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

¨	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.	Condensed Consolidated Financial Statements (Unaudited)	4

		Notes to Condensed Consolidated Financial Statements (Unaudited)	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	54

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	81

	Item 4.	Controls and Procedures	81

PART II - OTHER INFORMATION			82

	Item 1.	Legal Proceedings	82

	Item 1A.	Risk Factors	82

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82

	Item 3.	Defaults Upon Senior Securities	82

	Item 4.	(Removed and Reserved)	82

	Item 5.	Other Information	82

	Item 6.	Exhibits	83

SIGNATURE			83

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

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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.

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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.

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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”).

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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	)

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	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	)

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	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	)

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(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	)

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(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.

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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		—			—		—