Edgar Filing: CATHAY GENERAL BANCORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

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 March 31, 2010

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

For the transition period from to

Commission file number 0-18630

CATHAY GENERAL BANCORP

(Exact name of registrant as specified in its charter)


Delaware		95-4274680
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

777 North Broadway, Los Angeles, California		90012
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (213) 625-4700

(Former name, former address and former fiscal year, if changed since last report)

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 ¨ 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,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $.01 par value, 78,512,698 shares outstanding as of April 30, 2010.

CATHAY GENERAL BANCORP AND SUBSIDIARIES

1ST QUARTER 2010 REPORT ON FORM 10-Q

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION			5

	Item 1.	FINANCIAL STATEMENTS (Unaudited)	5
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	8
	Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	28
	Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	60
	Item 4.	CONTROLS AND PROCEDURES.	61

PART II – OTHER INFORMATION			61

	Item 1.	LEGAL PROCEEDINGS.	61
	Item 1A.	RISK FACTORS.	61
	Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	62
	Item 3.	DEFAULTS UPON SENIOR SECURITIES.	62
	Item 4.	(REMOVED AND RESERVED.)	62
	Item 5.	OTHER INFORMATION.	62
	Item 6.	EXHIBITS.	63

	SIGNATURES		64

Forward-Looking Statements

In this quarterly Report on Form 10-Q, the term “Bancorp” refers to Cathay General Bancorp and the term “Bank” refers to Cathay Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively. The statements in this report include forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 regarding management’s beliefs, projections, and assumptions concerning future results and events. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, financial expectations, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “aims,” “anticipates,” “believes,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “projects,” “seeks,” “shall”, “should,” “will,” “predicts,” “potential,” “continue,” and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by us are based on estimates, beliefs, projections, and assumptions of management and are not guarantees of future performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Such risks and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from:

•

U.S. and international economic and market conditions;

•

market disruption and volatility;

•

current and potential future supervisory action by bank supervisory authorities and changes in laws and regulations, or their interpretations;

•

restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital structure;

•

credit losses and deterioration in asset or credit quality;

•

availability of capital;

•

potential goodwill impairment;

•

liquidity risk;

•

fluctuations in interest rates;

•

past and future acquisitions;

•

inflation and deflation;

•

success of expansion, if any, of our business in new markets;

•

the soundness of other financial institutions;

•

real estate market conditions;

•

our ability to compete with competitors;

•

the short term and long term impact of the new Basel II capital standards and the forthcoming new capital rules to be proposed for non-Basel II U.S. banks;

•

our ability to retain key personnel;

•

successful management of reputational risk;

•

natural disasters and geopolitical events;

•

general economic or business conditions in California, Asia and other regions where the Bank has operations;

•

restrictions on compensation paid to our executives as a result of our participation in the TARP Capital Purchase Program;

•

our ability to adapt to our information technology systems; and

•

changes in accounting standards or tax laws and regulations.

These and other factors are further described in Cathay General Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2009 (Item 1A in particular), other reports and registration statements filed with the Securities and Exchange Commission (“SEC”), and other filings it makes with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which speak to the date of this report. Cathay General Bancorp has no intention and undertakes no obligation to update any forward-looking statement or to publicly announce any revision of any forward-looking statement to reflect future developments or events, except as required by law.

Cathay General Bancorp’s filings with the SEC are available at the website maintained by the SEC at http://www.sec.gov, or by request directed to Cathay General Bancorp, 9650 Flair Drive, El Monte, California 91731, Attention: Investor Relations (626) 279-3286.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	March 31, 2010			December 31, 2009
	(In thousands, except share and per share data)
ASSETS
Cash and due from banks	$	64,926		$	100,124
Short-term investments and interest bearing deposits		327,773			254,726
Securities held-to-maturity (market value of $634,374 in 2010 $628,908 in 2009)		635,208			635,015
Securities available-for-sale (amortized cost of $3,209,907 in 2010 and $2,916,491 in 2009)		3,222,407			2,915,099
Trading securities		13,004			18
Loans held for sale		20,944			54,826
Loans		6,852,549			6,899,142
Less: Allowance for loan losses		(233,120	)		(211,889	)
Unamortized deferred loan fees		(8,017	)		(8,339	)

Loans, net		6,611,412			6,678,914
Federal Home Loan Bank stock		71,791			71,791
Other real estate owned, net		111,858			71,014
Investments in affordable housing partnerships, net		94,481			95,853
Premises and equipment, net		107,972			108,635
Customers’ liability on acceptances		19,637			26,554
Accrued interest receivable		33,961			35,982
Goodwill		316,340			316,340
Other intangible assets		21,573			23,157
Other assets		197,211			200,184

Total assets	$	11,870,498		$	11,588,232

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand deposits	$	854,654		$	864,551
Interest-bearing accounts:
NOW accounts		360,466			337,304
Money market accounts		901,050			943,164
Saving accounts		354,717			347,724
Time deposits under $100,000		1,693,753			1,529,954
Time deposits of $100,000 or more		3,581,638			3,482,343

Total deposits		7,746,278			7,505,040

Securities sold under agreements to repurchase		1,559,000			1,557,000
Advances from the Federal Home Loan Bank		864,362			929,362
Other borrowings from financial institutions		13,351			7,212
Other borrowings for affordable housing investments		19,276			19,320
Long-term debt		171,136			171,136
Acceptances outstanding		19,637			26,554
Other liabilities		60,359			59,864

Total liabilities		10,453,399			10,275,488

Commitments and contigencies		—			—

Stockholders’ equity
Preferred stock, 10,000,000 shares authorized, 258,000 issued and outstanding in 2010 and in 2009		244,834			243,967
Common stock, $0.01 par value; 100,000,000 shares authorized, 82,719,439 issued and 78,511,874 outstanding at March 31, 2010 and 67,667,155 issued and 63,459,590 outstanding at December 31, 2009		827			677
Additional paid-in-capital		760,530			634,623
Accumulated other comprehensive income/(loss), net		7,174			(875	)
Retained earnings		520,970			551,588
Treasury stock, at cost (4,207,565 shares at March 31, 2010 and at December 31, 2009)		(125,736	)		(125,736	)

Total Cathay General Bancorp stockholders’ equity		1,408,599			1,304,244
Noncontrolling Interest		8,500			8,500

Total equity		1,417,099			1,312,744

Total liabilities and equity	$	11,870,498		$	11,588,232

See accompanying notes to unaudited condensed consolidated financial statements

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)

(Unaudited)


	Three months ended March 31,
	2010			2009
	(In thousands, except share and per share data)
INTEREST AND DIVIDEND INCOME
Loan receivable, including loan fees	$	95,739		$	103,994
Investment securities- taxable		30,288			32,194
Investment securities- nontaxable		77			246
Federal Home Loan Bank stock		48			—
Federal funds sold and securities purchased under agreements to resell		—			1,302
Deposits with banks		317			58

Total interest and dividend income		126,469			137,794


INTEREST EXPENSE
Time deposits of $100,000 or more		15,383			23,237
Other deposits		9,101			16,115
Securities sold under agreements to repurchase		16,312			15,936
Advances from Federal Home Loan Bank		10,039			10,565
Long-term debt		913			1,505
Short-term borrowings		—			11

Total interest expense		51,748			67,369

Net interest income before provision for credit losses		74,721			70,425
Provision for credit losses		84,000			47,000

Net interest (loss)/income after provision for credit losses		(9,279	)		23,425


NON-INTEREST INCOME
Securities gains, net		3,439			22,498
Letters of credit commissions		959			976
Depository service fees		1,357			1,399
Other operating (loss)/income		(971	)		2,788

Total non-interest income		4,784			27,661


NON-INTEREST EXPENSE
Salaries and employee benefits		15,226			16,886
Occupancy expense		3,838			4,121
Computer and equipment expense		2,013			1,896
Professional services expense		4,639			2,967
FDIC and State assessments		5,144			2,854
Marketing expense		899			1,028
Other real estate owned expense		3,295			2,142
Operations of affordable housing investments , net		2,113			1,698
Amortization of core deposit intangibles		1,507			1,711
Other operating expense		5,489			2,220

Total non-interest expense		44,163			37,523

(Loss)/income before income tax (benefit)/expense		(48,658	)		13,563
Income tax (benefit)/expense		(23,068	)		3,175

Net (loss)/income		(25,590	)		10,388
Less: net income attributable to noncontrolling interest		(151	)		(151	)

Net (loss)/income attributable to Cathay General Bancorp		(25,741	)		10,237
Dividends on preferred stock		(4,092	)		(4,080	)

Net (loss)/income available to common stockholders		(29,833	)		6,157

Other comprehensive income (loss) , net of tax
Unrealized holding gains arising during the period		9,495			9,460
Less: reclassification adjustments included in net income		1,446			11,779

Total other comprehensive gain/(loss), net of tax		8,049			(2,319	)

Total comprehensive (loss)/income	$	(17,692	)	$	7,918

Net (loss)/income per common share:
Basic	$	(0.41	)	$	0.12
Diluted	$	(0.41	)	$	0.12

Cash dividends paid per common share	$	0.010		$	0.105
Basic average common shares outstanding		72,653,755			49,531,343
Diluted average common shares outstanding		72,653,755			49,541,041

See accompanying notes to unaudited condensed consolidated financial statements.

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31
	2010			2009
	(In thousands)
Cash Flows from Operating Activities
Net (loss)/income	$	(25,590	)	$	10,388
Adjustments to reconcile net income to net cash provided/(used) by operting activities:
Provision for credit losses		84,000			47,000
Provision for losses on other real estate owned		2,855			1,641
Deferred tax (benefit)/liability		(17,131	)		5,434
Depreciation		2,071			1,935
Net gains on sale of other real estate owned		(1,368	)		—
Net gains on sale of loans held for sale		—			(39	)
Proceeds from sale of loans held for sale		—			3,562
Purchase of trading securities		—			(348,315	)
Proceeds from sale of trading securities		—			99,785
Write-downs on venture capital investments		199			707
Write-downs on impaired securities		—			82
Gain on sales and calls of securities		(3,439	)		(22,580	)
Other non-cash interest		61			14
Amortization of security premiums, net		1,177			256
Amortization of intangibles		1,527			1,725
Excess tax short-fall from share-based payment arrangements		87			114
Stock based compensation expense		1,137			1,458
Decrease in deferred loan fees, net		(322	)		—
Decrease in accrued interest receivable		2,021			7,048
Increase/(decrease) in other assets, net		15,806			(7,623	)
Increase in other liabilities		1,567			3,042

Net cash provided/(used) by operating activities		64,658			(194,366	)

