Annual Statements Open main menu

EAST WEST BANCORP INC - Quarter Report: 2011 September (Form 10-Q)

form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

Mark One

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

For the quarterly period ended September 30, 2011

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 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 x  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 x   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 x
Accelerated filer ¨
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 x
 
Number of shares outstanding of the issuer’s common stock on the latest practicable date: 149,051,662 shares of common stock as of October 31, 2011.
 


 
 

 

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
4
   
 
Item 1.
4
       
   
8
       
 
Item 2.
54
       
 
Item 3.
81
       
 
Item 4.
81
       
PART II - OTHER INFORMATION
82
       
 
Item 1.
82
       
 
Item 1A.
82
       
 
Item 2.
82
       
 
Item 3.
82
       
 
Item 4.
82
       
 
Item 5.
82
       
 
Item 6.
83
       
83
 
 
Forward-Looking Statements
 
Certain matters discussed in this Quarterly Report contain or incorporate statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Exchange Act”), and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language, such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases, such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including, but not limited to, those described in the documents incorporated by reference. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us.
 
There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:
 
 
·
our ability to manage the loan portfolio acquired from FDIC-assisted acquisitions 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;
 
 
·
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 2010 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,
 
   
2011
   
2010
 
ASSETS
           
Cash and cash equivalents
  $ 1,105,888     $ 1,333,949  
Short-term investments
    66,009       143,560  
Federal funds sold
    30,000        
Securities purchased under resale agreements
    951,824       500,000  
Investment securities available-for-sale, at fair value (with amortized cost of $3,318,301 at September 30, 2011 and $2,900,410 at December 31, 2010)
    3,279,592       2,875,941  
Loans held for sale
    251,920       220,055  
Loans receivable, excluding covered loans (net of allowance for loan losses of $211,738 at September 30, 2011 and $230,408 at December 31, 2010)
    9,578,766       8,430,199  
Covered loans (net of allowance for loan losses of $6,434  at September 30, 2011and $4,225 at December 31, 2010)
    4,139,902       4,800,876  
Total loans receivable, net
    13,718,668       13,231,075  
FDIC indemnification asset
    569,157       785,035  
Other real estate owned, net
    21,178       21,865  
Other real estate owned covered, net
    87,298       123,902  
Total other real estate owned
    108,476       145,767  
Investment in affordable housing partnerships
    172,407       155,074  
Premises and equipment, net
    119,035       135,919  
Accrued interest receivable
    93,042       82,090  
Due from customers on acceptances
    225,470       73,796  
Premiums on deposits acquired, net
    70,115       79,518  
Goodwill
    337,438       337,438  
Other assets
    714,005       601,320  
TOTAL
  $ 21,813,046     $ 20,700,537  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Customer deposit accounts:
               
Noninterest-bearing
  $ 3,377,559     $ 2,676,466  
Interest-bearing
    13,931,141       12,964,793  
Total deposits
    17,308,700       15,641,259  
Federal Home Loan Bank advances
    457,075       1,214,148  
Securities sold under repurchase agreements
    1,024,949       1,083,545  
Notes payable and other borrowings
    89,969       60,686  
Bank acceptances outstanding
    225,470       73,796  
Long-term debt
    214,178       235,570  
Accrued expenses and other liabilities
    231,536       277,602  
Total liabilities
    19,551,877       18,586,606  
                 
COMMITMENTS AND CONTINGENCIES (Note 11)
               
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, $0.001 par value, 5,000,000 shares authorized; Series A, non-cumulative convertible, 200,000 shares issued and 85,710 and 85,741 shares outstanding in 2011 and 2010, respectively.
    83,027       83,058  
Common stock, $0.001 par value, 200,000,000 shares authorized; 156,370,318 and 155,743,241 shares issued in 2011 and 2010, respectively; 148,961,927 and 148,542,940 shares outstanding in 2011 and 2010, respectively.
    156       156  
Additional paid in capital
    1,436,940       1,434,277  
Retained earnings
    877,595       720,116  
Treasury stock, at cost -- 7,408,391 shares in 2011 and 7,200,301 shares in 2010
    (114,954 )     (111,262 )
Accumulated other comprehensive (loss) income, net of tax
    (21,595 )     (12,414 )
Total stockholders' equity
    2,261,169       2,113,931  
TOTAL
  $ 21,813,046     $ 20,700,537  
 
See accompanying notes to condensed consolidated financial statements.
 
