximately 39.6%,
38.0% and 21.5%, respectively, of our non-accrual loans at September 30,
2009.  The non-accrual multi-family real estate loans primarily
consisted of a large number of smaller credit relationships with an average
balance of approximately $780,000 as of September 30, 2009.  At
September 30, 2009, there were two multi-family real estate loans greater than
$5.0 million that represented approximately 12.0% of the non-accrual loans
within this segment.  The following is a description of these two
multi-family real estate loans as of September 30, 2009:
 
 ·
              422
      unit apartment complex constructed in 1955 on approximately 13 acres of
      land secured by subject property located in Pasadena, TX.  This
      loan was originated in December 2005 to renovate the building, which was
      completed in 2007.  The borrower is an established real estate
      developer in the area and the building is 86% occupied.  The net
      loan balance as of September 30, 2009 was $9.2 million.  The
      Bank had no charge-offs related to this credit and there was no loan loss
      reserve specifically allocated to this credit relationship at the end of
      the period.
 ·
              60
      buildings consisting of 120 apartment units constructed in 1981 on
      approximately 11 acres of land located in Palmetto, FL.  The
      loan is secured by subject property and was originated in April 2007 to
      renovate the complex, which was completed in May 2008.  The
      borrower is an established real estate developer in the area and the
      property is currently 69% occupied.  The net loan balance as of
      September 30, 2009 was $5.0 million.  The Bank has no
      charge-offs related to this credit and there was no loan loss reserve
      allocated to this credit relationship at the end of the
      period.
 
 At
September 30, 2009, there were nine construction and land development loans
greater than $5.0 million that represented approximately 52.4% of the
non-accrual loans within this segment.  The following is a description
of these nine construction and land development loans as of September 30,
2009:
 
 ·
              Mixed-use
      construction project consisting of an approximately 70,000 square foot
      facility located in Pearland, TX.  The loan is secured by
      subject property.  and was originated in June
      2006.  The primary construction of both the retail and office
      building was completed in October 2007.  The borrower is an
      established real estate developer in the area and the property is
      currently 58% occupied.  The net loan balance as of September
      30, 2009 was $9.0 million.  The Bank previously charged-off $2.0
      million related to this credit and there was no loan loss reserve
      specifically allocated to this credit relationship at the end of the
      period.
 ·
              Land
      development loan related to a 1.5 acre residential zoned parcel secured by
      subject property located in Los Angeles, CA.  The property is
      currently operated as a parking facility and was intended to be developed
      into condominiums.  This loan was originated in May 2008 and the
      borrower filed for Chapter 11 bankruptcy in March 2009.  The
      Bank is currently working to modify this loan in connection with a planned
      reorganization through bankruptcy.  The net loan balance as of
      September 30, 2009 was $9.0 million.  The Bank had no
      charge-offs related to this credit and there was no loan loss reserve
      specifically allocated to this credit relationship at the end of the
      period.
  -45-
 Table of Contents
  ·
              Multi-family
      construction loan that was initially originated to convert a 107 unit
      apartment complex into a for-sale condominium project.  The loan
      is secured by the subject property located in Tucson, AZ.  This
      loan was originated in March 2007 and the borrower is highly experienced
      in apartment acquisitions and is in the process of leasing the collateral
      due to the feasibility of the condo sales strategy. Approximately 30% of
      the units have been leased to date.  The Bank is currently
      negotiating a troubled debt restructuring with this
      borrower.  The net loan balance as of September 30, 2009 was
      $8.0 million.  The Bank has no charge-offs related to this
      credit and there was no loan loss reserve specifically allocated to this
      credit relationship at the end of the
period.
 ·
              16
      unit condominium construction project secured by subject property located
      in West Los Angeles, CA.  This loan was originated in May
      2007.  The borrower is an established real estate developer in
      the area but cost overruns and borrower delay resulted in the failure to
      complete and sell the units by the maturity date of the loan. The net loan
      balance as of September 30, 2009 was $7.1 million and there was no loan
      loss reserve specifically allocated to this credit
      relationship.  The Bank previously charged-off $2.0 million
      related to this credit.
 ·
              Retail
      construction of an approximately 29,000 square foot facility secured by
      subject property located in Albuquerque, NM.  This loan was
      originated in May 2006.  The borrower is an established real
      estate developer in the area but cost overruns and permitting issues
      caused the borrower to default on the loan in June 2008.  As of
      September 30, 2009, the borrower had ceded control of the property to the
      Bank and the property was foreclosed upon in October 2009.  As
      of September 30, 2009, the property was 86% leased and 75%
      occupied.  The net loan balance as of September 30, 2009 was
      $5.6 million and there was no loan loss reserve specifically allocated to
      this credit relationship.  The Bank previously charged-off
      $141,000 related to this credit.
 ·
              Rehabilitation
      and modernization of a 16 unit multi-family property constructed in 1955
      secured by subject property located in Philadelphia, PA.  This
      loan was originated in December 2006.  The borrower is an
      established operator of multi-family properties in Philadelphia, PA. At
      September 30, 2009, occupancy was approximately 39% and approximately 34%
      of the units have been renovated.  The Bank expects to foreclose
      on the collateral real estate before the end of 2009.  The net
      loan balance as of September 30, 2009 was $5.4 million and there was no
      loan loss reserve allocated to this credit relationship.  The
      Bank previously charged-off $141,000 related to this
    credit.
 ·
              Commercial
      construction loan to expand a self storage facility from 554 units to
      1,048 units secured by subject property located in Phoenix,
      AZ.  This loan was originated in November 2007 and a foreclosure
      sale is scheduled for December 2009.  The borrower is
      experienced in commercial real estate construction in the Southwest
      region.  Construction was completed in July 2008 and leasing
      activity commenced in August 2008.  The net loan balance as of
      September 30, 2009 was $5.2 million and there was no loan loss reserve
      specifically allocated to this credit relationship.  The Bank
      previously charged-off $3.2 million related to this
  credit.
  -46-
 Table of Contents
  ·
              Condominium
      conversion project related to a 200 unit building secured by subject
      property located in Orlando, FL.  This loan was originated in
      December 2006, the borrower defaulted on the loan in June 2008 and a
      foreclosure sale is scheduled for December 2009.  The project is
      approximately 80% complete.  The borrower is experienced in
      condominium conversion projects in the area.  At origination,
      102 of the 200 units were pre-sold but construction delays and cost
      overruns have caused unit sales to slow due to the real estate market in
      Florida.  The net loan balance as of September 30, 2009 was $5.1
      million and there was no loan loss reserve specifically allocated to this
      credit relationship.  The Bank previously charged-off $5.3
      million related to this credit.
 ·
              Commercial
      real estate construction project related to the development of a 72,000
      square foot facility secured by subject property located in Pearland,
      TX.  This loan was originated in July 2007 and the office
      building was completed in February 2009.  The borrower is an
      established real estate developer in the area and the property is
      currently 14% occupied.  The net loan balance as of September
      30, 2009 was $5.0 million and there was no loan loss reserve specifically
      allocated to this credit relationship.  The Bank previously
      charged-off $3.8 million related to this
credit.
 
