EAST WEST BANCORP INC - Quarter Report: 2010 September (Form 10-Q)

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Mark One

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

¨	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 000-24939

EAST WEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices) (Zip Code)

(626) 768-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 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 þ 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 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 filed, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer and accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨

Accelerated filer þ

Non-accelerated filer ¨

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Number of shares outstanding of the issuer’s common stock on the latest practicable date: 148,004,889 shares of common stock as of October 31, 2010.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION			4
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)	4-7
		Notes to Condensed Consolidated Financial Statements (Unaudited)	8-42
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43-70
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	71
	Item 4.	Controls and Procedures	71
PART II - OTHER INFORMATION			72
	Item 1.	Legal Proceedings	72
	Item 1A.	Risk Factors	72
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
	Item 3.	Defaults Upon Senior Securities	73
	Item 4.	(Removed and Reserved)	73
	Item 5.	Other Information	73
	Item 6.	Exhibits	73
SIGNATURE			74

Forward-Looking Statements

Certain matters discussed in this Quarterly Report may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the environment in which we operate and projections of future performance including future earnings and financial condition. Our actual results, performance, or achievements may differ significantly from the results, performance, or achievements expected or implied in such forward-looking statements. Such risk and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from:

·	our ability to integrate the former acquired institutions’, through Federal Deposit Insurance Corporation (“FDIC”) assisted acquisitions, and to achieve expected synergies, operating efficiencies or other benefits within expected time frames, or at all, or within expected cost projections;

·	our ability to integrate and retain former depositors and borrowers of the acquired institutions;

·	our ability to manage the loan portfolio acquired from these institutions within the limits of the loss protection provided by the FDIC;

·	changes in our borrowers’ performance on loans;

·	changes in the commercial and consumer real estate markets;

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

·	changes in the economy, including inflation;

·	changes in government interest rate policies;

·	changes in laws or the regulatory environment;

·	changes in critical accounting policies and judgments;

·	changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies;

·	changes in the equity and debt securities markets;

·	changes in competitive pressures on financial institutions;

·	effect of additional provision for loan losses;

·	effect of any goodwill impairment;

·	fluctuations of our stock price;

·	success and timing of our business strategies;

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

·	changes in our ability to receive dividends from our subsidiaries; and

·	political developments, wars or other hostilities may disrupt or increase volatility in securities or otherwise affect economic conditions.

For a more detailed discussion of some of the factors that might cause such differences, see the Company’s 2009 Form 10-K under the heading “ITEM 1A. RISK FACTORS” and the information set forth under “RISK FACTORS” in this Form 10-Q. The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

PART I - FINANCIAL INFORMATION

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	September 30,			December 31,
	2010			2009
ASSETS
Cash and cash equivalents	$	859,694		$	835,141
Short-term investments		381,799			510,788
Fed funds sold		75,000			—
Securities purchased under resale agreements		350,000			227,444
Investment securities available for sale, at fair value (with amortized cost of $2,898,988 at
September 30, 2010 and $2,563,043 at December 31, 2009)		2,907,349			2,564,081
Loans held for sale, at fair value		16,902			28,014

Loans receivable, excluding covered loans (net of allowance for loan losses of $240,286 at
September 30, 2010 and $238,833 at December 31, 2009)		8,306,782			8,218,671
Covered loans (net of allowance for loan losses of $3,900 at September 30, 2010)		4,975,502			5,598,155

Total loans receivable, net		13,282,284			13,816,826

FDIC indemnification asset		874,759			1,091,814

Other real estate owned, net		16,936			13,832
Other real estate owned covered, net		137,353			44,273

Total other real estate owned		154,289			58,105

Accrued interest receivable		79,879			82,370
Due from customer acceptances		50,698			40,550
Investment in affordable housing partnerships		152,944			84,833
Premises and equipment, net		138,474			59,099
Premiums on deposits acquired, net		82,755			89,735
Goodwill		337,438			337,438
Other assets		672,982			732,974

TOTAL	$	20,417,246		$	20,559,212

LIABILITIES AND STOCKHOLDERS’ EQUITY
Customer deposit accounts:
Noninterest-bearing	$	2,571,750		$	2,291,259
Interest-bearing		12,726,221			12,696,354

Total deposits		15,297,971			14,987,613

Federal Home Loan Bank advances		1,018,074			1,805,387
Securities sold under repurchase agreements		1,045,664			1,026,870
Notes payable and other borrowings		73,550			74,406
Bank acceptances outstanding		50,698			40,550
Long-term debt		235,570			235,570
Accrued interest payable, accrued expenses and other liabilities		310,959			104,157