 
EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
INTEREST AND DIVIDEND INCOME
                       
Loans receivable, including fees
  $ 244,523     $ 210,086     $ 712,822     $ 731,813  
Investment securities
    24,503       15,725       66,613       50,642  
Securities purchased under resale agreements
    5,064       2,410       14,443       11,303  
Investment in Federal Home Loan Bank stock
    75       194       432       431  
Investment in Federal Reserve Bank stock
    710       623       2,128       2,042  
Short-term investments
    7,866       2,362       15,106       7,405  
Total interest and dividend income
    282,741       231,400       811,544       803,636  
INTEREST EXPENSE
                               
Customer deposit accounts
    28,216       28,498       83,328       91,078  
Federal Home Loan Bank advances
    3,013       5,725       12,746       20,905  
Securities sold under repurchase agreements
    12,218       12,189       36,351       36,775  
Long-term debt
    1,424       1,685       4,783       4,823  
Other borrowings
    88       498       384       1,903  
Total interest expense
    44,959       48,595       137,592       155,484  
Net interest income before provision for loan losses
    237,782       182,805       673,952       648,152  
Provision for loan losses
    22,000       38,648       75,006       170,325  
Net interest income after provision for loan losses
    215,782       144,157       598,946       477,827  
NONINTEREST (LOSS) INCOME
                               
Gain on acquisition
                      27,571  
Impairment loss on investment securities
          (6,522 )     (5,555 )     (17,515 )
Less:  Noncredit-related impairment loss recorded in other comprehensive income
          5,634       5,091       7,186  
Net impairment loss on investment securities recognized in earnings
          (888 )     (464 )     (10,329 )
(Decrease) increase in FDIC indemnification asset and receivable
    (43,451 )     5,826       (79,700 )     (47,170 )
Branch fees
    8,872       7,976       25,704       24,953  
Net gain on sales of investment securities
    3,191       2,791       6,823       24,749  
Net gain on sales of fixed assets
    30       25       2,236       77  
Letters of credit fees and foreign exchange income
    6,450       3,914       17,636       11,023  
Ancillary loan fees
    2,076       2,367       6,122       6,425  
Income from life insurance policies
    982       1,100       3,088       3,306  
Net gain on sales of loans
    5,452       4,177       18,753       12,250  
Other operating income
    2,853       2,027       9,789       3,694  
Total noninterest (loss) income
    (13,545 )     29,315       9,987       56,549  
NONINTEREST EXPENSE
                               
Compensation and employee benefits
    39,885       38,693       119,025       131,051  
Occupancy and equipment expense
    12,580       13,963       37,353       39,022  
Amortization of investments in affordable housing partnerships
    5,287       1,442       14,410       7,117  
Amortization of premiums on deposits acquired
    3,067       3,352       9,403       10,046  
Deposit insurance premiums and regulatory assessments
    2,430       5,676       16,454       21,785  
Loan-related expenses
    5,208       6,316       12,591       14,567  
Other real estate owned expense
    4,489       5,694       29,738       44,689  
Legal expense
    6,028       5,301       16,920       14,391  
Prepayment penalty for FHLB advances and other borrowings
    3,826             12,281       13,832  
Data processing
    1,827       2,646       6,530       8,174  
Deposit-related expenses
    1,667       1,239       4,199       3,381  
Consulting expense
    2,094       1,612       6,098       5,672  
Other operating expenses
    16,164       14,011       43,936       50,446  
Total noninterest expense
    104,552       99,945       328,938       364,173  
INCOME BEFORE PROVISION FOR INCOME TAXES
    97,685       73,527       279,995       170,203  
PROVISION FOR INCOME TAXES
    35,253       26,576       100,967       61,988  
NET INCOME
    62,432       46,951       179,028       108,215  
PREFERRED STOCK DIVIDENDS AND AMORTIZATION OF PREFERRED
                               