Cash Flows from Investing Activities
Increase in short-term investments		(73,047	)		(6,000	)
Decrease in securities purchased under agreements to resell		—			201,000
Purchase of investment securities available-for-sale		(1,267,803	)		(833,833	)
Proceeds from maturity and calls of investment securities available-for-sale		493,170			800,110
Proceeds from sale of investment securities available-for-sale		45,077			—
Purchase of mortgage-backed securities available-for-sale		—			(730,019	)
Proceeds from repayment and sale of mortgage-backed securities available-for-sale		438,445			922,333
Purchase of investment securities held-to-maturity		(10,000	)		—
Proceeds from maturity and call of investment securities held-to-maturity		9,465			—
Purchase of trading securities		(12,981	)		—
Net decrease/(increase) in loans		(34,254	)		33,353
Purchase of premises and equipment		(883	)		(5,834	)
Proceeds from sale of other real estate owned		9,739			—
Net increase in investment in affordable housing		(1,999	)		(6,235	)

Net cash (used)/provided in investing activities		(405,071	)		374,875


Cash Flows from Financing Activities
Net (decrease)/increase in demand deposits, NOW accounts, money market and saving deposits		(21,856	)		201,005
Net increase in time deposits		263,022			227,726
Net increase/(decrease) in federal funds purchased and securities sold under agreement to repurchase		2,000			(96,000	)
Advances from Federal Home Loan Bank		—			551,000
Repayment of Federal Home Loan Bank borrowings		(65,000	)		(1,071,000	)
Cash dividends		(785	)		(5,198	)
Issuance of common stock		124,924			—
Cash dividends paid to preferred stockholders		(3,225	)		(2,488	)
Proceeds from other borrowings		6,139			10,000
Proceeds from shares issued to Dividend Reinvestment Plan		83			584
Proceeds from exercise of stock options		—			14
Excess tax short-fall from share-based payment arrangements		(87	)		(114	)

Net cash provided/(used) by financing activities		305,215			(184,471	)

Decrease in cash and cash equivalents		(35,198	)		(3,962	)
Cash and cash equivalents, beginning of the period		100,124			84,818

Cash and cash equivalents, end of the period	$	64,926		$	80,856


Supplemental disclosure of cash flow information
Cash paid during the period:
Interest	$	51,903		$	67,403
Income taxes (refund)	$	(7,142	)	$	8,000
Non-cash investing and financing activities:
Net change in unrealized holding gain/(loss) on securities available-for-sale, net of tax	$	8,049		$	(2,319	)
Adjustment to initially apply SFAS No. 160	$	—		$	8,500
Loans to facilitate sale of loans	$	23,500		$	—
Transfers to other real estate owned	$	51,972		$	5,005

See accompanying notes to unaudited condensed consolidated financial statements.

CATHAY GENERAL BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Business

Cathay General Bancorp (the “Bancorp”) is the holding company for Cathay Bank (the “Bank”), six limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner, and GBC Venture Capital, Inc. The Bancorp also owns 100% of the common stock of five statutory business trusts created for the purpose of issuing capital securities. The Bank was founded in 1962 and offers a wide range of financial services. As of March 31, 2010, the Bank operates twenty branches in Southern California, eleven branches in Northern California, eight branches in New York State, three branches in Illinois, three branches in Washington State, two branches in Texas, one branch in Massachusetts, one branch in New Jersey, one branch in Hong Kong, and a representative office in Shanghai and in Taipei. Deposit accounts at the Hong Kong branch are not insured by the Federal Deposit Insurance Corporation (the “FDIC”).

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

The preparation of the consolidated financial statements in accordance with GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The most significant estimates subject to change are the allowance for loan losses, goodwill impairment, and other-than-temporary impairment.

3. Recent Accounting Pronouncements

In June 2009, the FASB issued ASC Topic 860, formerly SFAS 166, “Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140.” ASC Topic 860 removes the concept of a qualifying special-purpose entity and the provisions for guaranteed mortgage securitizations in earlier FASB pronouncements. A transferor should account for the transfer as a sale only if it transfers an entire financial asset and surrenders control over the entire transferred assets in accordance with the conditions in ASC Topic 860. ASC Topic 860 limits the circumstances in which a financial asset should be derecognized. ASC Topic 860 is effective for annual financial statements covering the first fiscal year ending after November 15, 2009. Adoption of ASC Topic 860 as of January 1, 2010, did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued ASC Topic 810, formerly SFAS 167, “Amendments to FASB Interpretation No. 46(R).” ASC Topic 810 eliminates the quantitative approach previously required under FIN 46(R) for determining whether an entity is a variable interest entity. ASC Topic 810 requires an entity to perform ongoing assessments to determine whether an entity is the primary beneficiary of a variable interest entity. The ongoing assessments identify the power to direct the activities of a variable interest entity, the obligation to absorb losses of the entity and the right to receive benefits from the entity that could potentially be significant to the variable interest entity. ASC Topic 810 is effective for annual financial statements covering the first fiscal year ending after November 15, 2009. Adoption of ASC Topic 810 as of January 1, 2010, did not have a significant impact on the Company’s consolidated financial statements.

The FASB issued ASU 2010-06 “Improving Disclosures about Fair Value Measurements” in January 2010 to improve disclosure requirements related to ASC Topic 820. ASU 2010-06 requires an entity to report separately significant transfers in and out of Level 1 and Level 2 fair value measurements and to explain the transfers. It also requires an entity to present separately information about purchases, sales, issuances, and settlements for Level 3 fair value measurements. ASU 2010-06 is effective for fiscal years beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements for Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. Adoption of ASU 2010-06 as of January 1, 2010, did not have a significant impact on the Company’s consolidated financial statements. The Company does not expect a material impact on its consolidated financial statements from adoption of ASU 2010-06 for the disclosures about purchases, sales, issuances, and settlements for Level 3 fair value measurements after December 15, 2010.

4. Earnings/Loss per Share

Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock that then shared in earnings. Potential dilution is excluded from computation of diluted per-share amounts when a net loss from operation exists.

Outstanding stock options with anti-dilutive effect were not included in the computation of diluted earnings per share. The following table sets forth basic and diluted earnings per share calculations and the average shares of stock options with anti-dilutive effect:


	For the three months ended March 31,
(Dollars in thousands, except share and per share data)	2010			2009
Net(loss)/ Income attributable to Cathay General Bancorp	$	(25,741	)	$	10,237
Dividends on preferred stock		(4,092	)		(4,080	)

Net (loss)/ income available to common stockholders	$	(29,833	)	$	6,157

Weighted-average shares:
Basic weighted-average number of common shares outstanding		72,653,755			49,531,343
Dilutive effect of weighted-average outstanding common shares equivalents
Stock Options		—			9,698

Diluted weighted-average number of common shares outstanding		72,653,755			49,541,041


Average shares of stock options and warrants with anti-dilutive effect		6,988,181			7,007,163

(Loss)/Earnings per common stock share:
Basic	$	(0.41	)	$	0.12
Diluted	$	(0.41	)	$	0.12

5. Stock-Based Compensation

Under the Company’s Equity Incentive Plans, directors and eligible employees may be granted incentive or non-statutory stock options and/or restricted stock units, or awarded non-vested stock. As of March 31, 2010, the only options granted by the Company were non-statutory stock options to selected bank officers and non-employee directors at exercise prices equal to the fair market value of a share of the Company’s common stock on the date of grant. Such options have a maximum ten-year term and vest in 20% annual increments (subject to early termination in certain events) except options granted to the Chief Executive Officer of the Company for 100,000 shares granted on February 21, 2008, of which 50% were vested on February 21, 2009, and the remaining 50% were vested on February 21, 2010. If such options expire or terminate without having been exercised, any shares not purchased will again be available for future grants or awards. Stock options are typically granted in the first quarter of the year. There were no options granted during 2009 and during the first quarter of 2010. The Company expects to issue new shares to satisfy stock option exercises and the vesting of restricted stock units.

Stock-based compensation expense for stock options is calculated based on the fair value of the award at the grant date for those options expected to vest, and is recognized as an expense over the vesting period of the grant. The Company uses the Black-Scholes option pricing model to estimate the value of granted options. This model takes into account the option exercise price, the expected life, the current price of the underlying stock, the expected volatility of the Company’s stock, expected dividends on the stock and a risk-free interest rate. The Company estimates the expected volatility based on the Company’s historical stock prices for the period corresponding to the expected life of the stock options. Based on SAB 107 and SAB 110, the Company has estimated the expected life of the options based on the average of the contractual period and the vesting period and has consistently applied the simplified method to all options granted starting from 2005. Option compensation expense totaled $1.1 million for the three months ended March 31, 2010, and $1.4 million for the three months ended March 31, 2009. Stock-based compensation is recognized ratably over the requisite service period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $3.9 million at March 31, 2010, and is expected to be recognized over the next 2.0 years.

No stock options were exercised during the first quarter of 2010 and 1,280 shares were exercised during the first quarter of 2009. Cash received totaled $13,000 and the aggregate intrinsic value totaled $8,000 from the exercise of stock options on 1,280 shares during the three months ended March 31, 2009. The fair value of stock options vested were $4.8 million during the first quarter of 2010 compared to $5.5 million during the first quarter of 2009. The table below summarizes stock option activity for the periods indicated:


	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Balance at December 31, 2009	5,169,653		$	27.71	4.6	$	—

Forfeited	(102,232	)	$	10.75

Balance at March 31, 2010	5,067,421		$	28.05	4.4	$	3

Exercisable at March 31, 2010	4,571,186		$	28.13	4.1	$	3

At March 31, 2010, 1,713,693 shares were available under the Company’s 2005 Incentive Plan for future grants.

In addition to stock options above, in February 2008, the Company also granted restricted stock units on 82,291 shares of the Company’s common stock to its eligible employees. On the date of granting of these restricted stock units, the closing price of the Company’s stock was $23.37 per share. Such restricted stock units have a maximum term of five years and vest in approximately 20% annual increments subject to employees’ continued employment with the Company. On February 21, 2009, restricted stock units of 15,828 shares were vested at the closing price of $8.94 per share. Among the 15,828 restricted stock units, 2,865 shares were cancelled immediately for employees who elected to satisfy income tax withholding amounts through cancellation of restricted stock units. Common stock shares of 12,963 were issued and outstanding as of February 21, 2009. On February 21, 2010, additional restricted stock units of 15,006 shares were vested and issued at the closing price of $9.64 per share. The following table presents information relating to the restricted stock units grant as of March 31, 2010:


	Units
Balance at December 31, 2009	60,021
Vested	(15,006	)
Cancelled or forfeited	(668	)

Balance at March 31, 2010	44,347

The compensation expense recorded related to the restricted stock units above was $82,000 for the three months ended March 31, 2010, and $82,000 for the three months ended March 31, 2009. Unrecognized stock-based compensation expense related to restricted stock units was $954,000 at March 31, 2010, and is expected to be recognized over the next 2.9 years.

