Edgar Filing: CATHAY GENERAL BANCORP

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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 September 30, 2011

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

For the transition period from to

Commission file number 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 x 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, 78,646,712 shares outstanding as of October 31, 2011.

CATHAY GENERAL BANCORP AND SUBSIDIARIES

3^RD QUARTER 2011 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.	37
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	70
Item 4.	CONTROLS AND PROCEDURES.	72

PART II – OTHER INFORMATION		72

Item 1.	LEGAL PROCEEDINGS.	72
Item 1A.	RISK FACTORS.	72
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	72
Item 3.	DEFAULTS UPON SENIOR SECURITIES.	73
Item 4.	(REMOVED AND RESERVED.)	73
Item 5.	OTHER INFORMATION.	73
Item 6.	EXHIBITS.	73

SIGNATURES		75

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 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;

•

increased costs of compliance and other risks associated with changes in regulation and the current regulatory environment, including the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and the potential for substantial changes in the legal, regulatory, and enforcement framework and oversight applicable to financial institutions in reaction to recent adverse financial market events, including changes pursuant to the Dodd-Frank Act;

•

the short term and long term impact of the Basel II and the proposed Basel III capital standards of the Basel Committee;

•

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 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, 2010 (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)


	September 30, 2011			December 31, 2010
	(In thousands, except share and per share data)
ASSETS
Cash and due from banks	$	208,873		$	87,347
Short-term investments and interest bearing deposits		33,693			206,321
Securities purchased under agreements to resell		80,000			110,000
Securities held-to-maturity (market value of $1,285,926 in 2011 and $837,359 in 2010)		1,235,736			840,102
Securities available-for-sale (amortized cost of $1,066,845 in 2011 and $2,005,330 in 2010)		1,057,371			2,003,567
Trading securities		156,977			3,818
Loans held for sale		1,276			2,873
Loans		7,017,142			6,868,621
Less: Allowance for loan losses		(209,116	)		(245,231	)
Unamortized deferred loan fees		(8,360	)		(7,621	)

Loans, net		6,799,666			6,615,769
Federal Home Loan Bank stock		56,175			63,873
Other real estate owned, net		94,308			77,740
Investments in affordable housing partnerships, net		80,592			88,472
Premises and equipment, net		106,613			109,456
Customers’ liability on acceptances		24,638			14,014
Accrued interest receivable		29,919			35,382
Goodwill		316,340			316,340
Other intangible assets		12,834			17,044
Other assets		204,100			209,868

Total assets	$	10,499,111		$	10,801,986

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand deposits	$	1,027,178		$	930,300
Interest-bearing accounts:
NOW accounts		435,860			418,703
Money market accounts		936,449			982,617
Savings accounts		426,000			385,245
Time deposits under $100,000		891,390			1,081,266
Time deposits of $100,000 or more		3,408,247			3,193,715

Total deposits		7,125,124			6,991,846

Securities sold under agreements to repurchase		1,407,500			1,561,000
Advances from the Federal Home Loan Bank		205,000			550,000
Other borrowings from financial institutions		2,770			8,465
Other borrowings for affordable housing investments		18,955			19,111
Long-term debt		171,136			171,136
Acceptances outstanding		24,638			14,014
Other liabilities		49,423			50,309

Total liabilities		9,004,546			9,365,881

Commitments and contingencies		—			—

Stockholders’ equity
Preferred stock, 10,000,000 shares authorized, 258,000 issued and outstanding at September 30, 2011, and at December 31, 2010		250,103			247,455
Common stock, $0.01 par value; 100,000,000 shares authorized, 82,853,701 issued and 78,646,136 outstanding at September 30, 2011, and 82,739,348 issued and 78,531,783 outstanding at December 31, 2010		829			827
Additional paid-in-capital		765,021			762,509
Accumulated other comprehensive loss, net		(5,490	)		(1,022	)
Retained earnings		601,391			543,625
Treasury stock, at cost (4,207,565 shares at September 30, 2011, and at December 31, 2010)		(125,736	)		(125,736	)

Total Cathay General Bancorp stockholders’ equity		1,486,118			1,427,658
Noncontrolling interest		8,447			8,447

