EAST WEST BANCORP INC - Quarter Report: 2012 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Mark One

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

For the quarterly period ended June 30, 2012

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

For the transition period from ________ to ________

Commission file number 000-24939

EAST WEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices) (Zip Code)

(626) 768-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer and accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
þ

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 þ

Number of shares outstanding of the issuer’s common stock on the latest practicable date: 141,939,270 shares of common stock as of July 31, 2012.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION		4

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	4

	Notes to Condensed Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	62

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	88

Item 4.	Controls and Procedures	88

PART II - OTHER INFORMATION		89

Item 1.	Legal Proceedings	89

Item 1A.	Risk Factors	89

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	89

Item 3.	Defaults Upon Senior Securities	89

Item 4.	Mine Safety Disclosures	89

Item 5.	Other Information	89

Item 6.	Exhibits	90

SIGNATURE		91

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 2011 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)

	June 30,			December 31,
	2012			2011
ASSETS
Cash and cash equivalents	$	2,429,614		$	1,431,185
Short-term investments	254,714			61,834
Federal funds sold	30,000			—
Securities purchased under resale agreements	675,000			786,434
Investment securities available-for-sale, at fair value (with amortized cost of $1,902,789 at June 30, 2012 and $3,132,968 at December 31, 2011)	1,873,739			3,072,578
Loans held for sale	137,812			278,603
Loans receivable, excluding covered loans (net of allowance for loan losses of $219,454 at June 30, 2012 and $209,876 at December 31, 2011)	10,555,654			10,061,788
Covered loans (net of allowance for loan losses of $7,173 at June 30, 2012 and $6,647 at December 31, 2011)	3,416,613			3,923,142
Total loans receivable, net	13,972,267			13,984,930
FDIC indemnification asset	409,287			511,135
Other real estate owned, net	43,222			29,350
Other real estate owned covered, net	35,577			63,624
Total other real estate owned	78,799			92,974
Investment in affordable housing partnerships	181,858			144,445
Premises and equipment, net	115,560			118,926
Accrued interest receivable	85,389			89,686
Due from customers on acceptances	31,939			198,774
Premiums on deposits acquired, net	61,480			67,190
Goodwill	337,438			337,438
Other assets	850,838			792,535
TOTAL	$	21,525,734		$	21,968,667

LIABILITIES AND STOCKHOLDERS’ EQUITY
Customer deposit accounts:
Noninterest-bearing	$	3,828,116		$	3,492,795
Interest-bearing	13,513,756			13,960,207
Total deposits	17,341,872			17,453,002
Federal Home Loan Bank advances	362,885			455,251
Securities sold under repurchase agreements	995,000			1,020,208
Bank acceptances outstanding	31,939			198,774
Long-term debt	212,178			212,178
Accrued expenses and other liabilities	286,920			317,511
Total liabilities	19,230,794			19,656,924

COMMITMENTS AND CONTINGENCIES (Note 12)

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 shares outstanding in 2012 and 2011.	83,027			83,027
Common stock, $0.001 par value, 200,000,000 shares authorized; 157,072,441 and 156,798,011 shares issued in 2012 and 2011, respectively; 142,645,812 and 149,327,907 shares outstanding in 2012 and 2011, respectively.	157			157
Additional paid in capital	1,456,361			1,443,883
Retained earnings	1,040,535			934,617
Treasury stock, at cost – 14,426,629 shares in 2012 and 7,470,104 shares in 2011	(269,217		)	(116,001		)
Accumulated other comprehensive loss, net of tax	(15,923		)	(33,940		)
Total stockholders’ equity	2,294,940			2,311,743
TOTAL	$	21,525,734		$	21,968,667

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						Six Months Ended
	June 30,						June 30,