Total liabilities		18,032,486			18,274,553

COMMITMENTS AND CONTINGENCIES (Note 10)

STOCKHOLDERS’ EQUITY
Preferred stock, $0.001 par value, 5,000,000 shares authorized; Series A, non-cumulative
convertible, 200,000 shares issued and 85,741 shares outstanding in 2010 and 2009; Series B,
cumulative, 306,546 shares issued and outstanding in 2010 and 2009; Series C, cumulative
convertible, 335,047 shares issued and outstanding in 2009		370,882			693,803
Common stock, $0.001 par value, 200,000,000 shares authorized; 155,092,439 and 116,754,403
shares issued in 2010 and 2009, respectively; 147,981,714 and 109,962,965 shares
outstanding in 2010 and 2009, respectively		155			117
Additional paid in capital		1,428,893			1,091,047
Retained earnings		689,356			604,223
Treasury stock, at cost - 7,110,725 shares in 2010 and 6,791,438 shares in 2009		(109,661	)		(105,130	)
Accumulated other comprehensive income, net of tax		5,135			599

Total stockholders’ equity		2,384,760			2,284,659

TOTAL	$	20,417,246		$	20,559,212

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees	$	210,086		$	114,512		$	731,813		$	336,997
Investment securities		15,725			28,485			50,642			88,178
Securities purchased under resale agreements		2,410			2,153			11,303			4,695
Short-term investments		2,362			1,856			7,405			7,341
Investment in Federal Reserve Bank stock		623			552			2,042			1,604
Investment in Federal Home Loan Bank stock		194			366			431			365

Total interest and dividend income		231,400			147,924			803,636			439,180

INTEREST EXPENSE
Customer deposit accounts		28,498			26,970			91,078			94,933
Securities sold under repurchase agreements		12,189			12,140			36,775			36,016
Federal Home Loan Bank advances		5,725			11,172			20,905			38,191
Long-term debt		1,685			1,760			4,823			6,211
Other borrowings		498			2			1,903			8

Total interest expense		48,595			52,044			155,484			175,359

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		182,805			95,880			648,152			263,821
Provision for loan losses		38,648			159,244			170,325			388,666

NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES		144,157			(63,364	)		477,827			(124,845	)

NONINTEREST INCOME (LOSS)
Increase (decrease) in FDIC indemnification asset and receivable		5,826			—			(47,170	)		—

Impairment loss on investment securities		(6,522	)		(45,199	)		(17,515	)		(82,846	)
Less: noncredit-related impairment loss recorded in other comprehensive income		5,634			20,950			7,186			20,950

Net impairment loss on investment securities recognized in earnings		(888	)		(24,249	)		(10,329	)		(61,896	)

Net gain on sale of investment securities		2,791			2,177			24,749			7,378
Branch fees		7,976			4,679			24,953			14,463
Gain on acquisition		—			—			27,571			—
Letters of credit fees and commissions		2,888			1,984			8,493			5,768
Ancillary loan fees		2,367			1,227			6,425			4,812
Income from life insurance policies		1,100			1,090			3,306			3,269
Net gain on sale of loans		4,177			8			12,250			19
Other operating income		3,078			1,204			6,301			1,902

Total noninterest income (loss)		29,315			(11,880	)		56,549			(24,285	)

NONINTEREST EXPENSE
Compensation and employee benefits		38,693			15,875			131,051			49,492
Other real estate owned expense		5,694			767			44,689			16,480
Occupancy and equipment expense		13,963			6,262			39,022			19,950
Deposit insurance premiums and regulatory assessments		5,676			6,057			21,785			18,950
Prepayment penalty for Federal Home Loan Bank advances		—			—			13,832			—
Amortization of premiums on deposits acquired		3,352			1,069			10,046			3,286
Amortization of investments in affordable housing partnerships		1,442			1,709			7,117			5,121
Loan related expenses		6,316			2,197			14,567			5,274
Legal expense		5,301			1,323			14,391			4,856
Data processing		2,646			1,079			8,174			3,362
Consulting expense		1,612			759			5,672			1,879
Deposit-related expenses		1,239			948			3,381			2,863
Other operating expenses		14,011			8,019			50,446			23,869

Total noninterest expense		99,945			46,064			364,173			155,382

INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES		73,527			(121,308	)		170,203			(304,512	)
Provision (benefit) for income taxes		26,576			(52,777	)		61,988			(126,790	)

NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS		46,951			(68,531	)		108,215			(177,722	)
Extraordinary item – impact of desecuritization, net of tax		—			—			—			(5,366	)