 At
September 30, 2009, there were four commercial real estate loans greater than
$5.0 million that represented approximately 64.3% of the non-accrual loans
within this segment.  The following is a description of these four
commercial real estate loans as of September 30, 2009:
 
 ·
              407,000
      square foot mall secured by subject property located in Nampa,
      ID.  This loan was originated in September 2007.  The
      borrower is an established commercial real estate developer in the area;
      however the property has performed poorly due to current economic
      conditions in the area.  Two of the mall’s anchor tenants have
      vacated their space.  The net loan balance as of September 30,
      2009 was $17.2 million and there was no loan loss reserve specifically
      allocated to this credit relationship.  The Bank previously
      charged-off $3.3 million related to this
credit.
 ·
              Financing
      of the assemblage of two land parcels totaling 40,000 square feet secured
      by subject property located in San Diego, CA.  This loan was
      originated in August 2006, the borrower defaulted in March 2008 and the
      Bank foreclosed on the property in October 2009.  The net loan
      balance as of September 30, 2009 was $9.6 million and there was a $2.8
      million loan loss reserve specifically allocated to this credit
      relationship.  The Bank previously charged-off $924,000 related
      to this credit.
 ·
              Commercial
      real estate loan related to a 182,000 square foot shopping mall secured by
      subject property located in Helena, MT.  This loan was
      originated in March 1999.  The loan matured in April
      2009.  The Bank is currently negotiating a loan modification
      with the borrower.  The net loan balance as of September 30,
      2009 was $7.5 million and there was no loan loss reserve specifically
      allocated to this credit relationship.  The Bank has no
      charge-offs related to this credit.
 ·
              Commercial
      real estate loan related to an industrial property secured by subject
      property located in downtown Los Angeles, CA.  This loan was
      originated in September 2005 and was currently 35% leased at September 30,
      2009.  The borrower filed for Chapter 11 Bankruptcy in March
      2009.  The Bank is currently negotiating a loan modification
      with the borrower in connection with a planned
      reorganization.  The net loan balance as of September 30, 2009
      was $7.0 million and there was no loan loss reserve specifically allocated
      to this credit relationship.  The Bank has no charge-offs
      related to this credit.
 
 -47-
 Table of Contents
 
 The
following table provides certain information with respect to our allowance for
loan losses, including charge-offs, recoveries and selected ratios for the
periods indicated.
 
 For
      the Nine
                Months
      Ended
                September
      30,2009
              
              
              For
      the Year
                Ended
                December
      31,2008
              
              
              For
      the Nine Months Ended
                September
      30,2008(dollars
      in thousands)Balance
      at beginning of period
              
              $
              50,574
              
              
              $
              47,783
              
              
              $
              47,783Provision
      for loan losses
              
              
              83,677
              
              
              
              77,965
              
              
              
              20,625Charge-offsReal
      estate loans
              
              
              (29,435
              )
              
              
              (18,521
              )
              
              
              (9,298
              )Construction
      and land loans
              
              
              (31,093
              )
              
              
              (56,243
              )
              
              
              (7,749
              )Entertainment
      finance loans
              
              
              (864
              )
              
              
              —
              
              
              
              —Franchise
      loans
              
              
              —
              
              
              
              —
              
              
              
              —Commercial
      and other loans
              
              
              —
              
              
              
              (1,159
              )
              
              
              (214
              )Total
      charge-offs
              
              
              (61,392
              )
              
              
              (75,923
              )
              
              
              (17,261
              )RecoveriesReal
      estate loans
              
              
              300
              
              
              