Prior to 2006, the Company presented the entire amount of the tax benefit on options exercised as operating activities in the consolidated statements of cash flows. After adoption of SFAS No. 123R in January 2006, the Company reports the benefits of tax deductions in excess of grant-date fair value as cash flows from operating activity and financing activity. The following table summarizes the tax benefit (short-fall) from share-based payment arrangements:


	For the three months ended March 31,
(Dollars in thousands)	2010			2009
Short-fall of tax deductions in excess of grant-date fair value	$	(87	)	$	(114	)
Benefit of tax deductions on grant-date fair value		87			117

Total benefit of tax deductions	$	—		$	3

6. Investment Securities

The following table reflects the amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment securities as of March 31, 2010, and December 31, 2009:


	March 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Securities Held-to-Maturity
U.S. government sponsored entities	$	109,887	$	1,676	$	—	$	111,563
Mortgage-backed securities		525,321		—		2,510		522,811

Total securities held-to-maturity	$	635,208	$	1,676	$	2,510	$	634,374

Securities Available-for-Sale
U.S. government sponsored entities	$	1,613,045	$	2,107	$	2,108	$	1,613,044
State and municipal securities		9,547		95		—		9,642
Mortgage-backed securities		1,507,505		13,930		1,046		1,520,389
Collateralized mortgage obligations		45,396		344		1,242		44,498
Asset-backed securities		262		—		40		222
Corporate bonds		10,246		512		—		10,758
Preferred stock of government sponsored entities		1,061		237		4		1,294
Other securities-foreign		21,795		11		95		21,711
Other equity securities		1,050		—		201		849

Total securities available-for-sale	$	3,209,907	$	17,236	$	4,736	$	3,222,407

Total investment securities	$	3,845,115	$	18,912	$	7,246	$	3,856,781


	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Securities Held-to-Maturity
U.S. government sponsored entities	$	99,876	$	1,187	$	—	$	101,063
Mortgage-backed securities		535,139		—		7,294		527,845

Total securiteis held-to-maturity	$	635,015	$	1,187	$	7,294	$	628,908

Securities Available-for-Sale
U.S. treasury securities	$	13,825	$	—	$	77	$	13,748
U.S. government sponsored entities		873,290		1,284		3,230		871,344
State and municipal securities		12,750		109		36		12,823
Mortgage-backed securities		1,939,821		9,730		7,375		1,942,176
Collateralized mortgage obligations		49,161		266		1,638		47,789
Asset-backed securities		312		—		63		249
Corporate bonds		10,246		—		489		9,757
Preferred stock of government sponsored entities		1,061		211		—		1,272
Other securities-foreign		14,975		—		84		14,891
Other equity securities		1,050		—		—		1,050

Total securities available-for-sale	$	2,916,491	$	11,600	$	12,992	$	2,915,099

Total investment securities	$	3,551,506	$	12,787	$	20,286	$	3,544,007

The amortized cost and fair value of investment securities at March 31, 2010, by contractual maturities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties.


	Securities Available-for-Sale				Securities Held-to-Maturity
	Cost		Fair Value		Cost		Fair Value
	(In thousands)
Due in one year or less	$	1,064	$	1,069	$	—	$	—
Due after one year through five years		1,583,457		1,582,469		109,887		111,563
Due after five years through ten years		245,870		252,012		—		—
Due after ten years (1)		1,379,516		1,386,857		525,321		522,811

Total	$	3,209,907	$	3,222,407	$	635,208	$	634,374

(1)	Equity securities are reported in this category.

Proceeds from sales and repayments of mortgage-backed securities were $438.4 million during the first quarter of 2010 compared to $922.3 million during the first quarter of 2009. Proceeds from sales and repayments of other investment securities were $45.1 million during the first quarter of 2010 compared to none during the first quarter of 2009. Proceeds from maturity and calls of investment securities were $493.2 million during the first quarter of 2010 compared to $800.1 million during the first quarter of 2009. Gains of $3.4 million and no losses were realized on sales and calls of investment securities during the first quarter of 2010 compared with $22.6 million in gains and no losses realized for the same quarter a year ago.

an entity does not intend to sell the debt security and will not be required to sell the debt security, the entity must consider whether it will recover the amortized cost basis of the security. If the present value of expected cash flows is less than the amortized cost basis of the security, OTTI shall be considered to have occurred. OTTI is then separated into the amount of the total impairment related to credit losses and the amount of the total impairment related to all other factors. An entity determines the impairment related to credit losses by comparing the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. OTTI related to the credit loss is then recognized in earnings. OTTI related to all other factors is recognized in other comprehensive income. OTTI not related to the credit loss for a held-to-maturity security should be recognized separately in a new category of other comprehensive income and amortized over the remaining life of the debt security as an increase in the carrying value of the security only when the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its remaining amortized cost basis. The Company expects to recover the amortized cost basis of its debt securities, and has no intent to sell and will not be required to sell available-for-sale securities that have declined below their cost before their anticipated recovery. At March 31, 2010, there was no other-than-temporary impairment recognized in earnings. Other-than-temporary impairment related to all other factors was recognized in other comprehensive income.

Between 2002 and 2004, we purchased a number of mortgage-backed securities and collateralized mortgage obligations comprised of interests in non-agency guaranteed residential mortgages. At March 31, 2010, the remaining par value was $12.8 million for non-agency guaranteed mortgage-backed securities with unrealized losses of $841,000 and $40.2 million of collateralized mortgage obligations with unrealized losses of $1.2 million. The remaining par value of these securities totaled $52.9 million which represents 1.4% of the fair value of investment securities and 0.5% of total assets. At March 31, 2010, the unrealized loss for these securities totaled $2.0 million which represented 3.8% of the par amount of these non-agency guaranteed residential mortgages. Based on the Company’s analysis at March 31, 2010, there was no “other-than-temporary” impairment in these securities due to the low loan to value ratio for the loans underlying these securities, the credit support provided by junior tranches of these securitizations, and the continued AAA rating for all but four issues of these securities. The Company’s analysis also indicated the continued full ultimate collection of principal and interest for the four issues that were no longer rated AAA.

The temporarily impaired securities represent 39.6% of the fair value of investment securities as of March 31, 2010. Unrealized losses for securities with unrealized losses for less than twelve months represent 0.3%, and securities with unrealized losses for twelve months or more represent 5.1%, of the historical cost of these securities. Unrealized losses on these securities generally resulted from increases in interest rate spreads subsequent to the date that these securities were purchased. All of these securities are investment grade as of March 31, 2010. At March 31, 2010, 13 issues of securities had unrealized losses for 12 months or longer and 42 issues of securities had unrealized losses of less than 12 months.

At March 31, 2010, management believed the impairment was temporary and, accordingly, no impairment loss has been recognized in our consolidated statements of operations. The table below shows the fair value, unrealized losses, and number of issuances of the temporarily impaired securities in our investment securities portfolio as of March 31, 2010, and December 31, 2009:


	As of March 31, 2010
	Temporarily Impaired Securities
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses		No. of Issuances	Fair Value		Unrealized Losses		No. of Issuances	Fair Value		Unrealized Losses		No. of Issuances
	(Dollars in thousands)
Securities Held-to-Maturity
Mortgage-backed securities	$	522,811	$	2,510	12		—		—	—	$	522,811	$	2,510	12

Total securities held-to-maturity		522,811		2,510	12		—		—	—		522,811		2,510	12

Securities Available-for-Sale
U.S. government sponsored entities		817,023		2,108	19		—		—	—		817,023		2,108	19
Mortgage-backed securities		137,943		197	6		662		8	2		138,605		205	8
Mortgage-backed securities-Non-agency		—		—	—		11,889		841	3		11,889		841	3
Collateralized mortgage obligations		162		10	1		27,050		1,232	8		27,212		1,242	9
Asset-backed securities		—		—	—		222		40	1		222		40	1
Preferred stock of government sponsored entities		121		4	1		—		—	—		121		4	1
Other securities-foreign organization		7,805		95	1		—		—	—		7,805		95	1
Other equity securities		849		201	1		—		—	—		849		201	1

Total securities available-for-sale		963,903		2,615	29		39,823		2,121	14		1,003,726		4,736	43

Total investment securities	$	1,486,714	$	5,125	41	$	39,823	$	2,121	14	$	1,526,537	$	7,246	55


	As of December 31, 2009
	Temporarily Impaired Securities
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses		No. of Issuances	Fair Value		Unrealized Losses		No. of Issuances	Fair Value		Unrealized Losses		No. of Issuances
	(Dollars in thousands)
Securities Held-to-Maturity
Mortgage-backed securities	$	527,845	$	7,294	12		—		—	—	$	527,845	$	7,294	12

Total securities held-to-maturity		527,845		7,294	12		—		—	—		527,845		7,294	12

Securities Available-for-Sale
U.S. Treasury entities	$	13,748	$	77	2	$	—	$	—	—	$	13,748	$	77	2
U.S. government sponsored entities		408,888		3,230	9		—		—	—		408,888		3,230	9
State and municipal securities		—		—	—		659		36	1		659		36	1
Mortgage-backed securities		1,050,968		6,216	32		855		3	5		1,051,823		6,219	37
Mortgage-backed securities-Non-agency		—		—	—		12,302		1,156	3		12,302		1,156	3
Collateralized mortgage obligations		30,870		955	4		8,304		683	8		39,174		1,638	12
Asset-backed securities		—		—	—		249		63	1		249		63	1
Corporate bonds		249		1	1		9,508		488	3		9,757		489	4
Other securities-foreign organization		14,891		84	3		—		—	—		14,891		84	3
Preferred stock of government sponsored entities		—		—	—		—		—	—		—		—	—

Total securities available-for-sale		1,519,614		10,563	51		31,877		2,429	21		1,551,491		12,992	72

Investment securities having a carrying value of $1.95 billion at March 31, 2010, and $1.97 billion at December 31, 2009, were pledged to secure public deposits, other borrowings, treasury tax and loan, Federal Home Loan Bank advances, securities sold under agreements to repurchase, and foreign exchange transactions.

7. Investments in Affordable Housing

The Company has invested in certain limited partnerships that were formed to develop and operate housing for lower-income tenants throughout the United States. The Company’s investments in these

partnerships were $94.5 million at March 31, 2010, and $95.9 million at December 31, 2009. At March 31, 2010, and December 31, 2009, six of the limited partnerships in which the Company has an equity interest were determined to be variable interest entities for which the Company is the primary beneficiary. The consolidation of these limited partnerships in the Company’s consolidated financial statements increased total assets and liabilities by $23.1 million at March 31, 2010, and by $22.8 million at December 31, 2009. Other borrowings for affordable housing limited partnerships were $19.3 million at March 31, 2010, and at December 31, 2009; recourse is limited to the assets of the limited partnerships. Unfunded commitments for affordable housing limited partnerships of $6.3 million as of March 31, 2010, and $8.1 million as of December 31, 2009, were recorded under other liabilities.

8. Commitments and Contingencies

In the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans, or through commercial or standby letters of credit, and financial guarantees. These instruments represent varying degrees of exposure to risk in excess of the amounts included in the accompanying condensed consolidated balance sheets. The contractual or notional amount of these instruments indicates a level of activity associated with a particular class of financial instrument and is not a reflection of the level of expected losses, if any.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The following table summarizes the outstanding commitments as of the dates indicated:


(In thousands)	At March 31, 2010		At December 31, 2009
Commitments to extend credit	$	1,545,608	$	1,591,019
Standby letters of credit		54,025		61,488
Other letters of credit		55,402		49,257
Bill of lading guarantees		35		300

Total	$	1,655,070	$	1,702,064

As of March 31, 2010, $6.3 million unfunded commitments for affordable housing investments were recorded under other liabilities compared to $8.1 million at December 31, 2009.