	2012			2011			2012			2011
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees	$	238,036		$	240,773		$	459,075		$	468,299
Investment securities	16,913			23,253			38,145			42,110
Securities purchased under resale agreements	4,758			5,109			9,072			9,379
Investment in Federal Home Loan Bank stock	167			124			387			357
Investment in Federal Reserve Bank stock	714			709			1,427			1,418
Due from banks and short-term investments	5,774			4,500			12,306			7,240
Total interest and dividend income	266,362			274,468			520,412			528,803
INTEREST EXPENSE
Customer deposit accounts	19,177			29,130			39,341			55,112
Federal funds purchased	—			—			2			—
Federal Home Loan Bank advances	1,353			3,955			3,495			9,733
Securities sold under repurchase agreements	11,591			12,116			23,313			24,133
Long-term debt	1,084			1,788			2,186			3,359
Other borrowings	—			143			—			296
Total interest expense	33,205			47,132			68,337			92,633
Net interest income before provision for loan losses	233,157			227,336			452,075			436,170
Provision for loan losses	15,500			26,500			33,600			53,006
Net interest income after provision for loan losses	217,657			200,836			418,475			383,164
NONINTEREST (LOSS) INCOME
Impairment loss on investment securities	—			—			(5,165		)	(5,555		)
Less: Noncredit-related impairment loss recorded in other comprehensive income	—			—			5,066			5,091
Net impairment loss on investment securities recognized in earnings	—			—			(99		)	(464		)
Decrease in FDIC indemnification asset and receivable	(40,345		)	(18,806		)	(45,763		)	(36,249		)
Branch fees	8,641			9,078			16,935			16,832
Net gain on sales of investment securities	71			1,117			554			3,632
Net gain on sale of fixed assets	37			2,169			73			2,206
Letters of credit fees and commissions	4,538			3,390			8,813			6,434
Foreign exchange income	563			2,826			2,359			4,752
Ancillary loan fees	2,188			2,055			4,196			4,046
Income from life insurance policies	959			1,122			1,949			2,106
Net gain on sales of loans	6,375			5,891			11,554			13,301
Other operating income	5,318			3,649			9,514			6,936
Total noninterest (loss) income	(11,655		)	12,491			10,085			23,532
NONINTEREST EXPENSE
Compensation and employee benefits	42,863			40,870			89,272			79,140
Occupancy and equipment expense	13,057			12,175			26,575			24,773
Amortization of investments in affordable housing partnerships and other investments	4,425			4,598			8,891			9,123
Amortization of premiums on deposits acquired	2,838			3,151			5,711			6,336
Deposit insurance premiums and regulatory assessments	3,323			6,833			7,315			14,024
Loan-related expenses	4,175			4,284			8,656			7,383
Other real estate owned expense	4,486			14,585			15,351			25,249
Legal expense	4,150			6,791			11,323			10,892
Prepayment penalty for FHLB advances	2,336			4,433			3,657			8,455
Data processing	2,197			2,100			4,661			4,703
Deposit-related expenses	1,657			1,373			3,084			2,532
Consulting expense	1,568			2,378			3,035			4,004
Other operating expenses	14,533			14,026			28,840			27,772
Total noninterest expense	101,608			117,597			216,371			224,386
INCOME BEFORE PROVISION FOR INCOME TAXES	104,394			95,730			212,189			182,310
PROVISION FOR INCOME TAXES	33,837			35,205			73,549			65,714
NET INCOME	70,557			60,525			138,640			116,596
PREFERRED STOCK DIVIDENDS	1,714			1,714			3,428			3,429
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	68,843		$	58,811		$	135,212		$	113,167
EARNINGS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
BASIC	$	0.48		$	0.40		$	0.93		$	0.77
DILUTED	$	0.47		$	0.39		$	0.92		$	0.76
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC	142,107			147,011			143,727			146,937
DILUTED	147,786			153,347			149,414			153,349
DIVIDENDS DECLARED PER COMMON SHARE	$	0.10		$	0.05		$	0.20		$	0.06