              184
              
              
              
              129Construction
      and land loans
              
              
              24
              
              
              
              60
              
              
              
              36Entertainment
      finance loans
              
              
              —
              
              
              
              505
              
              
              
              505Franchise
      loans
              
              
              —
              
              
              
              —
              
              
              
              —Commercial
      and other loans
              
              
              —
              
              
              
              —
              
              
              
              —Total
      recoveries
              
              
              324
              
              
              
              749
              
              
              
              670Net
      charge-offs
              
              
              (61,068
              )
              
              
              (75,174
              )
              
              
              (16,591
              )Balance
      at end of period
              
              $
              73,183
              
              
              $
              50,574
              
              
              $
              51,817Allowance
      for loan losses as a percentageof
      loans, net
              
              
              2.87
              %
              
              
              1.81
              %
              
              
              1.80
              %
 
 The
following table sets forth management’s historical allocation of the allowance
for loan losses by loan or contract category and the percentage of gross loans
in each category to total gross loans at the dates indicated.
 
 September
      30, 2009
              
              
              December
      31, 2008Loan
      Category:
              
              Allowance
                for
      loanlosses
              
              
              %
      of loans(1)
              
              
              Allowance
                for
      loanlosses
              
              
              %
      of loans(1)Secured
      by real estate
              
              $
              55,442
              
              
              
              86
              %
              
              $
              37,435
              
              
              
              83
              %Construction
      and land loans
              
              
              16,857
              
              
              
              13
              %
              
              
              12,270
              
              
              
              15
              %Entertainment
      finance
              
              
              499
              
              
              
              1
              %
              
              
              473
              
              
              
              2
              %Franchise
              
              
              197
              
              
              
              —
              
              
              
              261
              
              
              
              —Commercial
      and other
              
              
              188
              
              
              
              —
              
              
              
              135
              
              
              
              —Total
              
              $
              73,183
              
              
              
              100
              %
              
              $
              50,574
              
              
              
              100
              %
 ____________
 (1)
              Percentage
      represents gross loans in category to total gross
  loans.
  -48-
 Table of Contents
  Liquidity
 
 Liquidity
refers to our ability to maintain cash flows adequate to fund operations and
meet obligations and other commitments on a timely basis, including the payment
of maturing deposits and the origination or purchase of new loans.  We
maintain a cash and investment securities portfolio designed to satisfy
operating liquidity requirements while preserving capital and maximizing
yield.  As of September 30, 2009, we held $302.8 million of cash and
cash equivalents (consisting primarily of short-term investments with original
maturities of 90 days or less) and $238.3 million of investment securities
classified as available-for-sale.
 
 Short-term
fixed income investments classified as cash equivalents consisted of interest
bearing deposits at financial institutions, overnight repurchase agreement
investments, government money market funds and short-term government agency
securities, while investment securities available-for-sale consisted primarily
of fixed income instruments, which were rated “AAA”, or equivalent by nationally
recognized rating agencies.
 
 In March
2009, our credit facility with the FHLB of San Francisco was suspended until
further notice.  In September 2009, our credit facility with the
Federal Reserve Bank of San Francisco was suspended.  As a result, the
Bank is prohibited from receiving any additional borrowings from the FHLB or the
FRB until those suspensions are lifted.  Additionally, in March 2009,
the Bank’s $30.0 million repurchase agreement borrowing was called by the lender
prior to its maturity.  The Bank incurred a $1.1 million fee in 2009
in connection with the early settlement of this borrowing.  During the
quarter ended March 31, 2009, our $68.0 million of uncommitted, unsecured lines
of credit with three unaffiliated financial institutions were cancelled. As a
result of the Bank’s “undercapitalized” status, the Bank may not accept, renew
or roll over brokered deposits and the Bank may not solicit deposits yielding
more than 75 basis points over prevailing rates in either the Bank’s market area
or the area where deposits are solicited.  We believe that, although
these credit facilities are not presently available to us, we cannot add or
renew brokered deposits and we are restricted in the rates we can offer on
deposits, our current liquidity position, on-going cashflow from operations, and
retail deposits will meet our anticipated near-term funding needs, although no
assurance can be given in this regard.  Beginning on January 1, 2010,
all banks deemed to be less than “well capitalized” will be restricted from
paying deposit interest rates in excess of 75 basis points above the U.S.
average.  This rule change will further impair our ability to offer
competitive deposit rates and may adversely impact our future liquidity
position.
 
 -49-
 Table of Contents
 
 The Bank
assesses its liquidity position and adequacy by estimating its future sources
and uses of cash and liquidity. Under our current cash flow analysis, we believe
there is sufficient cash flow from our assets to meet our ongoing cash outflows
from maturing brokered CDs and FHLB advances.  Cash flows from assets
are estimated by modeling expected future cash inflows, consisting of both
scheduled and unscheduled collections from its loan and securities
portfolios.  Scheduled payments are estimated based on the assets’
contractual terms, adjusted to account for estimated defaults of contractual
amounts due.  Unscheduled payments, primarily consisting of principal
prepayments of loans and securities, are estimated based on an analysis of
historical prepayments and by applying an adjustment to reflect how future
prepayments are expected to differ from past experience.  For certain
assets, primarily those with single family residential mortgage loans as
collateral, third party prepayment models are used to model future prepayment
behavior.  Cash flows from deposits and FHLB advances are estimated
based on the contractual terms of those accounts and assumptions for the percent
of accounts that will renew upon maturity, and assumptions for the volume of new
accounts that will be added from new customers over time.  Although
the Bank has attempted to accurately model future cash flows of its assets and
liabilities, no assurance can be given that those estimates will be accurate or
that future market conditions will be consistent with those assumed when forming
its assumptions for scheduled and unscheduled cash flows.  If the cash
inflows from our assets are less than the amounts we have assumed in our
analysis, or if the cash outflows of our retail deposits are greater than the
amounts we have assumed, our liquidity position could be insufficient to meet
the Company’s ongoing requirements.
 