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment agreement. These commitments generally have fixed expiration dates and the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the borrower. Letters of credit, including standby letters of credit and bill of lading guarantees, are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing these types of instruments is essentially the same as that involved in making loans to customers.

9. Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase were $1.6 billion with a weighted average rate of 4.18% at March 31, 2010, compared to $1.6 billion with a weighted average rate of 4.19% at December 31, 2009. Seventeen floating-to-fixed rate agreements totaling $900.0 million are with initial floating rates for a period of time ranging from six months to one year, with the floating rates ranging from the three-month LIBOR minus 100 basis points to the three-month LIBOR minus 340 basis points. Thereafter, the rates are fixed for the remainder of the term, with interest rates ranging from 4.29% to 5.07%. After the initial floating rate term, the counterparties have the right to terminate the transaction at par at the fixed rate reset date and quarterly thereafter. Thirteen fixed-to-floating rate agreements totaling $650.0 million are with initial fixed rates ranging from 1.00% and 3.50% with initial fixed rate terms ranging from six months to eighteen months. For the remainder of the seven year term, the rates float at 8% minus the three-month LIBOR rate with a maximum rate ranging from 3.25% to 3.75% and minimum rate of 0.0%. After the initial fixed rate term, the counterparties have the right to terminate the transaction at par at the floating rate reset date and quarterly thereafter. At March 31, 2010, there was one short-term securities sold under agreements to repurchase of $9.0 million at the rate of 1.10% which matured on April 2, 2010. The table below provides summary data for long-term securities sold under agreements to repurchase as of March 31, 2010:

Securities Sold Under Agreements to Repurchase


(Dollars in millions)	Fixed-to-floating												Floating-to-fixed												Total
Callable		All callable at March 31, 2010												All callable at March 31, 2010
Rate type		Float Rate												Fixed Rate
Rate index		8% minus 3 month LIBOR

Maximum rate		3.75	%		3.50	%		3.50	%		3.25	%
Minimum rate		0.0	%		0.0	%		0.0	%		0.0	%
No. of agreements		3			5			4			1			2			1			10			4			30
Amount	$	150.0		$	250.0		$	200.0		$	50.0		$	100.0		$	50.0		$	550.0		$	200.0		$	1,550.0
Weighted average rate		3.75	%		3.50	%		3.50	%		3.25	%		4.77	%		4.83	%		4.54	%		5.00	%		4.18	%
Final maturity		2014			2014			2015			2015			2011			2012			2014			2017

These transactions are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold. The Company may have to provide additional collateral for the repurchase agreements, as necessary. The underlying collateral pledged for the repurchase agreements consists of U.S. Treasury securities, U.S. government agency security debt, and mortgage-backed securities with a fair value of $1.8 billion as of March 31, 2010, and as of December 31, 2009.

10. Advances from the Federal Home Loan Bank

Total advances from the FHLB decreased $65.0 million to $864.4 million at March 31, 2010 from $929.4 million at December 31, 2009. During the first quarter of 2010, the Company prepaid a $65.0 million advance from the FHLB and incurred a prepayment penalty of $909,000. Non-puttable advances totaled $164.4 million with a weighted rate of 5.27% and puttable advances totaled $700.0

million with a weighted average rate of 4.42% at March 31, 2010. The FHLB has the right to terminate the puttable transaction at par at each three-month anniversary after the first puttable date. As of March 31, 2010, all puttable FHLB advances were puttable, but the FHLB had not exercised its right to terminate any of the puttable transactions. At March 31, 2010, the Company had unused borrowing capacity from the FHLB of $563.4 million and expects to be able to access this source of funding, if required, in the near term.

11. Subordinated Note and Junior Subordinated Debt

On September 29, 2006, the Bank issued $50.0 million in subordinated debt in a private placement transaction (“Bank Subordinated Securities”). The debt has a maturity term of 10 years, is unsecured and bears interest at a rate of three month LIBOR plus 110 basis points, payable on a quarterly basis. At March 31, 2010, the per annum interest rate on the subordinated debt was 1.39% compared to 1.35% at December 31, 2009. The subordinated debt was issued through the Bank and qualifies as Tier 2 capital for regulatory reporting purposes and is included in long-term debt in the accompanying condensed consolidated balance sheets.

The Bancorp established three special purpose trusts in 2003 and two in 2007 for the purpose of issuing trust preferred securities to outside investors (“Capital Securities”). The trusts exist for the purpose of issuing the Capital Securities and investing the proceeds thereof, together with proceeds from the purchase of the common stock of the trusts by the Bancorp (“Junior Subordinated Securities”), in junior subordinated notes issued by the Bancorp. The five special purpose trusts are considered variable interest entities under GAAP. Because the Bancorp is not the primary beneficiary of the trusts, the financial statements of the trusts are not included in the consolidated financial statements of the Company. At March 31, 2010, junior subordinated debt securities totaled $121.1 million with a weighted average interest rate of 2.43% compared to $121.1 million with a weighted average rate of 2.41% at December 31, 2009. The junior subordinated debt securities have a stated maturity term of 30 years and are currently included in the Tier 1 capital of the Bancorp for regulatory capital purposes.

12. Income Taxes

The income tax benefit totaled $23.1 million, or an effective tax benefit rate of 47.3% for the first quarter of 2010 compared to income tax expense of $3.2 million, or effective tax rate of 23.7%, for the same period a year ago. Income tax benefit/expense results in effective tax rates that differ from the statutory Federal income tax rate for the periods indicated as follows:


	Three Months Ended March 31,
	2010					2009
	(In thousands)
Tax provision at Federal statutory rate	$	(17,083	)	35.0	%	$	4,694		35.0	%
State income taxes, net of Federal income tax benefit		(3,316	)	6.8			2,148		15.8
Interest on obligations of state and political subdivisions, which are exempt from Federal taxation		(26	)	0.1			(84	)	(0.6	)
Low income housing tax credit		(2,642	)	5.4			(2,734	)	(20.2	)
Other, net		(1	)	—			(849	)	(6.3	)

Total income tax (benefit)/expense	$	(23,068	)	47.3	%	$	3,175		23.7	%

As previously disclosed, on December 31, 2003, the California Franchise Tax Board (FTB) announced its intent to list certain transactions that in its view constitute potentially abusive tax shelters. Included in the transactions subject to this listing were transactions utilizing regulated investment companies (RICs) and real estate investment trusts (REITs). While the Company continues to believe that the tax benefits recorded in 2000, 2001, and 2002 with respect to its regulated investment company were appropriate and fully defensible under California law, the Company participated in Option 2 of the Voluntary Compliance Initiative of the Franchise Tax Board, and paid all California taxes and interest on these disputed 2000 through 2002 tax benefits, and at the same time filed a claim for refund for these years while avoiding certain potential penalties. The Company expects to resolve the California tax audits of its 2000 through 2002 tax years without any additional accruals.

In May 2009, the Company filed amended California tax returns for tax years 2003 through 2007. The Company paid California income tax of $5.5 million and interest of $1.2 million, substantially all of which had previously been recorded as unrecognized tax benefits.

The Company recognizes accrued interest and penalties relating to unrecognized tax benefits as an income tax provision expense. The Company had approximately $0.3 million of accrued interest and penalties as of March 31, 2010 and $0.2 million of accrued interest and penalties as of December 31, 2009.

The Company’s tax returns are open for audits by the Internal Revenue Service back to 2006 and by the Franchise Tax Board of the State of California back to 2000. The Company is currently under audit by the California Franchise Tax Board for the years 2000 to 2004.

13. Sale of Common Stock

On February 1, 2010, the Company raised $125.2 million in additional capital through the sale of 15.0 million shares of common stock.

14. Fair Value Measurements

The Company adopted ASC Topic 820 on January 1, 2008, and determined the fair values of our financial instruments based on the following:

•

Level 1 - Quoted prices in active markets for identical assets or liabilities.

•

Level 2 - Observable prices in active markets for similar assets or liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data.

•

Level 3 - Unobservable inputs based on the Company’s own judgments about the assumptions that a market participant would use.

The Company uses the following methodologies to measure the fair value of its financial assets on a recurring basis:

Securities Available for Sale. For certain actively traded agency preferred stocks and U.S. Treasury securities, the Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also measures securities by using

quoted market prices for similar securities or dealer quotes, a Level 2 measurement. This category generally includes U.S. Government agency securities, state and municipal securities, mortgage-backed securities (“MBS”), commercial MBS, collateralized mortgage obligations, asset-backed securities and corporate bonds.

Trading Securities. The Company measures the fair value of trading securities based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement.

Impaired Loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on old appraisals which are then adjusted based on recent market trends, a Level 3 measurement.

Warrants. The Company measures the fair value of warrants based on unobservable inputs based on assumption and management judgment, a Level 3 measurement.

Currency Option Contracts and Foreign Exchange Contracts. The Company measures the fair value of currency option and foreign exchange contracts based on dealer quotes on a recurring basis, a Level 2 measurement.

Interest Rate Swaps. Fair value of interest rate swaps was derived from observable market prices for similar assets on a recurring basis, a level 2 measurement. The valuation techniques for the assets and liabilities valued on a nonrecurring basis are as follows:

Loans Held-for-sale. The Company records loans held-for-sale at fair value based on quoted prices from third party sale analysis, existing sale agreements or appraisal reports adjusted by sales commission assumption, a Level 3 measurement.

Goodwill. The Company completes “step one” of the impairment test by comparing the fair value of each reporting unit (as determined based on the discussion below) with the recorded book value (or “carrying amount”) of its net assets, with goodwill included in the computation of the carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment. Step two of the impairment test compares the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill. The implied fair value of goodwill is computed by assuming all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill. This adjusted goodwill balance is the implied fair value used in step two. An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value. In connection with obtaining the independent valuation, management provided certain data and information that was utilized by the third party in its determination of fair value, including earnings forecast at the reporting unit level for the next four years. Other key assumptions include terminal values based on future growth rates and discount rates for valuing the cash flows, which have inputs for the risk-free rate, market risk premium and adjustments to reflect inherent risk and required market returns. Because of the significance of unobservable inputs in the valuation of goodwill impairment, goodwill subjected to nonrecurring fair value adjustments is classified as Level 3.

Core Deposit Intangibles. Core deposit intangibles is initially recorded at fair value based on a valuation of the core deposits acquired and is amortized over its estimated useful life to its residual value in proportion to the economic benefits consumed. The Company assesses the recoverability of this intangible asset on a nonrecurring basis using the core deposits remaining at the assessment date and the fair value of cash flows expected to be generated from the core deposits, a Level 3 measurement.