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2012		2011		2012		2011
Net income	$	70,557	$	60,525	$	138,640	$	116,596
Other comprehensive income, net of tax:
Unrealized gain on investment securities available-for-sale:
Unrealized holding gains arising during period	1,002		15,166		21,272		22,569
Reclassification adjustment for net gains included in net income	(41)		(648)		(321)		(2,107)
Noncredit-related impairment loss on securities	—		—		(2,938)		(2,953)
Foreign currency translation adjustments	(6)		67		4		(665)
Other comprehensive income	955		14,585		18,017		16,844
COMPREHENSIVE INCOME	$	71,512	$	75,110	$	156,657	$	133,440

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

			Additional					Additional								Accumulated
			Paid In					Paid In								Other
			Capital					Capital								Comprehensive			Total
	Preferred		Preferred			Common		Common		Retained			Treasury			Income (Loss),			Stockholders’
	Stock		Stock			Stock		Stock		Earnings			Stock			Net of Tax			Equity

BALANCE, JANAURY 1, 2011	$	—	$	83,058		$	156	$	1,434,277	$	720,116		$	(111,262	)	$	(12,414	)	$	2,113,931
Net income										116,596									116,596
Other comprehensive income																16,844			16,844
Stock compensation costs								5,570											5,570
Tax benefit from stock compensation plans, net								474											474
Issuance of 353,098 shares of common stock pursuant to various stock compensation plans and agreements								3,341											3,341
Conversion of 31 shares of Series A preferred stock into 2,014 shares of common stock			(31		)			31											—
Cancellation of 122,170 shares of common stock due to forfeitures of issued restricted stock								2,112					(2,112)						—
Purchase of 24,834 shares of treasury stock due to the vesting of restricted stock													(572)						(572		)
Preferred stock dividends										(3,429		)							(3,429		)
Common stock dividends										(8,923		)							(8,923		)
Repurchase of 1,517,555 common stock warrants								(14,500)											(14,500		)
BALANCE, JUNE 30, 2011	$	—	$	83,027		$	156	$	1,431,305	$	824,360		$	(113,946	)	$	4,430		$	2,229,332
BALANCE, JANAURY 1, 2012	$	—	$	83,027		$	157	$	1,443,883	$	934,617		$	(116,001	)	$	(33,940	)	$	2,311,743
Net income										138,640									138,640
Other comprehensive income																18,017			18,017
Stock compensation costs								7,773											7,773
Tax benefit from stock compensation plans, net								157											157
Issuance of 274,430 shares of common stock pursuant to various stock compensation plans and agreements								2,678											2,678
Cancellation of 108,662 shares of common stock due to forfeitures of issued restricted stock								1,870					(1,870)						—
Purchase of 63,636 shares of treasury stock due to the vesting of restricted stock													(1,396)						(1,396		)
Preferred stock dividends										(3,428		)							(3,428		)
Common stock dividends										(29,294		)							(29,294		)
Purchase of 6,784,227 shares of treasury stock pursuant to the Stock Repurchase Program													(149,950)						(149,950		)
BALANCE, JUNE 30, 2012	$	—	$	83,027		$	157	$	1,456,361	$	1,040,535		$	(269,217	)	$	(15,923	)	$	2,294,940

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	June 30,

	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	138,640		$	116,596
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	39,711			30,708
(Accretion) of discount and amortization of premiums, net	(96,885		)	(101,894		)
Decrease in FDIC indemnification asset and receivable	45,763			36,249
Stock compensation costs	7,773			5,570
Deferred tax (benefit) expense	(19,868		)	63,616
Provision for loan losses	33,600			53,006
Impairment on other real estate owned	10,541			19,655
Net gain on sales of investment securities, loans and other assets	(14,854		)	(19,518		)
Originations and purchases of loans held for sale	(34,716		)	(6,884		)
Proceeds from sales of loans held for sale	—			8,081
Prepayment penalty for Federal Home Loan Bank advances, net	3,657			8,455
Prepayment penalty on modification of Federal Home Loan Bank advances	(37,678		)	—
Net proceeds from FDIC shared-loss agreements	63,077			101,102
Net change in accrued interest receivable and other assets	(67,820		)	(129,150		)
Net change in accrued expenses and other liabilities	(43,142		)	156,015
Other net operating activities	(2,007		)	(1,653		)
Total adjustments	(112,848		)	223,358
Net cash provided by operating activities	25,792			339,954

CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in:
Loans	184,443			(396,027		)
Short-term investments	(192,880		)	58,081
Federal funds sold	(30,000		)	—
Purchases of:
Securities purchased under resale agreements	(25,000		)	(418,369		)
Investment securities available-for-sale	(482,500		)	(1,385,644		)
Loans receivable	(239,272		)	(463,981		)
Premises and equipment	(3,405		)	(2,199		)
Investments in affordable housing partnerships	(34,128		)	(17,444		)
Proceeds from sale of:
Investment securities available-for-sale	1,097,270			527,823
Loans receivable	58,205			125,288
Loans held for sale originated for investment	199,435			368,478
Other real estate owned	59,814			74,004
Premises and equipment	11			9,111
Repayments, maturities and redemptions of investment securities available-for-sale	606,704			561,711
Paydowns, maturities and termination of securities purchased under resale agreements	136,434			106,088
Redemption of Federal Home Loan Bank stock	12,674			12,903
Other net investing activities	(236		)	—
Net cash provided by (used in) investing activities	1,347,569			(840,177		)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in:
Deposits	(110,498		)	1,495,126
Short-term borrowings	(25,208		)	(5,930		)
Proceeds from:
Issuance of common stock pursuant to various stock plans and agreements	2,678			3,341
Payment for:
Repayment of FHLB advances	(57,616		)	(683,130		)
Repayment of long-term debt	—			(10,309		)
Repayment of notes payable and other borrowings	—			(6,250		)
Repurchase of common stock warrants	—			(14,500		)
Repurchase of shares of treasury stock pursuant to the Stock Repurchase Plan	(149,950		)	—
Cash dividends	(32,642		)	(12,352		)
Other net financing activities	(1,239		)	(98		)
Net cash (used in) provided by financing activities	(374,475		)	765,898
Effect of exchange rate changes on cash and cash equivalents	(457		)	(1,126		)
NET INCREASE IN CASH AND CASH EQUIVALENTS	998,429			264,549
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	1,431,185			1,333,949
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	2,429,614		$	1,598,498

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	73,938		$	92,622
Income tax payments, net of refunds	185,729			12,587
Noncash investing and financing activities:
Loans transferred to loans held for sale, net	21,317			479,582
Transfers to other real estate owned	54,478			104,842
Loans to facilitate sales of other real estate owned	850			7,562
Loans to facilitate sales of loans	638			17,416
Loans to facilitate sales of premises and equipment	—			11,100
Conversion of preferred stock to common stock	—			31

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 seven 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 six months ended June 30, 2012 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, 2011.

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. Retrospective 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.

The Company adopted ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs and has made the accounting policy election to use the exception in ASC 820 with respect to measuring counterparty credit risk for derivative instruments. That exception permits the Company to measure the fair value of a group of financial assets and liabilities on the basis of the price that would be received to sell an asset position or to transfer a liability position for a particular risk exposure, based on specified criteria, which have been met by the Company.

Comprehensive Income—The term “comprehensive income” describes the total of all components of comprehensive income, including net income and other comprehensive income. “Other comprehensive income” refers to revenues, expenses, and gains and losses that are included in comprehensive income but are excluded from net income because they have been recorded directly in equity under the provisions of other Financial Accounting Standards Board statements. In accordance with the adoption of ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, the Company presents comprehensive income in the condensed consolidated statements of comprehensive income, which was formerly presented in the condensed consolidated statements of changes in stockholders’ equity.

Recent Accounting Standards

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 were 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 were 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. The adoption of this guidance did not have a material effect on the Company’s 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 were effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material effect on the Company’s condensed consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 requires 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. The FASB amended ASU 2011-05 in December 2011, with the issuance of ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers only changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. Both standards were effective for interim and annual periods beginning after December 15, 2011. The adoption of these standards only affected the presentation of the Company’s condensed consolidated financial statements and did not have an impact on the financial amounts presented in the statements.