 At
September 30, 2009, the Company’s primary cash commitments consisted of upcoming
maturities of its retail deposit accounts, its brokered CDs, and FHLB
Advances.  Retail deposits consist of approximately $1.65 billion of
retail certificates of deposit.  These accounts are generally for a
fixed term, primarily for six months to one year.  As such, on
average, approximately one tenth of the Company’s retail certificate of deposit
portfolio will mature in any given month.  In addition to scheduled
maturities of retail deposits, the Company’s Brokered CDs and FHLB Advances are
also for fixed terms and a portion of the amounts of these portfolios also
become due and payable over time.  As of September 30, 2009, Brokered
CD maturities during the three months ending December 31, 2009, and the twelve
months ending December 31, 2010 and 2011, respectively, totaled $32.5 million,
$169.1 million, and $207.0 million.  FHLB Advance maturities during
the three months ending December 31, 2009, and the twelve months ending December
31, 2010 and 2011, respectively, totaled $50.0 million, $333.9 million, and
$182.5 million.
 
 Known
trends and uncertainties include changes in prepayment speeds on loans and
securities and the retention rate the Company has experienced on its maturing
retail CD accounts.  Over the past twelve months, the voluntary
prepayment rate on the Company’s loan portfolio has decreased to historically
low levels as the transaction volume and lending activity in the commercial and
multifamily real estate markets has slowed significantly.  The Company
has incorporated this slowdown in prepayment activity in its estimates of future
cash flow from its loan portfolio.  Also, the Company’s historical
retention rate on maturing retail CD accounts, on a monthly basis, has over the
past twelve months ranged from a low of 51% of maturing balances to a high of
75% of maturing balances, and averaged approximately 65% of maturing balances
over that period.  The Company’s deposit accounts are insured by the
FDIC up to legal limits, generally $250,000 per account holder.  To
date, the Company’s account retention rate has not been materially negatively
impacted due to the operating losses it has recorded or to the regulatory
restrictions it is operating under, and the Company has assumed a similar
retention rate on its future account maturities for purposes of evaluating
liquidity.  However, the maturing deposit account retention rate could
be negatively impacted due to a negative customer reaction to the Company’s
operating losses, decline in capital ratios, the regulatory orders or the rate
restrictions placed on the Bank.  Liquidity could also be negatively
impacted by margin calls on the Company’s secured FHLB borrowing
line.  If the retention rate on maturing CD accounts were to decline
significantly from the current levels, or if the Company was to receive a
significant margin call from the FHLB, liquidity would be negatively
impacted.  In addition, it is unclear as to what extent the
restrictions discussed above on the interest rates the Bank may offer deposit
customers as a result of the Bank’s regulatory capital status, as well as the
Bank’s declining capital condition, will have on the Bank’s continued ability to
maintain adequate liquidity.
 
 -50-
 Table of Contents
 
 Capital
Resources
 
 The Bank
had Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios at
September 30, 2009 of 3.83%, 4.83% and 6.10%, respectively, which represents
($7.1) million, $27.4 million and ($62.5) million, respectively, of capital in
excess (deficit) of the amount required to be “adequately capitalized” for
regulatory purposes.  These ratios were 6.04%, 8.04% and 9.30% as of
December 31, 2008, respectively.
 
 The
Company, the Bank’s holding company, had Tier 1 leverage, Tier 1 risk-based and
total risk-based capital ratios at September 30, 2009 of 2.52%, 3.18% and 6.19%,
respectively.  These ratios were 5.63%, 7.50% and 9.41% as of December
31, 2008, respectively.
 
 Based on
the Bank’s total risk-based capital ratio, the Bank was undercapitalized at
September 30, 2009. As a result of not being “adequately capitalized,” the
Bank’s borrowing costs and terms from the Federal Reserve Bank, the FHLB of San
Francisco (which has suspended the Bank’s credit facility) and other financial
institutions, as well as the Bank’s premiums to the Deposit Insurance Fund, may
increase further.  The Bank is also subject to other regulatory
restrictions, as described under Note 2 – “Regulatory Developments and Going
Concern Considerations” and Note 14 – “Subsequent Events” in the Notes to the
Unaudited Consolidated Financial Statements in this Form 10-Q.
 
 At
September 30, 2009, shareholders' equity totaled $69.6 million, or 1.7% of total
assets.  Our book value per share of common stock was $13.71 as of
September 30, 2009, as compared to $37.76 as of December 31, 2008, and $44.92 as
of September 30, 2008.
 