Other Real Estate Owned. Real estate acquired in the settlement of loans is initially recorded at fair value based on the appraised value of the property on the date of transfer, less estimated costs to sell, a Level 2 measurement. From time to time, nonrecurring fair value adjustments is made to other real estate owned based on the current updated appraised value of the property, also a Level 2 measurement, or management’s judgment and estimation of value reported on old appraisals which are then adjusted based on recent market trends, a Level 3 measurement.

Investments in Venture Capital. The Company periodically reviews for OTTI on a nonrecurring basis. Investments in venture capital were written down to their fair value based on available financial reports from venture capital partnerships and management’s judgment and estimation, a Level 3 measurement.

Equity Investments. The Company records equity investments at fair value on a nonrecurring basis based on quoted market prices in active exchange market at the reporting date, a Level 1 measurement.

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis at March 31, 2010, and at December 31, 2009:


As of March 31, 2010	Fair Value Measurements Using						Total at Fair Value
As of March 31, 2010	Level 1		Level 2		Level 3		Total at Fair Value
	(In thousands)
Assets
Securities available-for-sale
U.S. government sponsored entities	$	—	$	1,613,044	$	—	$	1,613,044
State and municipal securities		—		9,642		—		9,642
Mortgage-backed securities		—		1,520,389		—		1,520,389
Collateralized mortgage obligations		—		44,498		—		44,498
Asset-backed securities		—		222		—		222
Corporate bonds		—		10,758		—		10,758
Preferred stock of government sponsored entities		—		1,294		—		1,294
Other foreign securities		—		21,711		—		21,711
Other equity securities		849		—		—		849

Total securities available-for-sale		849		3,221,558		—		3,222,407
Trading securities		13,004		—		—		13,004
Warrants		—		—		46		46
Option contracts		—		36		—		36
Foreign exchange contracts		—		1,602		—		1,602

Total assets	$	13,853	$	3,223,196	$	46	$	3,237,095

Liabilities
Interest rate swaps	$	—	$	3,679	$	—	$	3,679
Option contracts		—		11		—		11
Foreign exchange contracts		—		400		—		400

Total liabilities	$	—	$	4,090	$	—	$	4,090


As of December 31, 2009	Fair Value Measurements Using						Total at Fair Value
As of December 31, 2009	Level 1		Level 2		Level 3		Total at Fair Value
	(In thousands)
Assets
Securities available-for-sale
U.S. Treasury entities	$	13,748	$	—	$	—	$	13,748
U.S. government sponsored entities		—		871,344		—		871,344
State and municipal securities		—		12,823		—		12,823
Mortgage-backed securities		—		1,942,176		—		1,942,176
Collateralized mortgage obligations		—		47,789		—		47,789
Asset-backed securities		—		249		—		249
Corporate bonds		—		9,757		—		9,757
Preferred stock of government sponsored entities		—		1,272		—		1,272
Other foreign securities		—		14,891		—		14,891
Other equity securities		1,050		—		—		1,050

Total securities available-for-sale		14,798		2,900,301		—		2,915,099
Trading securities		18		—		—		18
Warrants		—		—		50		50
Option contracts		—		18		—		18
Foreign exchange contracts		—		3,565		—		3,565

Total assets	$	14,816	$	2,903,884	$	50	$	2,918,750


Liabilities
Interest rate swaps	$	—	$	694	$	—	$	694
Option contracts		—		8		—		8
Foreign exchange contracts		—		967		—		967

Total liabilities	$	—	$	1,669	$	—	$	1,669

For financial assets measured at fair value on a nonrecurring basis that were still reflected in the balance sheet at March 31, 2010, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets at March 31, 2010, and at December 31, 2009:


	As of March 31, 2010								Total Losses
	Fair Value Measurements Using						Total at		For the Three Months Ended
	Level 1		Level 2		Level 3		Fair Value		March 31, 2010		March 31, 2009
	(In thousands)
Assets
Impaired loans	$	—	$	100,213	$	32,812	$	133,025	$	44,793	$	27,081
Loans held-for-sale		—		—		20,944		20,944		2,285		—
Core deposit intangibles		—		—		20,888		20,888		1,507		1,711
Other real estate owned (1)		—		37,631		81,611		119,242		1,289		1,641
Investments in venture capital		—		—		8,007		8,007		245		761
Equity investments		826		—		—		826		—		—

Total assets	$	826	$	137,844	$	164,262	$	302,932	$	50,119	$	31,194

(1)	Other real estate owned balance of $111.9 million in the consolidated balance sheet is net of estimated disposal costs.


	As of December 31, 2009								Total Losses
	Fair Value Measurements Using						Total at Fair Value		For the Twelve Months Ended
	Level 1		Level 2		Level 3		Total at Fair Value		December 31, 2009		December 31, 2008
	(In thousands)
Assets
Impaired loans	$	—	$	109,993	$	26,401	$	136,394	$	91,009	$	27,215
Loans held-for-sale		—		—		54,826		54,826		19,252		—
Other real estate owned (1)		—		62,602		13,206		75,808		28,216		3,604
Investments in venture capital		—		—		8,147		8,147		1,794		11
Equity investments		826		—		—		826		—		1,042

Total assets	$	826	$	172,595	$	102,580	$	276,001	$	140,271	$	31,872

(1)	Other real estate owned balance of $71.0 million in the consolidated balance sheet is net of estimated disposal costs.

The Company measured the fair value of its warrants on a recurring basis using significant unobservable inputs. The fair value of warrants was $46,000 at March 31, 2010, compared to $50,000 at December 31, 2009. The fair value adjustment of $4,000 was included in other operating income in the first quarter of 2010.

15. Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash and Cash Equivalents. For cash and cash equivalents, the carrying amount was assumed to be a reasonable estimate of fair value.

Short-term Investments. For short-term investments, the carrying amount was assumed to be a reasonable estimate of fair value.

Securities Purchased under Agreements to Resell The fair value of the agreements to resell is based on dealer quotes.

Securities. For securities including securities held-to-maturity, available-for-sale and for trading, fair values were based on quoted market prices at the reporting date. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities or dealer quotes.

Loans Held-for-sale. The Company records loans held-for-sale at fair value based on quoted price from third party sources, or appraisal reports adjusted by sales commission assumption.

Loans. Fair values were estimated for portfolios of loans with similar financial characteristics. Each loan category was further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories.

The fair value of performing loans was calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan.

The fair value of impaired loans was calculated based on the market price of the most recent sale or quoted price from loans-held-for-sale.

Deposit Liabilities. The fair value of demand deposits, savings accounts, and certain money market deposits was assumed to be the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit was estimated using the rates currently offered for deposits with similar remaining maturities.

Securities Sold under Agreements to Repurchase. The fair value of repurchase agreements is based on dealer quotes.

Advances from Federal Home Loan Bank. The fair value of the advances is based on quotes from the FHLB to settle the advances.

Other Borrowings. This category includes federal funds purchased, revolving line of credit, and other short-term borrowings. The fair value of other borrowings is based on current market rates for borrowings with similar remaining maturities.

Long-term debt. The fair value of long-term debt is estimated based on the current spreads to LIBOR for long-term debt.

Currency Option Contracts and Foreign Exchange Contracts. The Company measures the fair value of currency option and foreign exchange contracts based on dealer quotes.

Interest Rate Swaps. Fair value of interest rate swaps was derived from observable market prices for similar assets.

Off-Balance-Sheet Financial Instruments. The fair value of commitments to extend credit, standby letters of credit, and financial guarantees written were estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties. The fair value of guarantees and letters of credit was based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date.

Fair value was estimated in accordance with ASC Topic 825, formerly SFAS 107. Fair value estimates were made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates were subjective in nature and involved uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair Value of Financial Instruments


	As of March 31, 2010					As of December 31, 2009
	Carrying Amount		Fair Value			Carrying Amount		Fair Value
	(In thousands)
Financial Assets
Cash and due from banks	$	64,926	$	64,926		$	100,124	$	100,124
Short-term investments		327,773		327,773			254,726		254,726
Securities held-to-maturity		635,208		634,374			635,015		628,908
Securities available-for-sale		3,222,407		3,222,407			2,915,099		2,915,099
Trading securities		13,004		13,004			18		18
Loans held-for-sale		20,944		20,944			54,826		54,826
Loans, net		6,611,412		6,485,814			6,678,914		6,528,170
Investment in Federal Home Loan Bank stock		71,791		71,791			71,791		71,791
Option contracts		12,804		36			4,671		18
Foreign exchange contracts		77,375		1,602			60,725		3,565
Financial Liabilities
Deposits		7,746,278		7,763,227			7,505,040		7,520,604
Securities sold under agreement to repurchase		1,559,000		1,697,560			1,557,000		1,695,130
Advances from Federal Home Loan Bank		864,362		923,254			929,362		993,243
Other borrowings		32,627		32,515			26,532		26,410
Long-term debt		171,136		99,532			171,136		92,553
Option contracts		11		11			8		8
Interest rate swaps		300,000		3,679			300,000		694
Foreign exchange contracts		26,554		400			60,846		967

	As of March 31, 2010					As of December 31, 2009
	Notional Amount		Fair Value			Notional Amount		Fair Value
	(In thousands)
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	1,545,608	$	(610	)	$	1,591,019	$	(621	)
Standby letters of credit		54,025		(206	)		61,488		(200	)
Other letters of credit		55,402		(29	)		49,257		(22	)
Bill of lading guarantees		35		0			300		(1	)

16. Goodwill and Goodwill Impairment

Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of ASC Topic 350. ASC Topic 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC Topic 360, formerly, SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”

The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. Accounting standards require management to estimate the fair value of each reporting unit in making the assessment of impairment at least annually.

The impairment testing process conducted by the Company begins by assigning net assets and goodwill to its three reporting units–Commercial Lending, Retail Banking, and East Coast Operations. The

Company then completes “step one” of the impairment test by comparing the fair value of each reporting unit (as determined based on the discussion below) with the recorded book value (or “carrying amount”) of its net assets, with goodwill included in the computation of the carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment. Step two of the impairment test compares the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill. The implied fair value of goodwill is computed by assuming all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill. This adjusted goodwill balance is the implied fair value used in step two. An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value.

The Commercial Lending unit did not have any goodwill allocated to the unit and accordingly no goodwill impairment testing was performed for that unit. The reporting unit fair values for the Retail Banking unit and the East Coast Operations were determined by an outside third-party national valuation firm, based on data supplied by the Company. Such reporting unit fair values were determined based on an equal weighting of (1) the fair value determined using a market approach using a combination of price to earnings multiples determined based on a representative peer group applied to 2010 and 2011 forecasted earnings, and if appropriate, 2009 net earnings and a price to book multiple and (2) the fair value determined using a dividend discount model with the discount rate determined using the same representative peer group. A control premium was then applied to the unit fair values so determined.