Total equity		1,494,565			1,436,105

Total liabilities and equity	$	10,499,111		$	10,801,986

See accompanying notes to unaudited condensed consolidated financial statements

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
	(In thousands, except share and per share data)
INTEREST AND DIVIDEND INCOME
Loans receivable, including loan fees	$	92,590		$	95,255		$	272,940		$	286,077
Investment securities- taxable		20,304			24,749			65,274			83,788
Investment securities- nontaxable		1,054			19			3,165			195
Federal Home Loan Bank stock		38			77			134			171
Federal funds sold and securities purchased under agreements to resell		33			—			81			—
Deposits with banks		360			406			901			1,031

Total interest and dividend income		114,379			120,506			342,495			371,262


INTEREST EXPENSE
Time deposits of $100,000 or more		10,496			12,754			32,115			42,418
Other deposits		4,777			6,603			15,871			23,689
Securities sold under agreements to repurchase		14,840			16,667			45,903			49,469
Advances from Federal Home Loan Bank		2,101			10,090			10,592			30,110
Long-term debt		1,208			1,046			3,630			2,902
Short-term borrowings		4			5			11			5

Total interest expense		33,426			47,165			108,122			148,593

Net interest income before provision for credit losses		80,953			73,341			234,373			222,669
Provision for credit losses		9,000			17,900			25,000			146,900

Net interest income after provision for credit losses		71,953			55,441			209,373			75,769


NON-INTEREST INCOME
Securities gains, net		8,833			484			20,243			9,112
Letters of credit commissions		1,440			1,253			4,113			3,280
Depository service fees		1,341			1,277			4,101			3,870
Other operating income/(loss)		5,213			872			13,449			(180	)

Total non-interest income		16,827			3,886			41,906			16,082


NON-INTEREST EXPENSE
Salaries and employee benefits		17,481			14,436			53,411			44,445
Occupancy expense		3,714			2,801			10,709			10,432
Computer and equipment expense		2,139			2,011			6,437			6,132
Professional services expense		4,846			4,460			13,534			14,099
FDIC and State assessments		2,642			4,599			9,864			15,527
Marketing expense		908			749			2,420			2,469
Other real estate owned expense		6,120			453			8,603			5,346
Operations of affordable housing investments, net		2,102			1,166			6,055			5,391
Amortization of core deposit intangibles		1,461			1,484			4,402			4,476
Cost associated with debt redemption		4,540			—			18,527			909
Other operating expense		2,430			2,722			7,614			10,137

Total non-interest expense		48,383			34,881			141,576			119,363

Income/(loss) before income tax benefit		40,397			24,446			109,703			(27,512	)
Income tax expense/(benefit)		14,162			7,023			36,802			(21,418	)

Net income/(loss)		26,235			17,423			72,901			(6,094	)
Less: net income attributable to noncontrolling interest		151			151			452			452

Net income/(loss) attributable to Cathay General Bancorp		26,084			17,272			72,449			(6,546	)
Dividends on preferred stock		(4,111	)		(4,098	)		(12,323	)		(12,286	)

Net income/(loss) attributable to common stockholders		21,973			13,174			60,126			(18,832	)

Other comprehensive (loss)/income, net of tax
Unrealized holding (loss)/gain arising during the period		(4,753	)		290			7,264			29,024
Less: reclassification adjustments included in net income		5,120			203			11,733			3,831

Total other comprehensive (loss)/gain, net of tax		(9,873	)		87			(4,469	)		25,193

Total comprehensive income	$	16,211		$	17,359		$	67,980		$	18,647

Net income/(loss) per common share:
Basic	$	0.28		$	0.17		$	0.76		$	(0.25	)
Diluted	$	0.28		$	0.17		$	0.76		$	(0.25	)

Cash dividends paid per common share	$	0.01		$	0.01		$	0.03		$	0.03
Average common shares outstanding
Basic		78,640,308			78,520,612			78,628,477			76,584,138
Diluted		78,641,142			78,520,612			78,637,977			76,584,138