 As
discussed elsewhere in this report, the Bank is subject to various regulatory
restrictions that require the Bank to raise its capital levels, the most recent
of which, received from the DFI on November 6, 2009, requires the Bank to either
promptly find a suitable buyer or merger partner or, by December 14, 2009,
increase its tangible shareholders’ equity by the greater of (i) $200.0 million
or (ii) such amount as may be necessary to make tangible shareholders’ equity
equal to at least 9% of total tangible assets of the Bank.  As
reported in the Bank’s September 30, 2009 Consolidated Report of Condition (Call
Report), as of September 30, 2009, the Bank’s tangible shareholders’ equity was
$146.0 million and 9% of adjusted total tangible assets amounted to $364.2
million.  Accordingly, the amount of additional tangible shareholders’
equity needed to comply with the DFI’s capital demand requirement as of
September 30, 2009 was $218.2 million.  See Note 2 – “Regulatory
Developments and Going Concern Considerations” and Note 14 – “Subsequent Events”
in the Notes to the Unaudited Consolidated Financial Statements in this Form
10-Q.   To date, the Company’s efforts to achieve a capital
investment, sale, strategic merger or some form of restructuring have been
unsuccessful and it is highly unlikely that the Company will succeed in this
endeavor and be able to comply with applicable regulatory requirements. In
addition, any transaction involving equity financing would result in substantial
dilution to current stockholders and would adversely affect the price of the
Company's common stock.
 
 -51-
 Table of Contents
  Item 3. Quantitative and Qualitative Disclosures About Market
Risk
 
 Our
estimated sensitivity to interest rate risk, as measured by the estimated
interest earnings sensitivity profile and the interest sensitivity gap analysis,
has not materially changed from the information disclosed in our annual report
on Form 10-K for the year ended December 31, 2008.
 
  Item 4. Controls and Procedures
 
 (a)
Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the “Act”)) was carried out as of September 30,
2009 under the supervision and with the participation of the Company’s Chief
Executive Officer, Chief Financial Officer and several other members of the
Company’s senior management.  In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met.  Our disclosure controls and procedures
have been designed to meet, and management believes that they meet, reasonable
assurance standards.  Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.  Based on their
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that, as of September 30, 2009, the Company’s disclosure controls and
procedures were effective at the reasonable assurance level in ensuring that the
information required to be disclosed by the Company in the reports it files or
submits under the Act is (i) accumulated and communicated to the Company’s
management (including the Chief Executive Officer and Chief Financial Officer)
to allow timely decisions regarding required disclosure, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.
 
 (b)
Changes in Internal Control over Financial Reporting:  During the
quarter ended September 30, 2009, no change occurred in the Company’s internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
 
 -52-
 Table of Contents
 
 The
Company does not expect that its internal control over financial reporting will
prevent all error and all fraud.  A control procedure, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control procedure are
met.  Because of the inherent limitations in all control procedures,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake.  Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control.  The design of any
control procedure also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate.  Because of the inherent limitations in a cost-effective
control procedure, misstatements due to error or fraud may occur and not be
detected.
  -53-
 Table of Contents
  PART II - OTHER INFORMATION
   Item
1. Legal Proceedings
  We are
party to certain legal proceedings incidental to our
business.  Management believes that the outcome of such currently
pending proceedings, in the aggregate, will not have a material effect on our
financial condition or results of operations.
  Item 1A. Risk Factors
  Except as
set forth below, there have been no material changes to the risk factors set
forth in Part I. Item 1A of the Company’s Annual Report on Form 10-K for the
year ended December 31, 2008.
 
 Certain
regulatory actions have been taken against us, and additional restrictions apply
to us as a result of the Bank’s “undercapitalized” status.
 
 On
November 6, 2009, the Bank received a notification from the DFI stating that the
Bank is in critical condition and that the DFI may take extreme action against
the Bank unless the Bank promptly either increases its capital or, in the
alternative, merges or sells its business to another depository
institution.  The DFI Notification provides that if the Bank is to
comply with the DFI Notification by increasing its capital, the Bank must, by
December 14, 2009, increase its tangible shareholders’ equity by the greater of
(i) $200.0 million or (ii) such amount as may be necessary to make tangible
shareholders’ equity equal to at least 9% of total tangible assets of the
Bank.  As reported in the Bank’s September 30, 2009 Consolidated
Report of Condition and Income (Call Report), as of September 30, 2009, the
Bank’s tangible shareholders’ equity was $146.0 million and 9% of adjusted total
tangible assets amounted to $364.2 million.  Accordingly, the amount
of additional tangible shareholders’ equity needed to comply with the capital
requirement of the DFI Notification as of September 30, 2009 was $218.2 million.
To date, the Company’s efforts to achieve a capital investment, sale, strategic
merger or some form of restructuring have been unsuccessful and it is highly
unlikely that the Company will succeed in this endeavor and be able to comply
with applicable regulatory requirements. In addition, any transaction involving
equity financing would result in substantial dilution to current stockholders
and would adversely affect the price of the Company's common stock.
 