In determining the forecasted earnings for the Retail Banking unit and the East Coast Operations, the financial forecasts assume some recovery from the current business downturn beginning in the second half of 2010 and then muted growth thereafter. It should be noted, however, that these reporting units have already been performing at a satisfactory level given the environment. The principal driver of the Company’s negative operating results has been the Commercial Lending reporting unit where the vast majority of the Company’s loan losses are incurred. The forecasts reflect an assumption that interest rates will increase steadily beginning in late 2010 until December 2012. A summary of the respective unit fair value, carrying amounts and unit goodwill as well as the percentage by which fair value exceed carrying value of each reporting unit is shown below:


Reporting Units	Carrying Amount		Fair Value		Fair Value in Excess of Carrying Amount		Allocated Goodwill
	(Dollars in thousands)
Commercial Lending Unit	$	567,359	$	55,000	—			—
Retail Banking Unit		405,019		700,000	72.8	%		235,193
East Coast Operations		188,322		290,000	54.0	%		81,147

Total	$	1,160,700	$	1,045,000			$	316,340

If economic conditions were to worsen instead of improve as assumed in the key assumptions, then the forecasted earnings for the Retail Banking unit and the East Coast Operations could be significantly lower than projected. In addition, a worsening of economic conditions could potentially reduce the price to earnings multiples and price to book multiples of peer groups for Retail Banking and East Coast Operations and result in a reduction in the fair value of these units even if the forecasted earnings were achieved.

17. Financial Derivatives

It is the policy of the Company not to speculate on the future direction of interest rates. However, the Company enters into financial derivatives in order to seek mitigation of exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in the Company’s assets or liabilities and against risk in specific transactions. In such instances, the Company may protect its position through the purchase or sale of interest rate futures contracts for a specific cash or interest rate risk position. Other hedge transactions may be implemented using interest rate swaps, interest rate caps, floors, financial futures, forward rate agreements, and options on futures or bonds. Prior to considering any hedging activities, we seek to analyze the costs and benefits of the hedge in comparison to other viable alternative strategies. All hedges will require an assessment of basis risk and must be approved by the Bank’s Investment Committee.

The Company follows ASC Topic 815 which established accounting and reporting standards for financial derivatives, including certain financial derivatives embedded in other contracts, and hedging activities. It requires the recognition of all financial derivatives as assets or liabilities in the Company’s consolidated balance sheet and measurement of those financial derivatives at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a financial derivative is designated as a hedge and if so, the type of hedge.

As of March 31, 2010, we entered into five interest rate swap agreements with two major financial institutions in the notional amount of $300.0 million for a period of three years. These interest rate swaps were not structured to hedge against inherent interest rate risks related to our interest-earning assets and interest-bearing liabilities. At March 31, 2010, the Company paid a fixed rate at a weighted average of 1.95% and received a floating 3-month Libor rate at a weighted average of 0.25% on these agreements. The net amount accrued on these interest rate swaps of $1.3 million for the first quarter of 2010 were recorded to reduce other non-interest income. At March 31, 2010, the Company recorded $3.7 million within other liabilities to recognize the negative fair value of these interest rate swaps.

The Company enters into foreign exchange forward contracts and foreign currency option contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates, for foreign exchange certificates of deposit, foreign exchange contracts or foreign currency option contracts entered into with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our consolidated balance sheets. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit, foreign exchange contracts or foreign currency option contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities. At March 31, 2010, the notional amount of option contracts totaled $12.8 million with a net positive fair value of $36,000. Spot and forward contracts in the total notional amount of $77.4 million had positive fair value, in the amount of $1.6 million, at March 31, 2010. Spot and forward contracts in the total notional amount of $26.6 million had a negative fair value, in the amount of $400,000, at March 31, 2010. At December 31, 2009, the notional amount of

option contracts totaled $4.7 million with a net positive fair value of $10,000. Spot and forward contracts in the total notional amount of $60.7 million had positive fair value, in the amount of $3.6 million, at December 31, 2009. Spot and forward contracts in the total notional amount of $60.8 million had a negative fair value, in the amount of $967,000, at December 31, 2009.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion is given based on the assumption that the reader has access to and has read the Annual Report on Form 10-K for the year ended December 31, 2009, of Cathay General Bancorp (“Bancorp”) and its wholly-owned subsidiary Cathay Bank (the “Bank” and, together, the “Company” or “we”, “us,” or “our”).

Critical Accounting Policies

The discussion and analysis of the Company’s unaudited condensed consolidated balance sheets and results of operations are based upon its unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Accounting for the allowance for credit losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans; management considers this accounting policy to be a critical accounting policy. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described under the heading “Accounting for the Allowance for Loan Losses” in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

Accounting for investment securities involves significant judgments and assumptions by management, which have a material impact on the carrying value of securities and the recognition of any “other-than-temporary” impairment to our investment securities. The judgments and assumptions used by management are described under the heading “Investment Securities” in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

Accounting for income taxes involves significant judgments and assumptions by management, which have a material impact on the amount of taxes currently payable and the income tax expense recorded in the financial statements. The judgments and assumptions used by management are described under the heading “Income Taxes” in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

Accounting for goodwill and goodwill impairment involves significant judgments and assumptions by management, which have a material impact on the amount of goodwill recorded and noninterest expense recorded in the financial statements. The judgments and assumptions used by management are described under the heading “Goodwill and Goodwill Impairment” in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

HIGHLIGHTS

•

Capital strengthened – The Company raised $125.2 million in additional capital through the sale of 15.0 million shares of common stock on February 1, 2010. Total risk-based capital ratio was 16.32% at March 31, 2010, compared to 15.43% at December 31, 2009.

•

Allowance for credit losses strengthened – Total allowance for credit losses increased to $238.0 million, or 3.47%, of total loans, excluding loans held for sale, at March 31, 2010, compared to 3.15% at December 31, 2009.

Statement of Operations Review

Net (Loss)/Income

Net loss attributable to common stockholders for the three months ended March 31, 2010 was $29.8 million, an increased loss of $36.0 million, compared to net income attributable to common stockholders of $6.2 million for the same period a year ago. Loss per share for the three months ended March 31, 2010, was $0.41 compared to earnings of $0.12 per share for the same period a year ago due primarily to increases in the provision for credit losses and lower gains on sale of securities.

Return on average stockholders’ equity was negative 7.51% and return on average assets was negative 0.88% for the three months ended March 31, 2010, compared to a return on average stockholders’ equity of 3.21% and a return on average assets of 0.37% for the same period of 2009.

Financial Performance


	Three months ended March 31,
	2010			2009
Net (loss)/income	$	(25.7) million		$	10.2 million
Net (loss)/income attributable to common stockholders	$	(29.8) million		$	6.2 million
(Loss)/basic earnings per common share	$	(0.41	)	$	0.12
(Loss)/ diluted earnings per common share	$	(0.41	)	$	0.12
Return on average assets		-0.88	%		0.37	%
Return on average total stockholders’ equity		-7.51	%		3.21	%
Efficiency ratio		55.55	%		38.26	%

Net Interest Income Before Provision for Credit Losses

Net interest income before provision for credit losses increased to $74.7 million during the first quarter of 2010, an increase of $4.3 million, or 6.1%, compared to $70.4 million during the same quarter a year ago. The increase was due primarily to the decreases in interest expense paid for time certificates of deposits and brokered deposits.

The net interest margin, on a fully taxable-equivalent basis, was 2.72% for the first quarter of 2010, an increase of seven basis points from 2.65% for the fourth quarter of 2009 and an increase of three basis points from 2.69% for the first quarter of 2009. A 110 basis point decrease in the rate on interest bearing deposits from 2.54% at March 31, 2009, to 1.44% at March 31, 2010, contributed primarily to the increase in the net interest margin from the corresponding quarter of the prior year. In addition, the majority of our variable rate loans contain interest rate floors, which help limit the impact of the record low level of the prime interest rate.

For the first quarter of 2010, the yield on average interest-earning assets was 4.61%, on a fully taxable-equivalent basis, the cost of funds on average interest-bearing liabilities equaled 2.20%, and the cost of interest bearing deposits was 1.44%. In comparison, for the first quarter of 2009, the yield on average interest-earning assets was 5.26%, on a fully taxable-equivalent basis, cost of funds on average interest-bearing liabilities equaled 2.98%, and the cost of interest bearing deposits was 2.54%. The interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, increased 13 basis points to 2.41% for the first quarter ended March 31, 2010, from 2.28% for the same quarter a year ago, primarily due to the reasons discussed above.

The cost of deposits, including demand deposits, decreased 17 basis points to 1.28% in the first quarter of 2010 compared to 1.45% in the fourth quarter of 2009 and decreased 99 basis points from 2.27% in the first quarter of 2009 due primarily to the decrease in the rates paid on certificates of deposit upon renewal and for core deposits as a result of the decline in market interest rates.

Average daily balances, together with the total dollar amounts, on a taxable-equivalent basis, of interest income and interest expense, and the weighted-average interest rate and net interest margin are as follows:

Interest-Earning Assets and Interest-Bearing Liabilities


Three months ended March 31,	2010							2009
	Average Balance			Interest Income/ Expense		Average Yield/ Rate (1)(2)		Average Balance			Interest Income/ Expense		Average Yield/ Rate (1)(2)
Taxable-equivalent basis (Dollars in thousands)	Average Balance			Interest Income/ Expense		Average Yield/ Rate (1)(2)		Average Balance			Interest Income/ Expense		Average Yield/ Rate (1)(2)
Interest Earning Assets
Commercial loans	$	1,328,764		$	14,409	4.40	%	$	1,598,804		$	18,753	4.76	%
Residential mortgage		896,888			11,676	5.21			795,752			10,621	5.34
Commercial mortgage		4,067,903			61,931	6.17			4,126,739			64,439	6.33
Real estate construction loans		636,720			7,542	4.80			916,495			9,974	4.41
Other loans and leases		22,757			181	3.23			21,302			207	3.94

Total loans and leases (1)		6,953,032			95,739	5.58			7,459,092			103,994	5.65
Taxable securities		3,670,984			30,288	3.35			2,970,700			32,194	4.40
Tax-exempt securities (3)		12,124			118	3.95			22,845			379	6.73
Federal Home Loan Bank Stock		71,791			48	0.27			71,791			—	—
Interest bearing deposits		432,711			317	0.30			24,998			58	0.94
Federal funds sold & securities purchased under agreements to resell		—			—	—			80,700			1,302	6.54

Total interest-earning assets		11,140,642			126,510	4.61			10,630,126			137,927	5.26

Non-interest earning assets
Cash and due from banks		100,786							100,919
Other non-earning assets		886,094							764,864

Total non-interest earning assets		986,880							865,783
Less: Allowance for loan losses		(235,581	)						(134,616	)
Deferred loan fees		(7,944	)						(9,531	)

Total assets	$	11,883,997						$	11,351,762

Interest bearing liabilities:
Interest bearing demand accounts	$	393,865		$	315	0.32		$	259,535		$	254	0.40
Money market accounts		931,918			2,298	1.00			759,930			2,957	1.58
Savings accounts		355,500			194	0.22			311,145			171	0.22
Time deposits		5,201,310			21,677	1.69			4,961,130			35,970	2.94

Total interest-bearing deposits		6,882,593			24,484	1.44			6,291,740			39,352	2.54

Federal funds purchased		—			—	—			16,933			11	0.26
Securities sold under agreements to repurchase		1,560,200			16,312	4.24			1,580,989			15,936	4.09
Other borrowings		912,547			10,039	4.46			1,117,844			10,565	3.83
Long-term debt		171,136			913	2.16			171,136			1,505	3.57

Total interest-bearing liabilities		9,526,476			51,748	2.20			9,178,642			67,369	2.98

Non-interest bearing liabilities
Demand deposits		884,680							734,883
Other liabilities		74,445							137,505
Total equity		1,398,396							1,300,732

Total liabilities and equity	$	11,883,997						$	11,351,762

Net interest spread (4)						2.41	%						2.28	%

Net interest income (4)				$	74,762						$	70,558

Net interest margin (4)						2.72	%						2.69	%

(1)	Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.