STOCK DISCOUNT
    1,714       6,732       5,143       19,017  
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
  $ 60,718     $ 40,219     $ 173,885     $ 89,198  
EARNINGS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
                               
BASIC
  $ 0.41     $ 0.27     $ 1.18     $ 0.66  
DILUTED
  $ 0.41     $ 0.27     $ 1.17     $ 0.61  
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
                               
BASIC
    147,162       146,454       147,013       134,396  
DILUTED
    153,453       147,113       153,372       146,993  
DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.05     $ 0.01     $ 0.11     $ 0.03  
 
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)
 
    Preferred    
Additional
Paid In
Capital
    Common    
Additional
Paid In
Capital
    Retained     Treasury    
Accumulated
Other
Comprehensive
Income (Loss)
   
Comprehensive
   
Total
Stockholders'
 
   
Stock
   
Stock
   
Stock
   
Stock
   
Earnings
   
Stock
   
Net of Tax
   
Income
   
Equity
 
                                                       
BALANCE, JANAURY 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,net of taxes of $6,057 and reclassification of $8,363 net gain included in net income
                                                    7,142       7,142       7,142  
Noncredit-related impairment loss on securities, net of tax benefits of $2,366
                                                    (3,268 )     (3,268 )     (3,268 )
Foreign currency translation adjustments, net of tax expense of $480
                                                    662       662       662  
Total comprehensive income
                                                          $ 112,751          
Stock compensation costs
                            6,164                                       6,164  
Tax provision from stock compensation plans, net
                            (156 )                                     (156 )
Issuance of 1,216,392 shares of common stock pursuant to various stock compensation plans and agreements
                    1       2,245                                       2,246  
Conversion of 335,047 shares of Series C preferred stock into 37,103,734 shares of common stock
            (325,299 )     37       325,262                                        
Issuance of 17,910 shares pursuant to Director retainer fee
                            281                                       281  
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, SEPTEMBER 30, 2010
  $     $ 370,882     $ 155     $ 1,428,893     $ 689,356     $ (109,661 )   $ 5,135             $ 2,384,760  
                                                                         
BALANCE, JANAURY 1, 2011
  $     $ 83,058     $ 156     $ 1,434,277     $ 720,116     $ (111,262   $ (12,414 )           $ 2,113,931  
Comprehensive income:
                                                                       
Net income
                                    179,028                     $ 179,028       179,028  
Net unrealized loss on investment securities available-for-sale,net of tax benefits of $3,913 and reclassification of $10,925 net loss included in net income
                                                    (5,403 )     (5,403 )     (5,403 )
Noncredit-related impairment loss on securities, net of tax benefits of $2,139
                                                    (2,952 )     (2,952 )     (2,952 )
Foreign currency translation adjustments, net of tax benefits of $424
                                                    (586 )     (586 )     (586 )
Net unrealized loss on other asset investment, net of taxes benefits of $174
                                                    (240 )     (240 )     (240 )
Total comprehensive income
                                                          $ 169,847          
Stock compensation costs
                            9,330                                       9,330  
Tax benefit from stock compensation plans, net
                            546                                       546  
Issuance of 597,232 shares of common stock pursuant to various stock compensation plans and agreements
                            3,663                                       3,663  
Conversion of 31 shares of Series A preferred stock into 2,014 shares of common stock
            (31 )             31                                        
Issuance of 27,831 shares pursuant to Director retainer fee
                            520                                       520  
Cancellation of 180,152 shares of common stock due to forfeitures of issued restricted stock
                            3,073               (3,073 )                      
Purchase of 27,938 shares of treasury stock due to the vesting of restricted stock
                                            (619 )                     (619 )
Preferred stock dividends
                                    (5,143 )                             (5,143 )
Common stock dividends
                                    (16,406 )                             (16,406 )
Repurchase of 1,517,555 common stock warrants
                            (14,500 )                                     (14,500 )
BALANCE, SEPTEMBER 30, 2011
  $     $ 83,027     $ 156     $ 1,436,940     $ 877,595     $ (114,954 )   $ (21,595 )           $ 2,261,169  
 