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 gives 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. The Company has elected to continue to assess the two-step goodwill impairment, quantitatively. As such, this guidance did not have an impact on the Company’s condensed consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 addresses the differences in offsetting requirements between GAAP and IFRS by enhancing disclosures about financial instruments and derivative instruments that are either offset in accordance with GAAP or are subject to an enforceable master netting arrangement or similar agreement. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The guidance is effective for interim and annual reporting periods beginning on or after January 1, 2013, and must be applied retrospectively to all comparative periods presented. 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, corporate debt securities, single issuer trust preferred securities, equity swap agreements, foreign exchange options, interest rate swaps, impaired loans 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 pooled trust preferred securities and derivatives payable.

The Company records investment securities available-for-sale, equity swap agreements, derivative liabilities, foreign exchange options, interest rate swaps and short-term foreign exchange contracts 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 June 30, 2012 and December 31, 2011. 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 3 or Levels 2 and 3 during the first six months of 2012 and 2011.

	Assets (Liabilities) Measured at Fair Value on a Recurring Basis
	as of June 30, 2012
				Quoted Prices in		Significant
	Fair Value			Active Markets		Other			Significant
	Measurements			for Identical		Observable			Unobservable
	June 30,			Assets		Inputs			Inputs
	2012			(Level 1)		(Level 2)			(Level 3)
	(In thousands)
Investment securities available-for-sale:
U.S. Treasury securities	$	72,188		$	72,188	$	—		$	—
U.S. Government agency and U.S. Government sponsored enterprise debt securities	359,724			—		359,724			—
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities	48,689			—		48,689			—
Residential mortgage-backed securities	876,244			—		876,244			—
Municipal securities	65,782			—		65,782			—
Corporate debt securities:
Investment grade	426,055			—		426,055			—
Non-investment grade	14,919			—		12,497			2,422
Other securities	10,138			—		10,138			—
Total investment securities available-for-sale	$	1,873,739		$	72,188	$	1,799,129		$	2,422
Equity swap agreements	$	204		$	—	$	204		$	—
Foreign exchange options	4,264			—		4,264			—
Interest rate swaps	28,582			—		28,582			—
Short-term foreign exchange contracts	877			—		877			—
Derivative liabilities	(31,740		)	—		(28,926		)	(2,814		)

	Assets (Liabilities) Measured at Fair Value on a Recurring Basis
	as of December 31, 2011
				Quoted Prices in		Significant
	Fair Value			Active Markets		Other			Significant
	Measurements			for Identical		Observable			Unobservable
	December 31,			Assets		Inputs			Inputs
	2011			(Level 1)		(Level 2)			(Level 3)
	(In thousands)
Investment securities available-for-sale:
U.S. Treasury securities	$	20,725		$	20,725	$	—		$	—
U.S. Government agency and U.S. Government sponsored enterprise debt securities	576,578			—		576,578			—
U.S. Government agency and U.S. Government sponsored enterprise mortgage-backed securities:
Commercial mortgage-backed securities	49,315			—		49,315			—
Residential mortgage-backed securities	993,770			—		993,770			—
Municipal securities	79,946			—		79,946			—
Corporate debt securities:
Investment grade	1,322,561			—		1,322,561			—
Non-investment grade	19,615			—		17,380			2,235
Other securities	10,068			—		10,068			—
Total investment securities available-for-sale	$	3,072,578		$	20,725	$	3,049,618		$	2,235
Equity swap agreements	$	202		$	—	$	202		$	—
Foreign exchange options	3,899			—		3,899			—
Interest rate swaps	20,474			—		20,474			—
Short-term foreign exchange contracts	1,403			—		1,403			—
Derivative liabilities	(24,164		)	—		(21,530		)	(2,634		)