(2)	Calculated by dividing net interest income by average outstanding interest-earning assets

(3)	The average yield has been adjusted to a fully taxable-equivalent basis for certain securities of states and political subdivisions and other securities held using a statutory Federal income tax rate of 35%

(4)	Net interest income, net interest spread, and net interest margin on interest-earning assets have been adjusted to a fully taxable-equivalent basis using a statutory Federal income tax rate of 35%

The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates:

Taxable-Equivalent Net Interest Income — Changes Due to Rate and Volume(1)


	Three months ended March 31, 2010-2009 Increase (Decrease) in Net Interest Income Due to:
(Dollars in thousands)	Changes in Volume			Changes in Rate			Total Change
Interest-Earning Assets:
Loans and leases		(6,982	)		(1,273	)		(8,255	)
Taxable securities		6,795			(8,701	)		(1,906	)
Tax-exempt securities (2)		(139	)		(122	)		(261	)
Federal Home Loan Bank Stock		—			48			48
Deposits with other banks		326			(67	)		259
Federal funds sold and securities purchased under agreements to resell		(1,302	)		—			(1,302	)

Total decrease in interest income		(1,302	)		(10,115	)		(11,417	)


Interest-Bearing Liabilities:
Interest bearing demand accounts		115			(54	)		61
Money market accounts		587			(1,246	)		(659	)
Savings accounts		23			—			23
Time deposits		1,709			(16,002	)		(14,293	)
Federal funds purchased		(11	)		—			(11	)
Securities sold under agreements to repurchase		(216	)		592			376
Other borrowed funds		(2,134	)		1,608			(526	)
Long-term debts		—			(592	)		(592	)

Total increase/(decrease) in interest expense		73			(15,694	)		(15,621	)

Changes in net interest income	$	(1,375	)	$	5,579		$	4,204

(1)	Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate.

(2)	The amount of interest earned on certain securities of states and political subdivisions and other securities held has been adjusted to a fully taxable-equivalent basis, using a statutory federal income tax rate of 35%.

Provision for Loan Losses

The provision for credit losses was $84.0 million for the first quarter of 2010 compared to $91.0 million for the fourth quarter of 2009 and compared to $47.0 million in the first quarter of 2009. The provision for credit losses was based on the review of the adequacy of the allowance for loan losses at March 31, 2010. The provision for credit losses represents the charge against current earnings that is determined by management, through a credit review process, as the amount needed to establish an allowance that management believes to be sufficient to absorb credit losses inherent in the Company’s loan portfolio, including unfunded commitments. The following table summarizes the charge-offs and recoveries for the periods as indicated:


	For the three months ended,
	March 31, 2010		December 31, 2009		March 31, 2009
	(In thousands)
Charge-offs:
Commercial loans	$	9,646	$	9,713	$	11,078
Construction loans- residential		7,882		12,612		17,516
Construction loans- other		17,581		11,394		5,884
Real estate loans (1)		24,157		26,381		1,361
Real estate- land loans		4,751		9,368		2,377

Total charge-offs		64,017		69,468		38,216

Recoveries:
Commercial loans		578		381		198
Construction loans- residential		70		367		—
Construction loans- other		78		—		—
Real estate loans (1)		202		415		—
Real estate- land loans		30		6		—
Installment and other loans		2		2		—

Total recoveries		960		1,171		198

Net Charge-offs	$	63,057	$	68,297	$	38,018

(1)	Real estate loans includes commercial mortgage loans, residential mortgage loans and equity lines.

Total charge-offs of $64.0 million for the first quarter of 2010 included $25.5 million of charge-offs on 19 construction loans, $23.2 million of charge-offs on 23 commercial real estate loans, $9.6 million on 25 commercial loans, $4.8 million of charge-offs on 10 land loans and $916,000 of charge-offs on residential mortgage loans. In the first quarter of 2010, net loan charge-offs decreased $5.2 million, or 7.7%, compared to the fourth quarter of 2009, but remained high as a result of the continuing weak economy.

Non-Interest Income

Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), gains (losses) on loan sales, wire transfer fees, and other sources of fee income, was $4.8 million for the first quarter of 2010, a decrease of $22.9 million compared to the non-interest income of $27.7 million for the first quarter of 2009. The decrease in non-interest income was primarily due to a decrease in securities gains from $22.5 million in the first quarter of 2009 to $3.4 million in the first quarter of 2010. In addition, the net loss for interest rate swaps increased $4.3 million. Offsetting the above decreases was a $547,000 increase in venture capital income.

Non-Interest Expense

Non-interest expense increased $6.6 million, or 17.7%, to $44.2 million in the first quarter of 2010 compared to $37.5 million in the same quarter a year ago. The efficiency ratio was 55.55% in the first quarter of 2010 compared to 38.26% for the same period a year ago due primarily to higher OREO expenses, higher FDIC assessments, higher loss for interest rate swaps, and lower securities gains recorded in the first quarter of 2010.

FDIC and State assessments increased $2.3 million to $5.2 million in the first quarter of 2010 from $2.9 million in the same quarter a year ago due to a higher assessment rate and higher deposit balances. OREO expense increased $1.2 million to $3.3 million in the first quarter of 2010 from $2.1 million in the same quarter a year ago primarily due to write-downs required as a result of a continued decline in

real estate values and the expense resulting from increased OREO holdings. Professional service expense increased $1.6 million to $4.6 million in the first quarter of 2010 compared with $3.0 million in the same quarter a year ago due mainly to increases in legal expenses, professional expenses, and collection expenses. Other operating expense increase of $3.3 million was primarily due to a $909,000 FHLB advance prepayment penalty, a $483,000 write-down on transfers from loans held for sale to OREOs, and a $1.8 million write-down on fair value of loans held for sale.

Offsetting the above described increases were decreases of $1.7 million in salaries and employee benefits due primarily to a $321,000 decrease in option compensation expense, a $581,000 decrease in salaries and payroll taxes, and a $771,000 decrease in bonus accruals, 401K employer contributions, other benefits and deferred loan costs.

Income Taxes

The effective tax rate was 47.3% for the first quarter of 2010 compared to 23.7% for the first quarter of 2009, and compared to 48.1% for the full year 2009. The tax benefit for the first quarter of 2010 resulted from the pretax loss for the quarter and the utilization of low income housing tax credits.

Balance Sheet Review

Assets

Total assets were $11.9 billion at March 31, 2010, an increase of $282.3 million, or 2.4%, from $11.6 billion at December 31, 2009, primarily due to increases of $307.3 million, or 10.5%, in securities available-for-sale, offset by a decrease of $46.6 million, or 0.7%, in gross loans, excluding loans held for sale.

Investment Securities

Investment securities represented 32.50% of total assets at March 31, 2010, compared with 30.64% of total assets at December 31, 2009. The carrying value of investment securities at March 31, 2010, was $3.86 billion compared with $3.55 billion at December 31, 2009. Securities available-for-sale are carried at fair value and had a net unrealized gain of $12.5 million at March 31, 2010, compared with a net unrealized loss of $1.4 million at December 31, 2009. Book value for securities held-to-maturity was $635.2 million at March 31, 2010, and $635.0 million at December 31, 2009.

The following table reflects the amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment securities as of March 31, 2010, and December 31, 2009:


	March 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Securities Held-to-Maturity
U.S. government sponsored entities	$	109,887	$	1,676	$	—	$	111,563
Mortgage-backed securities		525,321		—		2,510		522,811

Total securities held-to-maturity	$	635,208	$	1,676	$	2,510	$	634,374


Securities Available-for-Sale
U.S. government sponsored entities		1,613,045		2,107		2,108		1,613,044
State and municipal securities		9,547		95		—		9,642
Mortgage-backed securities		1,507,505		13,930		1,046		1,520,389
Collateralized mortgage obligations		45,396		344		1,242		44,498
Asset-backed securities		262		—		40		222
Corporate bonds		10,246		512		—		10,758
Preferred stock of government sponsored entities		1,061		237		4		1,294
Other securities-foreign		21,795		11		95		21,711
Other equity securities		1,050		—		201		849

Total securities available-for-sale	$	3,209,907	$	17,236	$	4,736	$	3,222,407

Total investment securities	$	3,845,115	$	18,912	$	7,246	$	3,856,781


	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Securities Held-to-Maturity
U.S. government sponsored entities	$	99,876	$	1,187	$	—	$	101,063
Mortgage-backed securities		535,139		—		7,294		527,845

Total securities held-to-maturity	$	635,015	$	1,187	$	7,294	$	628,908


Securities Available-for-Sale
U.S. treasury securities	$	13,825	$	—	$	77	$	13,748
U.S. government sponsored entities		873,290		1,284		3,230		871,344
State and municipal securities		12,750		109		36		12,823
Mortgage-backed securities		1,939,821		9,730		7,375		1,942,176
Collateralized mortgage obligations		49,161		266		1,638		47,789
Asset-backed securities		312		—		63		249
Corporate bonds		10,246		—		489		9,757
Preferred stock of government sponsored entities		1,061		211		—		1,272
Other securities-foreign		14,975		—		84		14,891
Other equity securities		1,050		—		—		1,050

Total securities available-for-sale	$	2,916,491	$	11,600	$	12,992	$	2,915,099

Total investment securities	$	3,551,506	$	12,787	$	20,286	$	3,544,007

ASC Topic 320 requires an entity to assess whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an entity must recognize an other-than-temporary impairment (“OTTI”). If an entity does not intend to sell the debt security and will not be required to sell the debt security, the entity must consider whether it will recover the amortized cost basis of the security. If the present value of expected cash flows is less than the amortized cost basis of the security, OTTI shall be considered to have occurred. OTTI is then separated into the amount of the total impairment related to credit losses and the amount of the total impairment related to all other factors. An entity determines the impairment related to credit losses by comparing the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. OTTI related to the credit loss is then recognized in earnings. OTTI related to all other factors is recognized in other comprehensive income. OTTI not related to the credit loss for a held-to-maturity security should be recognized

separately in a new category of other comprehensive income and amortized over the remaining life of the debt security as an increase in the carrying value of the security only when the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its remaining amortized cost basis. The Company expects to recover the amortized cost basis of its debt securities, and has no intent to sell and will not be required to sell available-for-sale securities that have declined below their cost before their anticipated recovery. At March 31, 2010, there was no other-than-temporary impairment recognized in earnings. Other-than-temporary impairment related to all other factors was recognized in other comprehensive income.