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,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 179,028     $ 108,215  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    48,823       48,153  
(Accretion) of discount and amortization of premiums, net
    (162,319 )     (159,226 )
Decrease in FDIC indemnification asset and receivable
    79,700       47,170  
Gain on acquisition
          (27,571 )
Stock compensation costs
    9,850       6,164  
Deferred tax expense
    64,398       32,355  
Provision for loan losses
    75,006       170,325  
Impairment on other real estate owned
    22,440       36,508  
Net gain on sales of investment securities, loans and other assets
    (29,586 )     (39,260 )
Originations and purchases of loans held for sale
    (40,193 )     (22,013 )
Proceeds from sales of loans held for sale
    30,180       20,389  
Prepayment penalty for Federal Home Loan Bank advances and other borrowings
    12,281       13,832  
Net proceeds from FDIC shared-loss agreements
    147,121       249,175  
Net change in accrued interest receivable and other assets
    (134,500 )     29,211  
Net change in accrued expenses and other liabilities
    (100,393 )     162,446  
Other net operating activities
    (2,383 )     10,833  
Total adjustments
    20,425       578,491  
Net cash provided by operating activities
    199,453       686,706  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Net cash acquired in WFIB acquisition
          67,186  
Net (increase) decrease in loans
    (720,348 )     662,655  
Net decrease in short-term investments
    77,551       95,288  
Net increase in federal funds sold
    (30,000 )     (75,000 )
Purchases of:
               
Securities purchased under resale agreements
    (1,119,711 )     (750,000 )
Investment securities available-for-sale
    (2,464,002 )     (3,612,331 )
Loans receivable
    (569,946 )     (580,396 )
Federal Reserve Bank stock
    (99 )     (10,500 )
Premises and equipment
    (7,460 )     (90,051 )
Investments in affordable housing partnerships
    (22,756 )     (37,773 )
Proceeds from sale of:
               
Investment securities available-for-sale
    602,625       1,047,173  
Loans receivable
    151,961       427,087  
Loans held for sale originated for investment
    607,291       147,194  
Other real estate owned
    135,461       77,804  
Premises and equipment
    9,200       84  
Repayments, maturities and redemptions of investment securities available-for-sale
    1,447,842       2,268,589  
Paydowns, maturities and termination of securities purchased under resale agreements
    667,887       630,000  
Redemption of Federal Home Loan Bank stock
    19,424       13,427  
Net cash (used in) provided by investing activities
    (1,215,080 )     280,436  
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase (decrease) in:
               
Deposits
    1,668,073       (87,053 )
Short-term borrowings
    (58,596 )     2,214  
Proceeds from:
               
FHLB advances
          350,000  
Issuance of common stock pursuant to various stock plans and agreements
    3,663       2,527  
Payment for:
               
Repayment of FHLB advances
    (760,274 )     (1,198,312 )
Repayment of long-term debt
    (21,918 )     (24,825 )
Repayment of notes payable and other borrowings
    (6,250 )      
Repurchase of common stock warrants
    (14,500 )      
Cash dividends
    (21,512 )     (20,704 )
Other net financing activities
    (73 )     (637 )
Net cash provided by (used in) financing activities
    788,613       (976,790 )
Effect of exchange rate changes on cash and cash equivalents
    (1,047 )     500  
NET INCREASE IN CASH AND CASH EQUIVALENTS
    (228,061 )     (9,148 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    1,333,949       1,099,084  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 1,105,888     $ 1,089,936  
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
  $ 135,037     $ 159,742  
Income tax payments, net of refunds
    262,988       24,292  
Noncash investing and financing activities:
               