 The DFI
Notification is the most recent of the various regulatory actions that have been
taken with respect to the Bank and the Company during the past year as
previously reported by the Company, including the Supervisory Prompt Corrective
Action Directive issued by the FDIC received by the Bank on October 15, 2009,
the written agreement entered into between the Company and the Federal Reserve
Bank of San Francisco and the DFI dated July 28, 2009, and the Order to Cease
and Desist issued against the Bank on February 17, 2009 by the FDIC and the DFI
(as reported in the Company’s Current Report on Form 8-K filed on February 20,
2009).  The Bank is also subject to various restrictions as a result
of its “undercapitalized” status under regulatory capital guidelines and because
its capital restoration plan, which the Bank was required to submit to the FDIC
due to the Bank’s undercapitalized status, has not been accepted by the
FDIC.  These regulatory actions and restrictions are described in
greater detail in Note 2 – “Regulatory Developments and Going Concern
Considerations” in the Notes to Unaudited Consolidated Financial Statements in
this Form 10-Q.
 
 -54-
 Table of Contents
 
 It is
highly unlikely that the Company and the Bank will be able to comply fully with
the above mentioned regulatory actions or that its efforts to comply will not
have material and adverse effects on the operations and financial condition of
the Company. The Company and the Bank are diligently continuing to seek
qualified sources of outside capital. The Company and the Bank continue to
consult with the DFI, FRB and FDIC on a regular basis concerning the Company’s
and Bank’s proposals to obtain outside capital that will be acceptable to
federal regulatory authorities, but there can be no assurance that these actions
will be successful, or that even if one or more of the Company’s and Bank’s
proposals are accepted by the Company’s and Bank’s federal regulators, that
these proposals will be successfully implemented. At this point in time the
Company believes that it is highly unlikely that it will be able to obtain
additional outside capital that does not include the provision of substantial
assistance by the FDIC or other federal governmental authorities. The Bank’s
failure to comply with the DFI Notification, the Supervisory Prompt Corrective
Action Directive or the Order to Cease and Desist, or the Company’s failure to
comply with its agreement with the FRB and the DFI, particularly if the Company
is unable to promptly raise sufficient capital for the Bank or find a buyer or
merger partner suitable to the regulators, could result in additional regulatory
actions.  As a result of the Bank’s financial condition, its
regulators are continually monitoring its liquidity and capital adequacy. Based
on their assessment of its ability to operate in a safe and sound manner, the
Bank’s regulators at any time may take other and further actions, including
placing the Bank into conservatorship or receivership, to protect the interests
of depositors insured by the FDIC.  If a receivership were to occur,
the Bank’s assets would likely be liquidated, including a sale of such assets to
another institution, and it would be unlikely that any assets would be
distributed to holders of the Company’s common stock or holders of trust
preferred securities issued by its trust subsidiaries.
 
 The
valuation of the Company’s investment securities and the determination of any
other-than-temporary impairment with respect to these securities is highly
subjective and our regulators may not agree with our analyses.
 
 At
September 30, 2009, we maintained a $709.4 million investment portfolio of
corporate sponsored collateralized mortgage obligations (“CMOs”) that are
classified as held-to-maturity.  These CMOs are secured by Alt A first
lien residential mortgage loans geographically dispersed across the United
States.  At September 30, 2009 the fair value of these securities was
$616.4 million.  Under U.S. generally accepted accounting principles,
declines in the fair value of held-to-maturity and available-for-sale securities
below their cost that are deemed to be other than temporary are reflected in
earnings as realized losses to the extent the impairment is related to credit
losses.  The amount of the impairment related to other factors is
recognized in other comprehensive income.  During the three months
ended September 30, 2009, the Company recognized a $3.2 million
other-than-temporary impairment (“OTTI”) on three held-to-maturity corporate
sponsored CMOs, of which $425,000 was identified as credit related and was
recorded in earnings.  During the nine months ended September 30,
2009, the Company recognized a $14.5 million OTTI on six held-to-maturity
corporate sponsored CMOs, of which $3.0 million was identified as credit related
and was recorded in earnings.  The Company also recognized a $2.1
million OTTI during the three months ended September 30, 2009 on two
available-for-sale corporate sponsored CMOs, of which $446,000 was identified as
credit related and was recorded in earnings.  These OTTI charges were
determined based on anticipated adverse changes to the projected cash flows for
each of these securities caused by, among other things, an increase in projected
collateral losses, a change in historical prepayment speeds, and a deterioration
in the current level of subordination.
 
 -55-
 Table of Contents
 
 We
closely monitor these and our other investment securities for changes in credit
risk. The valuation of our investment securities and the determination of
any OTTI with respect to such securities is highly complex and involves a
comprehensive process, including quantitative modeling and significant
judgment.   The valuation of our investment securities will also
continue to be influenced by external market and other factors, including
implementation of Securities and Exchange Commission and Financial Accounting
Standards Board guidance on fair value accounting, and default rates of
specific CMOs, rating agency actions, and the prices at which observable
market transactions occur.  The current market environment
significantly limits our ability to mitigate our exposure to valuation changes
in our CMO securities by selling them.  Accordingly, if market
conditions deteriorate further and we determine our holdings of these or other
investment securities have additional OTTI, our future earnings, shareholders'
equity, regulatory capital and continuing operations could be materially
adversely affected.
 
 In
addition, as with other areas involving the highly subjective determination of
amounts by management, there remains the possibility that the Company’s and the
Bank’s regulators will disagree with management’s valuation and OTTI analyses
with respect to our investment securities and require further write-downs in the
values of these securities and the recognition of additional OTTI
charges.  This could have a material adverse effect on our results of
operations and capital.
 
 Our deposit insurance premiums and
assessments have increased substantially, and are more likely than not to remain
at or above this level, which will increase our non-interest expenses and
adversely affect our operating results.
 