	Assets Measured at Fair Value on a Non-Recurring Basis
	as of and for the Three Months Ended June 30, 2012
			Quoted Prices in		Significant				Total Gains
	Fair Value		Active Markets		Other		Significant		(Losses) for the
	Measurements		for Identical		Observable		Unobservable		Three Months Ended
	June 30,		Assets		Inputs		Inputs		June 30,
	2012		(Level 1)		(Level 2)		(Level 3)		2012
	(In thousands)
Non-covered impaired loans:
Total residential	$	14,824	$	—	$	14,824	$	—	$	(2,240	)
Total commercial real estate	16,517		—		16,517		—		(4,315		)
Total commercial and industrial	15,616		—		—		15,616		(9,705		)
Total consumer	372		—		372		—		(264		)
Total non-covered impaired loans	$	47,329	$	—	$	31,713	$	15,616	$	(16,524	)
Non-covered OREO	$	4,625	$	—	$	4,625	$	—	$	(1,820	)
Covered OREO (1)	$	6,544	$	—	$	6,544	$	—	$	(1,241	)
Loans held for sale	$	—	$	—	$	—	$	—	$	—

	Assets Measured at Fair Value on a Non-Recurring Basis
	as of and for the Three Months Ended June 30, 2011
			Quoted Prices in		Significant				Total Gains
	Fair Value		Active Markets		Other		Significant		(Losses) for the
	Measurements		for Identical		Observable		Unobservable		Three Months Ended
	June 30,		Assets		Inputs		Inputs		June 30,
	2011		(Level 1)		(Level 2)		(Level 3)		2011
	(In thousands)
Non-covered impaired loans:
Total residential	$	3,898	$	—	$	3,898	$	—	$	(715	)
Total commercial real estate	28,936		—		28,936		—		(16,933		)
Total commercial and industrial	6,795		—		—		6,795		2,487
Total consumer	—		—		—		—		—
Total non-covered impaired loans	$	39,629	$	—	$	32,834	$	6,795	$	(15,161	)
Non-covered OREO	$	7,034	$	—	$	7,034	$	—	$	(460	)
Covered OREO (1)	$	46,333	$	—	$	46,333	$	—	$	(9,148	)
Loans held for sale	$	—	$	—	$	—	$	—	$	—

(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 $1.2 million in losses, or $248 thousand, and 20% of the $9.1 million in losses, or $1.8 million, for the three months ended June 30, 2012 and 2011, respectively.

	Assets Measured at Fair Value on a Non-Recurring Basis
	as of and for the Six Months Ended June 30, 2012
			Quoted Prices in		Significant				Total Gains
	Fair Value		Active Markets		Other		Significant		(Losses) for the
	Measurements		for Identical		Observable		Unobservable		Six Months Ended
	June 30,		Assets		Inputs		Inputs		June 30,
	2012		(Level 1)		(Level 2)		(Level 3)		2012
	(In thousands)
Non-covered impaired loans:
Total residential	$	18,466	$	—	$	18,466	$	—	$	(2,789	)
Total commercial real estate	26,789		—		26,789		—		(4,316		)
Total commercial and industrial	16,097		—		—		16,097		(10,281		)
Total consumer	379		—		379		—		(321		)
Total non-covered impaired loans	$	61,731	$	—	$	45,634	$	16,097	$	(17,707	)
Non-covered OREO	$	8,674	$	—	$	8,674	$	—	$	(2,675	)
Covered OREO (1)	$	17,712	$	—	$	17,712	$	—	$	(7,689	)
Loans held for sale	$	—	$	—	$	—	$	—	$	(4,730	)

	Assets Measured at Fair Value on a Non-Recurring Basis
	as of and for the Six Months Ended June 30, 2011
			Quoted Prices in		Significant				Total Gains
	Fair Value		Active Markets		Other		Significant		(Losses) for the
	Measurements		for Identical		Observable		Unobservable		Six Months Ended
	June 30,		Assets		Inputs		Inputs		June 30,
	2011		(Level 1)		(Level 2)		(Level 3)		2011
	(In thousands)
Non-covered impaired loans:
Total residential	$	5,540	$	—	$	5,540	$	—	$	(1,502	)
Total commercial real estate	33,480		—		33,480		—		(20,708		)
Total commercial and industrial	3,968		—		—		3,968		(4,562		)
Total consumer	272		—		272		—		(178		)
Total non-covered impaired loans	$	43,260	$	—	$	39,292	$	3,968	$	(26,950	)
Non-covered OREO	$	13,656	$	—	$	13,656	$	—	$	(1,512	)
Covered OREO (1)	$	93,097	$	—	$	93,097	$	—	$	(15,403	)
Loans held for sale	$	11,493	$	—	$	11,493	$	—	$	(4,722	)