Transfers to other real estate owned/affordable housing investments
    140,987       203,276  
Conversion of preferred stock to common stock
    31       325,299  
Loans to facilitate sales of other real estate owned
    8,792       13,550  
Loans to facilitate sales of loans
    21,637       42,022  
Loans to facilitate sales of premises and equipment
    11,100        
Loans transferred to loans held for sale
    631,407       138,792  
 
See accompanying notes to condensed consolidated financial statements.
 
 
EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(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 (“East West Bank” or the “Bank”) and East West Insurance Services, Inc. Intercompany transactions and accounts have been eliminated in consolidation. East West also has eight wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board (“FASB”) 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, 2011 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, 2010.
 
Certain prior year balances have been reclassified to conform to current year presentation.
 
NOTE 2 —SIGNIFICANT ACCOUNTING POLICIES
 
Derivative Financial Instruments—As part of its asset and liability management strategy, the Company uses derivative financial instruments to mitigate exposure to interest rate and foreign currency risks. All derivative instruments, including certain derivative instruments embedded in other contracts, are recognized on the condensed consolidated balance sheet at fair value with the change in fair value reported in earnings. When master netting agreements exist, the Company nets counterparty positions with any cash collateral received or delivered.
 
The Company's interest rate swaps on certain certificates of deposit qualify for hedge accounting treatment under ASC 815, Derivatives and Hedging. The Company documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction at the time the derivative contract is executed. This includes designating the derivative contract as a "fair value hedge" which is a hedge of a recognized asset or liability. All derivatives designated as fair value hedges are linked to specific hedged items or to groups of specific assets and liabilities on the balance sheet. Both at inception and quarterly thereafter, the Company assesses whether the derivatives used in hedging transactions are highly effective (as defined in the guidance) in offsetting changes in the fair value of the hedged item. Retroactive effectiveness is also assessed as well as the continued expectation that the hedge will remain effective prospectively. Any ineffective portion of the changes of fair value hedges is recognized immediately in interest expense in the condensed consolidated statements of income.
 
 
The Company discontinues hedge accounting prospectively when (i) a derivative is no longer highly effective in offsetting changes in the fair value, (ii) a derivative expires or is sold, terminated, or exercised, or (iii) the Company determines that designation of a derivative as a hedge is no longer appropriate. If a fair value hedge derivative instrument is terminated or the hedge designation removed, the previous adjustments to the carrying amount of the hedged liability would be subsequently accounted for in the same manner as other components of the carrying amount of that liability. For interest-bearing liabilities, such adjustments would be amortized into earnings over the remaining life of the respective liability.
 
Troubled debt restructurings (“TDR”)— A loan is identified as a troubled debt restructure when a borrower is experiencing financial difficulties and for economic or legal reasons related to these difficulties the Company grants a concession to the borrower in the restructuring that it would not otherwise consider. The Company has granted a concession when, as a result of the restructuring, it does not expect to collect all amounts due, including principal and/or interest accrued at the original terms of the loan. The concessions may be granted in various forms, including a below-market change in the stated interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date, or a note split with principal forgiveness. A restructuring executed at an interest rate that is at or near market interest rates for nontroubled debt is not a TDR. All troubled debt restructurings are reviewed for potential impairment. For modifications where we forgive principal, the entire amount of such principal forgiveness is immediately charged off. Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a period of six months to demonstrate that the borrower can perform under the restructured terms. However, the borrower's performance prior to the restructuring, or other significant events at the time of restructuring may be considered in assessing whether the borrower can meet the new terms and may result in the loan remaining on accrual status or being returned to accrual status after a shorter performance period. If the borrower's performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan. Loans classified as TDRs are reported as impaired loans.
 