NET INCOME (LOSS) AFTER EXTRAORDINARY ITEMS		46,951			(68,531	)		108,215			(183,088	)

Preferred stock dividends, amortization of preferred stock discount and inducement of
preferred stock conversion		6,732			10,620			19,017			42,986

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS	$	40,219		$	(79,151	)	$	89,198		$	(226,074	)

EARNINGS (LOSS) PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
Basic	$	0.27		$	(0.91	)	$	0.66		$	(3.19	)
Diluted	$	0.27		$	(0.91	)	$	0.61		$	(3.19	)
Dividends declared per common share	$	0.01		$	0.01		$	0.03		$	0.04
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic		146,454			86,538			134,396			70,967
Diluted		147,113			86,538			146,993			70,967

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(In thousands, except share data)

(Unaudited)

			Additional
			Paid In														Accumulated			Compre-
			Capital					Additional									Other			hensive			Total
	Preferred		Preferred			Common		Paid In			Retained			Treasury			Comprehensive			Income			Stockholders'
	Stock		Stock			Stock		Capital			Earnings			Stock			Income (Loss)			(Loss)			Equity

BALANCE AS OF DECEMBER 31, 2008	$	—	$	472,311		$	70	$	695,521		$	572,172		$	(102,817	)	$	(86,491	)				$	1,550,766

Cumulative effect adjustment for
reclassification of the previously
recognized noncredit-related impairment
loss on investment securities												8,110						(8,110	)					—

BALANCE AS OF JANUARY 1, 2009		—		472,311			70		695,521			580,282			(102,817	)		(94,601	)					1,550,766

Comprehensive loss
Net loss after extraordinary item for the year												(183,088	)							$	(183,088	)		(183,088	)
Net unrealized gain on investment securities
available-for-sale																		53,021			53,021			53,021
Net unrealized loss as a result of desecuritization																		30,551			30,551			30,551
Noncredit-related impairment loss on investment
securities recorded in the current year																		(12,150	)		(12,150	)		(12,150	)

Total comprehensive loss																				$	(111,666	)

Stock compensation costs									4,370															4,370
Tax provision from stock plans									(498	)														(498	)
Preferred stock issuance and conversion cost				(180	)																			(180	)
Common stock issuance cost									(5,535	)														(5,535	)
Induced conversion of 110,764 shares of preferred stock				(107,474	)																			(107,474	)
Issuance of 9,968,760 shares of common stock from
converted 110,764 shares of Preferred Stock							10		107,464															107,474
Issuance of 5,000,000 shares of common stock from
private placement							5		27,495															27,500
Issuance of 12,650,000 shares of common stock from
public offering							12		80,316															80,328
Issuance of 423,597 shares of common stock pursuant to
various stock plans and agreements							1		399															400
Issuance of 22,386 shares of common stock in lieu of
Board of Director retainer fees									219															219
Cancellation of 60,578 shares of common stock due to
forfeitures of issued restricted stock									1,467						(1,467	)								—
Purchase of 11,166 shares of treasury stock due to the
vesting of restricted stock															(54	)								(54	)
Amortization of Series B preferred stock discount				3,265								(3,265	)											—
Preferred stock dividends												(21,381	)											(21,381	)
Common stock dividends												(2,487	)											(2,487	)
Inducement of preferred stock conversion									18,340			(18,340	)											—

BALANCE AS OF SEPTEMBER 30, 2009	$	—	$	367,922		$	98	$	929,558		$	351,721		$	(104,338	)	$	(23,179	)				$	1,521,782

BALANCE AS OF JANUARY 1, 2010	$	—	$	693,803		$	117	$	1,091,047		$	604,223		$	(105,130	)	$	599					$	2,284,659

Comprehensive income:
Net income												108,215								$	108,215			108,215
Net unrealized gain on investment securities
available-for-sale																		7,142			7,142			7,142
Noncredit-related impairment loss on investment
securities recorded in the current year																		(3,268	)		(3,268	)		(3,268	)
Foreign currency translation																		662			662			662

Total comprehensive income																				$	112,751

Stock compensation costs									6,164															6,164
Tax provision from stock plans									(156	)														(156	)
Issuance of 1,234,302 shares of common stock pursuant
to various stock plans and agreements							1		2,526															2,527
Conversion of 335,047 shares of Series C preferred
stock into 37,103,734 shares of common stock				(325,299	)		37		325,262															—
Cancellation of 293,105 shares of common stock due to
forfeitures of issued restricted stock									4,050						(4,050	)								—
Purchase of 26,182 shares of treasury stock due to the
vesting of restricted stock															(481	)								(481	)
Amortization of Series B preferred stock discount				2,378								(2,378	)											—
Preferred stock dividends												(16,640	)											(16,640	)
Common stock dividends												(4,064	)											(4,064	)