 Our FDIC
deposit insurance assessments increased significantly in 2009 due to higher
assessment rates. In addition, in May 2009, the FDIC approved a rule providing
for a special assessment on all insured depository institutions of five basis
points based on the institution’s total assets less Tier 1 capital as of June
30, 2009, not to exceed ten basis points times the institution’s deposit
assessment base.  An additional special assessment may be imposed on
all institutions for the fourth quarter of 2009.
 
 We expect
that our FDIC insurance-related expenses will continue to remain high, which
will increase significantly our non-interest expenses and adversely affect our
operating results.
 
 Concerns
of customers over deposit insurance may cause a decrease in
deposits.
 
 With
recent increased concerns about bank failures, customers increasingly are
concerned about the extent to which their deposits are insured by the FDIC.
Customers may withdraw deposits in an effort to ensure that the amount they have
on deposit with their bank is fully insured or may even withdraw their insured
funds as well.  In the Bank’s case, this risk of customer loss may be
heightened by any negative publicity surrounding the Bank’s current financial
condition and the regulatory restrictions that have been imposed on the Bank.
Decreases in deposits may adversely our liquidity, funding costs, financial
condition and operating results.
  -56-
 Table of Contents
 
 Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
  The
following table sets forth the repurchases of our common stock for the fiscal
quarter ended September 30, 2009.
  Period
              
              Total
      Number of Shares Purchased
              
              
              Average
      Price Paid per Share
              
              
              Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
              
              
              Maximum
      Number of Shares that May Yet Be Purchased Under the Plans or
      Programs(1)July
      1, 2009 toJuly
      31, 2009
              
              
              —
              
              
              $
              —
              
              
              
              —
              
              
              
              110,486August
      1, 2009 toAugust
      31, 2009
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              110,486September
      1, 2009 toSeptember
      30, 2009
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              110,486Total
              
              
              —
              
              
              $
              —
              
              
              
              —
              
              
              
              110,486
 ____________
 (1)
              There
      were no repurchases under the twelfth extension of our stock repurchase
      program during the three months ended September 30, 2009.  The
      twelfth extension was announced on March 14, 2006, and authorized the
      repurchase of an additional 5% of the outstanding shares as of the
      authorization date.  At September 30, 2009, a total of 110,486
      shares remained available for repurchase under this
    extension.
  Item3. Defaults Upon Senior Securities
  Not
applicable.
  Item 4. Submission of Matters to a Vote of Security
Holders
  None.
  Item 5. Other Information
  None.
  Item 6. Exhibits
  See
exhibit index.
  -57-
 Table of Contents
  SIGNATURES
  
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
 
 
 
 IMPERIAL
      CAPITAL BANCORP, INC.Date:
      November 16, 2009
              /s/ Joseph W. Kiley IIIJoseph
      W. Kiley IIIPresident
      andChief
      Executive Officer
 
 Date:
      November 16, 2009
              /s/ Timothy M. DoyleTimothy
      M. DoyleExecutive
      Managing Director andChief
      Financial Officer
  -58-
 Table of Contents
  EXHIBIT
INDEX
 Regulation
      S-K Exhibit Number
              
              Document
              
              Reference
      to Prior Filing or Exhibit Number Attached Hereto3.1
              
              Certificate
      of Incorporation
              
              ************3.2
              
              Bylaws,
      as amended
              
              ***4
              
              Instruments
      Defining the Rights of Security Holders, Including
    Indentures
              
              **********10.1
              
              2005
      Re-Designated, Amended and Restated Stock Option Plan For Nonemployee
      Directors (“NEDP”)
              
              *****10.2
              
              2005
      Re-Designated, Amended and Restated Employee Stock Incentive Plan
      (“ESIP”)
              
              ********10.3a
              
              409A
      Consolidated Nonqualified (Employer Securities Only) 2005 Deferred
      Compensation Plan
              
              ***10.3b
              
              409A
      Consolidated Nonqualified (Non-Employer Securities) 2005 Deferred
      Compensation Plan
              
              ***10.3c
              
              Consolidated
      Nonqualified (Employer Securities Only) Deferred Compensation
      Plan
              
              ***10.3d
              
              Consolidated
      Nonqualified (Non-Employer Securities) Deferred Compensation
      Plan
              
              ***10.4
              
              Supplemental
      Salary Savings Plan
              
              *10.5a
              
              Amended
      and Restated Employment Agreement with George W.
Haligowski
              
              ********10.5b
              
              Non-Competition
      and Non-Solicitation Agreement with George W. Haligowski
              
              ********10.5c
              
              Amendment
      to Amended and Restated Employment Agreement with George W.
      Haligowski
              
              **************10.6
              
              Change
      in Control Severance Agreement with Norval L. Bruce
              
              ********10.6a
              
              Amendment
      to Change in Control Severance Agreement with Norval L.
    Bruce
              
              **************10.7
              
              Change
      in Control Severance Agreement with Timothy M. Doyle
              
              ********10.7a
              
              Amendment
      to Change in Control Severance Agreement with Timothy M.
    Doyle
              
              **************10.8
              
              Change
      in Control Severance Agreement with Lyle C. Lodwick
              
              ********10.8a
              
              Amendment
      to Change in Control Severance Agreement with Lyle C.
    Lodwick
              