(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 $7.7 million in losses, or $1.5 million, and 20% of the $15.4 million in losses, or $3.1 million, for the six months ended June 30, 2012 and 2011, 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 six months ended June 30, 2012 and 2011:

	Investment Securities Available-for-Sale
			Other Residential Mortgage- Backed Securities		Corporate Debt Securities
	Total		Non-Investment Grade		Non-Investment Grade		Derivatives Payable
	(In thousands)
Opening balance, April 1, 2012	$	2,247	$	—	$	2,247	$	(3,122	)
Total gains or (losses) for the period: (1)
Included in earnings	—		—		—		308
Included in other comprehensive loss (unrealized) (2)	105		—		105		—
Purchases, issues, sales, settlements (3)
Purchases	—		—		—		—
Issues	—		—		—		—
Sales	—		—		—		—
Settlements	70		—		70		—
Transfer from investment grade to non-investment grade	—		—		—		—
Transfers in and/or out of Level 3 (4)	—		—		—		—
Closing balance, June 30, 2012	$	2,422	$	—	$	2,422	$	(2,814	)
Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of June 30, 2012	$	—	$	—	$	—	$	(308	)

	Investment Securities Available-for-Sale
			Other Residential Mortgage- Backed Securities		Corporate Debt Securities
	Total		Non-Investment Grade		Non-Investment Grade		Derivatives Payable
	(In thousands)
Opening balance, April 1, 2011	$	2,379	$	—	$	2,379	$	(3,270	)
Total gains or (losses) for the period: (1)
Included in earnings	—		—		—		23
Included in other comprehensive loss (unrealized) (2)	11		—		11		—
Purchases, issues, sales, settlements (3)
Purchases	—		—		—		—
Issues	—		—		—		—
Sales	—		—		—		—
Settlements	63		—		63		—
Transfer from investment grade to non-investment grade	—		—		—		—
Transfers in and/or out of Level 3(4)	—		—		—		—
Closing balance, June 30, 2011	$	2,453	$	—	$	2,453	$	(3,247	)
Changes in unrealized losses included in earnings relating to assets and liabilities held at the end of June 30, 2011	$	—	$	—	$	—	$	(178	)

(1) Total gains or losses represent the total realized and unrealized gains and losses recorded for Level 3 assets and liabilities. Realized gains or losses are reported in the condensed consolidated statements of income.

(2) Unrealized gains or losses on investment securities are reported in accumulated other comprehensive loss, net of tax, in the condensed consolidated statements of changes in stockholders’ equity.

(3) Purchases, issuances, sales, and settlements represent Level 3 assets and liabilities that were either purchased, issued, sold, or settled during the period. The amounts are recorded at their end of period fair values.

(4) Transfers in and/or out represent existing assets and liabilities that were either previously categorized as a higher level and the inputs to the model became unobservable or assets and liabilities that were previously classified as Level 3 and the lowest significant input became observable during the period. These assets and liabilities are recorded at their end of period fair values.

	Investment Securities Available-for-Sale
				Other Residential Mortgage- Backed Securities		Corporate Debt Securities
	Total			Non-Investment Grade		Non-Investment Grade			Derivatives Payable
	(In thousands)
Beginning balance, January 1, 2012	$	2,235		$	—	$	2,235		$	(2,634	)
Total gains or (losses) for the period: (1)
Included in earnings	(99		)	—		(99		)	(180		)
Included in other comprehensive loss (unrealized) (2)	330			—		330			—
Purchases, issues, sales, settlements (3)
Purchases	—			—		—			—
Issues	—			—		—			—
Sales	—			—		—			—
Settlements	(44