BALANCE AS OF SEPTEMBER 30, 2010	$	—	$	370,882		$	155	$	1,428,893		$	689,356		$	(109,661	)	$	5,135					$	2,384,760

																				Nine Months Ended
																				September 30,
																					2010			2009
																				(In thousands)
Disclosure of reclassification amounts:
Unrealized holding gain (loss) on securities arising during the period, net of tax expense of $(8,862) in 2010 and $(37,620) in 2009																				$	12,237		$	51,952
Less: Reclassification adjustment for gain (loss) included in net income (loss), net of tax expense of $6,057 in 2010 and $(22,898) in 2009																					(8,363	)		31,620

Net unrealized gain (loss) on securities, net of tax expense of $(2,805) in 2010 and $(60,518) in 2009																				$	3,874		$	83,572

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) after extraordinary items	$	108,215		$	(183,088	)
Adjustments to reconcile net income (loss) after extraordinary items to net cash provided by operating activities:
Depreciation and amortization		48,153			16,847
Accretion of discount and premium		(159,226	)		—
Decrease in FDIC indemnification asset and receivable		47,170			—
Gain on acquisition		(27,571	)		—
Net impairment loss on investment securities recognized in earnings		10,329			61,896
Impairment writedown on mortgage servicing assets		348			660
Stock compensation costs		6,164			4,370
Deferred tax expense (benefit)		32,355			(16,886	)
Provision for loan losses and impact of desecuritization		170,325			397,929
Impairment on other real estate owned		36,508			17,670
Impairment loss on other equity investment		—			581
Net gain on sales of investment securities, loans and other assets		(39,260	)		(2,827	)
Originations of loans held for sale		(22,013	)		(33,248	)
Proceeds from sale of loans held for sale		20,389			33,318
Prepayment penalty for Federal Home Loan Bank advances		13,832			—
Tax provision from stock plans		156			498
Net change in accrued interest receivable and other assets		278,386			(11,710	)
Net change in accrued expenses and other liabilities		162,446			(97,694	)

Total adjustments		578,491			371,404

Net cash provided by operating activities		686,706			188,316

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of WFIB assets		67,186			—
Net decrease in loans		662,655			318,232
Net decrease in short-term investments		103,989			(92,415	)
Purchases of:
Securities purchased under resale agreements		(880,000	)		(50,000	)
Investment securities held-to-maturity		—			(697,768	)
Investment securities available-for-sale		(3,612,331	)		(1,314,263	)
Loans receivable		(580,396	)		(350,000	)
Federal Reserve Bank stock		(10,500	)		(9,196	)
Investments in affordable housing partnerships		(473	)		(22	)
Premises and equipment		(90,051	)		(433	)
Proceeds from sale of:
Investment securities		1,047,173			336,710
Securities purchased under resale agreements		710,000			25,000
Loans receivable		427,087			105,227
Loans held for sale originated for investment		147,194			—
Other real estate owned		77,804			51,807
Premises and equipment		84			8
Repayments, maturity and redemption of investment securities available-for-sale		2,268,589			1,040,828
Dividends/redemption of Federal Home Loan Bank stock		13,427			182

Net cash provided by (used in) investing activities		351,437			(636,103	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net (payment for) proceeds from:
Deposits		(87,053	)		526,598
Short-term borrowings		2,214			(3,980	)
Proceeds from:
Issuance of long-term borrowings		350,000			—
Issuance of common stock from public offering		—			80,328
Issuance of common stock from private placement		—			27,500
Issuance of common stock pursuant to various stock plans and agreements		2,527			400
Payment for:
Repayment of long-term borrowings		(1,223,137	)		(430,000	)
Repayment of notes payable and other borrowings		(37,300	)		(9,395	)
Purchase of treasury shares due to the vesting of restricted stock		(481	)		(54	)
Preferred stock issuance cost		—			(5,715	)
Cash dividends on preferred stock		(16,640	)		(20,530	)
Cash dividends on common stock		(4,064	)		(2,486	)
Tax benefit from stock plans		(156	)		(498	)

Net cash (used in) provided by financing activities		(1,014,090	)		162,168
Effect of exchange rate changes on cash and cash equivalents		500			—
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		24,553			(285,619	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		835,141			878,853