              **************10.9
              
              Change
      in Control Severance Agreement with Phillip E. Lombardi
              
              ***********10.9a
              
              Amendment
      to Change in Control Severance Agreement with Phillip E.
      Lombardi
              
              **************10.10
              
              Recognition
      and Retention Plan
              
              **10.11
              
              Voluntary
      Retainer Stock and Deferred Compensation Plan for Outside
      Directors
              
              ****10.12
              
              Amended
      and Restated Supplemental Executive Retirement Plan
              
              ********10.13
              
              Amended
      and Restated ITLA Capital Corporation Rabbi Trust
Agreement
              
              *********10.14
              
              Amended
      and Restated Salary Continuation Plan
              
              ********10.15
              
              Form
      of Incentive Stock Option Agreement under ESIP
              
              ******10.16
                10.17
              
              Form
      of Non-Qualified Stock Option Agreement under the ESIP
                Form
      of Non-Qualified Stock Option Agreement under the NEDP
              
              ******
                *******10.18
              
              Description
      of Named Executive Officer Salary, Bonus and Perquisite Arrangements for
      2009
              
              **************10.19
              
              Description
      of Director Fee Arrangements
              
              **************10.20
              
              Split
      Dollar Agreement
              
              ************10.21
              
              Stipulation
      and Consent to the Issuance of an Order to Cease and
Desist
              
              *************10.22
              
              Order
      to Cease and Desist dated February 17, 2009 issued by the Federal Deposit
      Insurance Corporation and the California Department of Financial
      Institutions
              
              *************10.23
              
              Agreement,
      dated July 28, 2009, by and among Imperial Capital Bancorp, Inc., the
      Federal Reserve Bank of San Francisco and the State of California
      Department of Financial Institutions
              
              **************10.24
              
              Employment
      Agreement with Joseph W. Kiley III
              
              ***************10.25
              
              Supervisory
      Prompt Corrective Action Directive dated October 13, 2009 issued by the
      Federal Deposit Insurance Corporation
              
              ****************11
              
              Statement
      Regarding Computation of Per Share Earnings
              
              Not
      Required13
              
              Annual
      Report to Security Holders
              
              None18
              
              Letter
      Regarding Change in Accounting Principles
              
              None21
              
              Subsidiaries
      of the Registrant
              
              Not
      Required22
              
              Published
      Report Regarding Matters Submitted to Vote of Security
    Holders
              
              None24
              
              Power
      of Attorney
              
              None31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer
              
              31.131.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer
              
              31.232
              
              Section
      1350 Certifications of Chief Executive Officer and Chief Financial
      Officer
              
              32
 
 *
              Filed
      as an exhibit to Imperial’s Registration Statement on Form S-1 (File No.
      33-96518) filed with the Commission on September 1, 1995, pursuant to
      Section 5 of the Securities Act of 1933.*
      *
              Filed
      as an exhibit to the Company’s Registration Statement on Form S-4 (File
      No. 333-03551) filed with the Commission on May 10, 1996, pursuant to
      Section 5 of the Securities Act of 1933.* *
      *
              Filed
      as an exhibit to the Company’s Current Report on Form 8-K filed on
      December 7, 2007.* *
      * *
              Filed
      as an exhibit to Amendment No. Two to the Company’s Registration Statement
      on Form S-4 (File No. 333-03551) filed with the Commission on June 19,
      1996.* *
      * * *
              Filed
      as an appendix to the Company’s definitive proxy materials filed on June
      27, 2005.* *
      * * * *
              Filed
      as an exhibit to the Company’s Current Report on Form 8-K filed on August
      9, 2005.* *
      * * * * *
              Filed
      as an exhibit to the Company’s Current Report on Form 8-K filed on
      November 4, 2005.* *
      * * * * * *
              Filed
      as an exhibit to the Company’s Current Report on Form 8-K filed on
      February 24, 2006.* *
      * * * * * * *
              Filed
      as an exhibit to the Company’s Form 10-Q for the quarter ended June 30,
      2006.* *
      * * * * * * * *
              The
      Company hereby agrees to furnish the SEC, upon request, copies of the
      instruments defining the rights of the holders of each issue of the
      Company's long-term debt.* *
      * * * * * * * * *
              Filed
      as an exhibit to the Company’s Form 10-K for the year ended December 31,
      2006.* *
      * * * * * * * * * *
              Filed
      as an exhibit to the Company’s Form 10-Q for the quarter ended June 30,
      2007.* *
      * * * * * * * * * *
              Filed
      as an exhibit to the Company’s Form 10-K for the year ended December 31,
      2007.* *
      * * * * * * * * * * *
              Filed
      as an exhibit to the Company’s Current Report on Form 8-K filed on
      February 20, 2009.* *
      * * * * * * * * * * * *
              Filed
      as an exhibit to the Company’s Form 10-K for the year ended December 31,
      2008.* *
      * * * * * * * * * * * *
              Filed
      as an exhibit to the Company’s Current Report on Form 8-K filed on August
      3, 2009.* *
      * * * * * * * * * * * * *
              Filed
      as an exhibit to the Company’s Current Report on Form 8-K filed on October
      5, 2009.* *
      * * * * * * * * * * * * * *
              Filed
      as an exhibit to the Company’s Current Report on Form 8-K filed on October
      21, 2009.
  -59-