See accompanying notes to unaudited condensed consolidated financial statements

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30
	2011			2010
	(In thousands)
Cash Flows from Operating Activities
Net income/(loss)	$	72,901		$	(6,094	)
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Provision for loan losses		25,000			146,900
Provision for losses on other real estate owned		9,088			8,062
Deferred tax liability/(benefit)		4,380			(14,713	)
Depreciation		4,577			4,753
Net gains on sale and transfer of other real estate owned		(4,842	)		(7,049	)
Net gains on sale of loans		(2,851	)		(149	)
Proceeds from sale of loans		20,699			12,681
Originations of loans held-for-sale		(10,992	)		(7,332	)
Write-downs on loans held-for-sale		—			3,160
Increase in trading securities, net		(153,440	)		—
Mark-to-market of trading securities		281			—
Write-downs on venture capital investments		57			392
Write-downs on impaired securities		—			492
Gain on sales and calls of securities		(20,243	)		(9,603	)
Increase in fair value of warrants		(12	)		(17	)
(Decrease)/increase in unrealized loss from interest rate swaps mark-to-market		(2,580	)		7,146
Other non-cash interest		(399	)		(562	)
Amortization/accretion of security premiums/discounts, net		2,903			4,073
Amortization of intangibles		4,475			4,534
Excess tax short-fall from share-based payment arrangements		276			362
Stock based compensation expense		1,278			2,690
Increase/(decrease) in deferred loan fees, net		739			(599	)
Decrease in accrued interest receivable		5,463			2,309
Decrease in other assets, net		7,427			15,559
Increase/(decrease) in other liabilities		4,214			(12,377	)

Net cash provided by operating activities		(31,601	)		154,618

Cash Flows from Investing Activities
Decrease in short-term investments		172,629			6,171
Decrease in securities purchased under agreements to resell		30,000			—
Purchase of investment securities available-for-sale		(371,116	)		(3,047,136	)
Proceeds from maturity and calls of investment securities available-for-sale		385,000			2,272,239
Proceeds from sale of investment securities available-for-sale		503,561			65,073
Purchase of mortgage-backed securities available-for-sale		(403,123	)		—
Proceeds from repayment and sale of mortgage-backed securities available-for-sale		843,248			913,226
Purchase of investment securities held-to-maturity		—			(30,541	)
Purchase of mortgage-backed securities held-to-maturity		(480,083	)		—
Proceeds from maturity and call of investment securities held-to-maturity		82,703			60,660
Redemption of Federal Home Loan Bank stock		7,698			5,284
Net increase in loans		(283,232	)		(147,884	)
Purchase of premises and equipment		(1,995	)		(4,484	)
Proceeds from sale of other real estate owned		50,115			68,791
Net increase in investment in affordable housing		(968	)		(2,767	)

Net cash provided by investing activities		534,437			158,632


Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts, money market and savings deposits		108,622			195,548
Net increase/(decrease) in time deposits		25,062			(592,296	)
Net (decrease)/increase in federal funds purchased and securities sold under agreements to repurchase		(153,500	)		9,000
Advances from Federal Home Loan Bank		3,473			—
Repayment of Federal Home Loan Bank borrowings		(348,473	)		(65,000	)
Dividends paid on common stock		(2,359	)		(2,355	)
Dividends paid on preferred stock		(9,675	)		(9,675	)
Issuance of common stock		—			124,922
Proceeds from other borrowings		—			1,139
Repayment of other borrowings		(5,695	)		—
Proceeds from shares issued under Dividend Reinvestment Plan		205			229
Proceeds from exercise of stock options		1,306			—
Excess tax short-fall from share-based payment arrangements		(276	)		(362	)

Net cash used in financing activities		(381,310	)		(338,850	)

Increase/(decrease) in cash and cash equivalents		121,526			(25,600	)
Cash and cash equivalents, beginning of the period		87,347			100,124

Cash and cash equivalents, end of the period	$	208,873		$	74,524


Supplemental disclosure of cash flow information
Cash paid during the period:
Interest	$	111,300		$	154,195
Income taxes paid/(refunded)	$	39,750		$	(3,942	)
Non-cash investing and financing activities:
Net change in unrealized holding (loss)/gain on securities available-for-sale, net of tax	$	(4,469	)	$	25,193
Loans to facilitate sale of loans	$	6,094		$	22,700
Transfers to other real estate owned from loans held for investment	$	73,161		$	69,727
Transfers to other real estate owned from loans held-for-sale	$	2,873		$	20,922
Loans transferred from investment to held for sale	$	4,139		$	1,329
Loans to facilitate the sale of other real estate owned	$	7,703		$	11,775

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 (“Bancorp”) is the holding company for Cathay Bank (the “Bank” and, together, the “Company”), 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 September 30, 2011, the Bank operated 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, 2011. 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, 2010.

The preparation of the condensed 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

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, 2010. Adoption of ASU 2010-06 did not have a significant impact on the Company’s consolidated financial statements.