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	859,694		$	593,234

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	159,742		$	184,054
Income tax (refunds) payments		24,292			(13,126	)
Noncash investing and financing activities:
Transfers to real estate owned/affordable housing partnership		203,276			116,124
Conversion of preferred stock to common stock		325,299			—
Desecuritization of loans receivable		—			635,614
Loans to facilitate sales of real estate owned		13,550			38,605
Loans transferred to loans held for sale		138,792			—
Loans to facilitate sales of loans		42,022			130,509
Issuance of common stock in lieu of Board of Director retainer fees		360			219

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2010 and 2009

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) and its wholly-owned subsidiaries, East West Bank and subsidiaries (the “Bank”) and East West Insurance Services, Inc. Intercompany transactions and accounts have been eliminated in consolidation. East West also has nine wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 810, the Trusts are not consolidated into the accounts of East West Bancorp, Inc.

The interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments that, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the three months and nine months ended September 30, 2010 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. Events subsequent to the condensed consolidated balance sheet date have been evaluated through the date the financial statements are issued for inclusion in the accompanying financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Certain prior year balances have been reclassified to conform to current year presentation.

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Standards

In September 2009, the Financial Accounting Standards Board (“FASB”) issued ASC 860 which requires additional information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. It was effective for the Company on January 1, 2010. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In September 2009, the FASB issued ASC 810 that changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. It was effective for the Company on January 1, 2010. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and reasons for the transfers and separate presentation of information about purchases, sales, issuances and settlements in the

reconciliation for Level 3 fair value measurements. Additionally, ASU 2010-06 clarifies existing disclosures regarding level of disaggregation and inputs and valuation techniques. The new disclosures and clarifications of existing disclosures under ASU 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years ending after December 15, 2010 and for interim periods within those fiscal years. The Company adopted the disclosure requirements of significant transfers in and out of Level 1 and Level 2 fair value measurements (see Note 3). The Company does not expect the adoption of the disclosure requirements to have a material effect on its condensed consolidated financial statements.

In April 2010, the FASB issued ASU 2010-18, Receivables, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, which amends ASC 310-30. This ASU clarifies the treatment of loan modifications for loans accounted for within a loan pool. Loans accounted for under ASC 310-30, should not be removed from the pool even if the loan modification would otherwise be considered a troubled debt restructuring. An entity is still required to assess the entire pool for impairment. The update does not require additional disclosures. This clarified treatment of loan modifications is effective for interim and annual reporting periods beginning after July 15, 2010. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivable and Allowance for Credit Losses, which amends ASC 310, Receivables. ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Companies will be required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure. The disclosures as of the end of a reporting period will be effective for interim and annual reporting periods ending on or after December 15, 2010. The Company does not expect the adoption of the disclosure requirements to have a material effect on its condensed consolidated financial statements.

NOTE 3 — FAIR VALUE

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market and income approaches. Based on these approaches, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the information according to the fair value hierarchy noted below. The hierarchy is based on the quality and reliability of the information used to determine fair values. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1 – Quoted prices for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Level 1 financial instruments typically include U.S. Treasury securities.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data. Level 2 financial instruments typically include U.S. Government debt and agency mortgage-backed securities, municipal securities, U.S. Government sponsored enterprise preferred stock securities, single issue trust preferred securities, equity swap agreements, foreign exchange options and other real estate owned (“OREO”).

Level 3 – Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category typically includes mortgage servicing assets, impaired loans, private label mortgage-backed securities, pooled trust preferred securities and derivatives payable.

The Company records investment securities available-for-sale, equity swap agreements, derivatives payable and foreign exchange options at fair value on a recurring basis. Certain other assets such as mortgage servicing assets, impaired loans, other real estate owned, goodwill, premiums on acquired deposits and private equity investments are recorded at fair value on a nonrecurring basis. Nonrecurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the remeasurement is performed.

In determining the appropriate hierarchy levels, the Company performs a detailed analysis of assets and liabilities that are subject to fair value disclosure. The following tables present both financial and non-financial assets and liabilities that are measured at fair value on a recurring and non-recurring basis. These assets and liabilities are reported on the condensed consolidated balance sheets at their fair values as of September 30, 2010 and December 31, 2009. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. There were no transfers in and out of Levels 1 and 2 during the first nine months of 2010. There were also no transfers in and out of levels 1 and 3 or levels 2 and 3.

	Assets (Liabilities) Measured at Fair Value on a Recurring Basis as of September 30, 2010
	Fair Value Measurements September 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Investment securities available-for-sale:
U.S. Treasury securities	$	21,740	$	21,740	$	—	$	—