	As of March 31, 2010
	Temporarily Impaired Securities
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses		No. of Issuances	Fair Value		Unrealized Losses		No. of Issuances	Fair Value		Unrealized Losses		No. of Issuances
	(Dollars in thousands)
Securities Held-to-Maturity
Mortgage-backed securities	$	522,811	$	2,510	12		—		—	—	$	522,811	$	2,510	12

Total securities held-to-maturity		522,811		2,510	12		—		—	—		522,811		2,510	12

Securities Available-for-Sale
U.S. government sponsored entities		817,023		2,108	19		—		—	—		817,023		2,108	19
Mortgage-backed securities		137,943		197	6		662		8	2		138,605		205	8
Mortgage-backed securities-Non-agency		—		—	—		11,889		841	3		11,889		841	3
Collateralized mortgage obligations		162		10	1		27,050		1,232	8		27,212		1,242	9
Asset-backed securities		—		—	—		222		40	1		222		40	1
Preferred stock of government sponsored entities		121		4	1		—		—	—		121		4	1
Other securities-foreign organization		7,805		95	1		—		—	—		7,805		95	1
Other equity securities		849		201	1		—		—	—		849		201	1

Total securities available-for-sale		963,903		2,615	29		39,823		2,121	14		1,003,726		4,736	43

Total investment securities	$	1,486,714	$	5,125	41	$	39,823	$	2,121	14	$	1,526,537	$	7,246	55


	As of December 31, 2009
	Temporarily Impaired Securities
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses		No. of Issuances	Fair Value		Unrealized Losses		No. of Issuances	Fair Value		Unrealized Losses		No. of Issuances
	(Dollars in thousands)
Securities Held-to-Maturity
Mortgage-backed securities	$	527,845	$	7,294	12		—		—	—	$	527,845	$	7,294	12

Total securities held-to-maturity		527,845		7,294	12		—		—	—		527,845		7,294	12

Securities Available-for-Sale
U.S. Treasury entities	$	13,748	$	77	2	$	—	$	—	—	$	13,748	$	77	2
U.S. government sponsored entities		408,888		3,230	9		—		—	—		408,888		3,230	9
State and municipal securities		—		—	—		659		36	1		659		36	1
Mortgage-backed securities		1,050,968		6,216	32		855		3	5		1,051,823		6,219	37
Mortgage-backed securities-Non-agency		—		—	—		12,302		1,156	3		12,302		1,156	3
Collateralized mortgage obligations		30,870		955	4		8,304		683	8		39,174		1,638	12
Asset-backed securities		—		—	—		249		63	1		249		63	1
Corporate bonds		249		1	1		9,508		488	3		9,757		489	4
Other securities-foreign organization		14,891		84	3		—		—	—		14,891		84	3

Total securities available-for-sale		1,519,614		10,563	51		31,877		2,429	21		1,551,491		12,992	72

Total investment securities	$	2,047,459	$	17,857	63	$	31,877	$	2,429	21	$	2,079,336	$	20,286	84

Loans

Gross loans, excluding loans held for sale, were $6.85 billion at March 31, 2010, a decrease of $46.6 million, or 0.7%, from $6.90 billion at December 31, 2009, primarily due to decreases of $61.7 million, or 1.5%, in commercial mortgage loans and decreases of $44.4 million, or 7.1%, in construction loans offset by increases of $38.2 million, or 5.6%, in residential mortgage loans. Decreases in gross loans was a result of a continued weak economy, loan charge-offs and the transfer of loans to OREO in the first quarter of 2010.

At March 31, 2010, commercial mortgage loans represented approximately 58.4% of the Bank’s gross loans compared to 58.9% at year-end 2009.

The following table sets forth the classification of loans by type, mix, and percentage change as of the dates indicated:


	March 31, 2010			% of Gross Loans		December 31, 2009			% of Gross Loans		% Change
	(Dollars in thousands)
Type of Loans
Commercial	$	1,323,558		19.3	%	$	1,307,880		19.0	%	1.2	%
Residential mortgage		720,497		10.5			682,291		9.9		5.6
Commercial mortgage		4,003,434		58.4			4,065,155		58.9		(1.5	)
Equity lines		201,876		3.0			195,975		2.8		3.0
Real estate construction		581,662		8.5			626,087		9.1		(7.1	)
Installment		13,617		0.2			13,390		0.2		1.7
Other		7,905		0.1			8,364		0.1		(5.5	)

Gross loans and leases	$	6,852,549		100	%	$	6,899,142		100	%	-0.7	%
Allowance for loan losses		(233,120	)				(211,889	)			10.0
Unamortized deferred loan fees		(8,017	)				(8,339	)			(3.9	)

Total loans and leases, net	$	6,611,412				$	6,678,914				-1.0	%

Loans held for sale		20,944					54,826

Asset Quality Review

Non-performing Assets

Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and other real estate owned. The Company’s policy is to place loans on non-accrual status if interest and/or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on non-accrual status, any previously accrued but unpaid interest is reversed and charged against current income and subsequent payments received are generally first applied towards the outstanding principal balance of the loan. Depending on the circumstances, management may elect to continue the accrual of interest on certain past due loans if partial payment is received and/or the loan is well collateralized and in the process of collection. The loan is generally returned to accrual status when the borrower has brought the past due principal and interest payments current and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled.

Management reviews the loan portfolio regularly for problem loans. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of the loan agreements. Such loans are placed under closer supervision with consideration given to placing the loan on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off.

The ratio of non-performing assets, excluding non-accrual loans held for sale, to total assets was 3.5% at March 31, 2010, compared to 3.0% at December 31, 2009, and compared to 2.6% at March 31, 2009. Total non-performing portfolio assets increased $61.5 million, or 17.5%, to $413.1 million at March 31, 2010, compared with $351.7 million at December 31, 2009, primarily due to a $40.9 million increase in OREO, a $14.7 million increase in non-accrual loans, and a $5.9 million increase in 90 days or more past due still accruing loans. Total non-performing portfolio assets increased $119.1 million, or 40.5%, to $413.1 million at March 31, 2010, compared with $294.0 million at March 31, 2009, due to a $74.1 million increase in non-accrual loans, a $46.9 million increase in OREO, and a $899,000 increase in 90 days or more past due still accruing loans.

As a percentage of gross loans, excluding loans held-for-sale, plus other real estate owned, our non-performing assets increased to 5.93% at March 31, 2010, from 5.05% at December 31, 2009. The non-performing portfolio loan coverage ratio, defined as the allowance for credit losses to non-performing loans, increased to 79.01% at March 31, 2010, from 77.36% at December 31, 2009.

The following table presents the breakdown of non-performing assets by category as of the dates indicated:


(Dollars in thousands)	March 31, 2010			December 31, 2009			% Change		March 31, 2009			% Change
Non-performing assets
Accruing loans past due 90 days or more	$	5,912		$	—		100		$	5,013		18
Non-accrual portfolio loans:
Construction- residential		38,811			54,490		(29	)		123,473		(69	)
Construction- non-residential		44,592			36,797		21			18,545		140
Land		34,254			40,534		(15	)		17,902		91
Commercial real estate, excluding land		141,078			112,774		25			30,723		359
Commercial		26,793			26,570		1			24,357		10
Residential mortgage		9,833			9,478		4			6,224		58

Total non-accrual loans:	$	295,361		$	280,643		5		$	221,224		34

Total non-performing loans		301,273			280,643		7			226,237		33
Other real estate owned and other assets		111,858			71,014		58			67,799		65

Total non-performing assets	$	413,131		$	351,657		17		$	294,036		41

Performing troubled debt restructurings	$	43,264		$	54,992		(21	)	$	4,037		972
Non-accrual loans held for sale	$	20,944		$	54,826		(62	)	$	—		100
Allowance for loan losses	$	233,120		$	211,889		10		$	132,393		76
Allowance for off-balance sheet credit commitments		4,919			5,207		(6	)		6,014		(18	)

Allowance for credit losses	$	238,039		$	217,096		10		$	138,407		72

Total gross loans outstanding at period-end (1)	$	6,852,549		$	6,899,142		(1	)	$	7,393,637		(7	)
Allowance for loan losses to non-performing loans, at period-end (2)		77.38	%		75.50	%				58.52	%
Allowance for loan losses to gross loans, at period-end (1)		3.40	%		3.07	%				1.79	%
Allowance for credit losses to non-performing loans, at period-end (2)		79.01	%		77.36	%				61.18	%
Allowance for credit losses to gross loans, at period-end (1)		3.47	%		3.15	%				1.87	%

(1)	Excludes loans held for sale at period-end.

(2)	Excludes non-accrual loans held for sale at period-end.

Non-accrual Loans

At March 31, 2010, total non-accrual portfolio loans, excluding non-accrual loans held for sale, were $295.4 million, an increase of $14.8 million, or 5.2%, from $280.6 million at December 31, 2009, and an increase of $74.2 million, or 33.5%, from $221.2 million at March 31, 2009. The allowance for the collateral-dependent loans is calculated by the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals, sales contract, or other available market price information. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

Non-accrual loans also include those troubled debt restructurings that do not qualify for accrual status. A summary of non-accrual loans by collateral type as of March 31, 2010, and as of December 31, 2009, is shown below:


	As of March 31, 2010
	California		No. of Loans	Other States		No. of Loans	Total		No. of Loans
	(Dollars in thousands except no. of loans)
Collateral Type
Non-accrual portfolio loans
Commercial real estate	$	89,300	24	$	51,778	23	$	141,078	47
Commercial		23,210	27		3,583	8		26,793	35
Construction- residential		38,065	7		746	3		38,811	10
Construction- non-residential		30,503	5		14,089	2		44,592	7
Residential mortgage		8,255	31		1,578	8		9,833	39
Land		18,071	15		16,183	5		34,254	20

Total non-accrual portfolio loans	$	207,404	109	$	87,957	49	$	295,361	158

Non-accrual loans held for sale	$	20,358	4	$	586	1	$	20,944	5


	As of December 31, 2009
	California		No. of Loans	Other States		No. of Loans	Total		No. of Loans
	(Dollars in thousands except no. of loans)
Collateral Type
Non-accrual portfolio loans
Commercial real estate	$	82,106	22	$	30,667	25	$	112,773	47
Commercial		22,873	31		3,697	9		26,570	40
Construction- residential		50,322	9		4,168	4		54,490	13
Construction- non-residential		35,972	8		825	1		36,797	9
Residential mortgage		6,922	25		2,556	11		9,478	36
Land		20,706	14		19,828	6		40,534	20

Total non-accrual portfolio loans	$	218,901	109