Recent Accounting Standards
 
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 which are effective for fiscal years ending after December 15, 2010 and for interim periods within those fiscal years. The adoption of the disclosure requirements did not have a material effect on the Company’s condensed consolidated financial statements.
 
In December 2010, the FASB issued ASU 2010-28, Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, which modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should also consider whether there are any adverse qualitative factors indicating that an impairment may exist. The amendments in ASU 2010-28 are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.
 
 
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations, which specifies that if a public entity presents comparative financials, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in ASU 2010-29 are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the disclosure requirements did not have a material effect on the Company’s condensed consolidated financial statements.
 
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies the guidance on the two conditions that must exist in evaluating whether a restructuring constitutes a troubled debt restructuring:  that the restructuring constitutes a concession and that the debtor is experiencing financial difficulties. In addition, ASU 2011-02 clarifies that a creditor is precluded from using the effective interest rate test in the debtor's guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring. The amendments in ASU 2011-02 are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Additionally, ASU 2011-02 finalizes the effective date for the disclosures required by paragraphs 310-10-50-33 through 50-34, which were deferred by ASU 2011-01, for interim and annual periods beginning on or after June 15, 2011. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.
 
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860):  Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 removes the transferor's ability criterion from the consideration of effective control for repos and other agreements that both entitle and obligate the transferor to repurchase or redeem financial assets before their maturity. The amendments in ASU 2011-03 remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The FASB indicates that eliminating the transferor's ability criterion and related implementation guidance from an entity's assessment of effective control should improve the accounting for repos and other similar transactions. The amendments in ASU 2011-03 are effective for the first interim or annual period beginning on or after December 15, 2011 and are to be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company does not expect the adoption of this guidance to have a material effect on its condensed consolidated financial statements.
 
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 addresses convergence between GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. The amendments in ASU 2011-04 are effective during interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Company does not expect the adoption of this guidance to have a material effect on its condensed consolidated financial statements.
 
 
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured, or when they must be reclassified to net income. This standard is effective for interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material effect on its condensed consolidated financial statements.
 
In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 gives both public and nonpublic companies the option to qualitatively determine whether they can bypass the two-step goodwill impairment test under ASC 350-20, Intangibles – Goodwill and Other: Goodwill. Under ASU 2011-08, if a company chooses to perform a qualitative assessment and determines that it is more likely than not (a more than 50 percent likelihood) that the fair value of a reporting unit is less than its carrying amount, it would then perform Step 1 of the annual goodwill impairment test in ASC 350-20 and, if necessary, proceed to Step 2. Otherwise, no further evaluation would be necessary. The amended guidance is effective for interim and annual periods beginning after December 15, 2011. Early adoption is permitted. The Company does not expect the adoption of this guidance 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 following 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, single issue trust preferred securities, equity swap agreements, foreign exchange options, interest rate swaps and other real estate owned (“OREO”).
 
 
 
·
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is 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, derivative liabilities, foreign exchange options and interest rate swaps at fair value on a recurring basis. Certain other assets such as mortgage servicing assets, impaired loans, other real estate owned, loans held for sale, goodwill, premiums on acquired deposits and other 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 nonfinancial assets and liabilities that are measured at fair value on a recurring and nonrecurring basis. These assets and liabilities are reported on the condensed consolidated balance sheets at their fair values as of September 30, 2011 and December 31, 2010. 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 2011. There were also no transfers in and out of Levels 1 and 3 or Levels 2 and 3 during the first nine months of 2011.
 
    Assets (Liabilities) Measured at Fair Value on a Recurring Basis  
    as of September 30, 2011  
   
Fair Value Measurements September 30, 2011
   
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
  $ 20,761     $ 20,761     $     $  
U.S. Government agency and U.S. Government sponsored enterprise debt securities
    642,951             642,951        
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:
                               
Commercial mortgage-backed securities
    16,823             16,823        
Residential mortgage-backed securities
    1,093,829             1,093,829        
Municipal securities
    77,466             77,466        
Other residential mortgage-backed securities:
                               
Investment grade
                       
Non-investment grade
                       
Corporate debt securities:
                               
Investment grade
    1,403,432             1,403,432        
Non-investment grade
    14,195             11,840       2,355  
Other securities
    10,135             10,135        
Total investment securities available-for-sale
  $ 3,279,592     $ 20,761     $ 3,256,476     $ 2,355  
Equity swap agreements
  $ 200     $     $ 200     $  
Foreign exchange options
    4,392             4,392        
Interest rate swaps
    17,791             17,791        
Derivative liabilities
    (20,206 )           (17,237 )     (2,969 )
 
 
    Assets (Liabilities) Measured at Fair Value on a Recurring Basis  
    as of December 31, 2010  
   
Fair Value Measurements December 31, 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
  $ 20,454     $ 20,454     $     $  
U.S. Government agency and U.S. Government sponsored enterprise debt securities
    1,333,465             1,333,465        
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:
                               
Commercial mortgage-backed securities
    19,132             19,132        
Residential mortgage-backed securities
    306,714             306,714        
Municipal securities
                       
Other residential mortgage-backed securities:
                               
Investment grade
                       
Non-investment grade
    6,254                   6,254  
Corporate debt securities:
                               
Investment grade
    1,056,867             1,056,867        
Non-investment grade
    38,730             35,957       2,773  
Other securities
    94,325             94,325        
Total investment securities available-for-sale
  $ 2,875,941     $ 20,454     $ 2,846,460     $ 9,027  
Equity swap agreements
  $ 206     $     $ 206     $  
Foreign exchange options
    5,084             5,084        
Interest rate swaps
    13             13        
Derivative liabilities
    (3,463 )           (14 )     (3,449 )
 
    Assets Measured at Fair Value on a Non-Recurring Basis  
    as of and for the Three Months Ended September 30, 2011  
   
Fair Value Measurements as of September 30, 2011
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Gains (Losses) for the Three Months Ended September 30, 2011
 
   
(In thousands)
 
Non-covered impaired loans:
                             
Total residential
  $ 9,637     $     $     $ 9,637     $ (3,142 )
Total commercial real estate
    40,997                   40,997       (16,645 )
Total commercial and industrial
    4,405                   4,405       (6,328 )
Total consumer
    315                   315       (265 )
Total non-covered impaired loans
  $ 55,354     $     $     $ 55,354     $ (26,380 )
                                         
Mortgage servicing assets (single-family, multifamily and commercial)
  $ 12,495     $     $     $ 12,495     $ (212 )
Non-covered OREO
  $ 36     $     $ 36     $     $ (17 )
Covered OREO (1)
  $ 18,068     $     $ 18,068     $     $ (3,252 )
Loans held for sale
  $ 2,714     $     $     $ 2,714     $ (260 )

 
    Assets Measured at Fair Value on a Non-Recurring Basis  
    as of and for the Three Months Ended September 30, 2010  
   
Fair Value Measurements as of September 30, 2010
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Gains (Losses) for the Three Months Ended September 30, 2010
 
   
(In thousands)
 
Non-covered impaired loans:
                             
Total residential
  $ 2,694     $     $     $ 2,694     $ (772 )
Total commercial real estate
    41,212                   41,212       (16,046 )
Total commercial and industrial
    7,830                   7,830       (3,053 )
Total consumer
    167                   167       96  
Total non-covered impaired loans
  $ 51,903     $     $     $ 51,903     $ (19,775 )
 
                                       
Mortgage servicing assets (single-family, multifamily and commercial)
  $ 15,973     $     $     $ 15,973     $ (284 )
Non-covered OREO
  $ 2,574     $     $ 2,574     $     $ (1,099 )
Covered OREO (1)
  $ 27,205     $     $ 27,205     $     $ (6,569 )
Loans held for sale
  $ 359     $     $     $ 359     $ (228 )
_____________________
 
(1)  
Covered OREO results from the WFIB and UCB FDIC-assisted acquisitions for which the Company entered into shared-loss agreements with the FDIC whereby the FDIC will reimburse the Company for 80% of eligible losses. As such, the Company’s liability for losses is 20% of the $3.3 million in losses, or $650 thousand, and 20% of the $6.6 million in losses, or $1.3 million, for the three months ended September 30, 2011 and 2010, respectively.
 
    Assets Measured at Fair Value on a Non-Recurring Basis  
    as of and for the Nine Months Ended September 30, 2011  
   
Fair Value Measurements as of September 30, 2011
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Gains (Losses) for the Nine Months Ended September 30, 2011
 
   
(In thousands)
 
Non-covered impaired loans:
                             
Total residential
  $ 12,533     $     $     $ 12,533     $ (3,727 )
Total commercial real estate
    44,840                   44,840       (34,192 )
Total commercial and industrial
    5,513                   5,513       (9,915 )
Total consumer
    359                   359       (443 )
Total non-covered impaired loans
  $ 63,245     $     $     $ 63,245     $ (48,277 )
 
                                       
Mortgage servicing assets (single-family, multifamily and commercial)
  $ 12,495     $     $     $ 12,495     $ (675 )
Non-covered OREO
  $ 13,692     $     $ 13,692     $     $ (1,529 )
Covered OREO (1)
  $ 110,133     $     $ 110,133     $     $ (18,655 )
Loans held for sale
  $ 2,714     $     $     $ 2,714     $ (260 )
 
    Assets Measured at Fair Value on a Non-Recurring Basis  
    as of and for the Nine Months Ended September 30, 2010  
   
Fair Value Measurements as of September 30, 2010
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Total Gains (Losses) for the Nine Months Ended September 30, 2010
 
   
(In thousands)
 
Non-covered impaired loans:
                             
Total residential
  $ 5,953     $     $     $ 5,953     $ (2,234 )
Total commercial real estate
    74,630                   74,630       (36,230 )
Total commercial and industrial
    7,925                   7,925       (4,836 )
Total consumer
    166                   166       (245 )
Total non-covered impaired loans
  $ 88,674     $     $     $ 88,674     $ (43,545 )
 
                                       
Mortgage servicing assets (single-family, multifamily and commercial)
  $ 15,973     $     $     $ 15,973     $ (348 )
Non-covered OREO
  $ 4,101     $     $ 4,101     $     $ (4,012 )
Covered OREO (1)
  $ 57,234     $     $ 57,234     $     $ (32,496 )
Loans held for sale
  $ 3,737     $     $     $ 3,737     $ (2,059 )
_____________________
 
(1)  
Covered OREO results from the WFIB and UCB FDIC-assisted acquisitions for which the Company entered into shared-loss agreements with the FDIC whereby the FDIC will reimburse the Company for 80% of eligible losses. As such, the Company’s liability for losses is 20% of the $18.7 million in losses, or $3.7 million, and 20% of the $32.5 million in losses, or $6.5 million, for the nine months ended September 30, 2011 and 2010, respectively.
 
 
At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The following tables provide a reconciliation of the beginning and ending balances for major asset and liability categories measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011 and 2010:
 
    Investment Securities Available-for-Sale        
         
Other Residential Mortgage-Backed Securities,
   
Corporate Debt Securities
       
   
Total
   
Non-Investment Grade
   
Investment Grade
   
Non-Investment Grade
   
Derivatives Payable
 
   
(In thousands)
 
Beginning balance, July 1, 2011
  $ 2,453     $     $     $ 2,453     $ (3,247 )
Total gains or (losses): (1)
                                       
Included in earnings
                            278  
Included in accumulated other comprehensive loss (unrealized) (2)
    (90 )                 (90 )      
Purchases, issuances, sales, settlements (3)
                                       
Purchases
                             
Issuances
                             
Sales