The FASB issued ASU 2010-20 “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” in July 2010 to provide disclosures that facilitate financial statement

users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses, and (iii) the changes and reasons for those changes in the allowance for credit losses. An entity should provide disclosures on two levels of disaggregation– portfolio segment and class of financing receivable. The disclosure requirements include, among other things, a roll-forward schedule of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 was effective for the entity’s financial statements as of December 31, 2010, as related to end of a reporting period disclosure requirement. Disclosures that relate to activity during a reporting period are required for the entity’s financial statements that include periods beginning on or after January 1, 2011. See Note 7 to these condensed consolidated financial statements for the required disclosures at September 30, 2011.

The FASB issued ASU 2010-28 “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” in December 2010. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 2010-28 was effective for interim and annual periods beginning on or after December 15, 2010. Adoption of ASU 2010-28 did not have a significant impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02 “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 clarifies the guidance on a creditor’s evaluation of whether a restructuring constitutes a troubled debt restructuring. A restructuring constitutes a troubled debt restructuring if it meets both of the following criteria: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 was effective for interim and annual periods beginning on or after June 15, 2011, and was applied retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 did not have a significant impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03 “Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 improves the accounting for repurchase agreements and other similar transactions by removing following: the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms even in the event of default by the transferee, and the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 will be effective for interim and annual periods beginning on or after December 15, 2011, and will be applied prospectively. Adoption of ASU 2011-03 is not expected to have a significant impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income.” ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. ASU 2011-

05 will be effective for interim and annual periods beginning on or after December 15, 2011, and will be applied retrospectively. Adoption of ASU 2011-05 is not expected to have a significant impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08 “Intangible- Goodwill and other.” ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. ASU 2011-08 will be effective for interim and annual goodwill impairment tests performed after December 15, 2011. Adoption of ASU 2011-08 is not expected to have a significant impact on the Company’s consolidated financial statements.

4. Earnings/Loss per Share

Basic earnings per share exclude 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 earnings or loss per common stock share calculations:


	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands, except share and per share data)	2011			2010			2011			2010
Net income/(loss) attributable to Cathay General Bancorp	$	26,084		$	17,272		$	72,449		($	6,546	)
Dividends on preferred stock		(4,111	)		(4,098	)		(12,323	)		(12,286	)

Net income/(loss) available to common stockholders	$	21,973		$	13,174		$	60,126		($	18,832	)
Weighted-average shares:
Basic weighted-average number of common shares outstanding		78,640,308			78,520,612			78,628,477			76,584,138
Dilutive effect of weighted-average outstanding common share equivalents stock options		834			—			9,500			—

Diluted weighted-average number of common shares outstanding		78,641,142			78,520,612			78,637,977			76,584,138

Average stock options and warrants with anti-dilutive effect		6,294,961			6,911,096			6,265,913			6,946,976
Earnings/(loss) per common stock share:
Basic	$	0.28		$	0.17		$	0.76		($	0.25	)
Diluted	$	0.28		$	0.17		$	0.76		($	0.25	)

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 September 30, 2011, 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 certain options granted to the Chief Executive Officer of the Company in 2005 and 2008. If such options expire or terminate without having been exercised, any shares not purchased will again be available for future grants or awards. There were no options granted during 2010 or during the first nine months of 2011.

Option compensation expense totaled $194,000 for the three months ended September 30, 2011, and $694,000 for the three months ended September 30, 2010. For the nine months ended September 30, option compensation expense totaled $756,000 for 2011 and $2.4 million for 2010. Stock-based compensation is recognized ratably over the requisite service period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $1.1 million at September 30, 2011, and is expected to be recognized over the next 1.4 years.

Stock options covering 86,860 shares were exercised during the first quarter of 2011 compared to none in the second quarter or the third quarter of 2011 and none in the year 2010. Cash received totaled $1.3 million and the aggregate intrinsic value totaled $172,000 from the exercise of stock options during the nine months ended September 30, 2011. There were no stock options vested during the third quarter of 2011 or during the third quarter of 2010. 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, December 31, 2010		4,947,348			27.93		3.7	$	334
Exercised		(86,860	)		15.05
Forfeited		(481,588	)		21.82

Balance, March 31, 2011		4,378,900		$	28.86		3.9	$	178

Forfeited		(8,992	)		32.30

Balance, June 30, 2011		4,369,908		$	28.85		3.6	$	69

Forfeited		(1,143	)		26.92

Balance, September 30, 2011		4,368,765		$	28.86		3.4	$	0

Exercisable, September 30, 2011		4,144,071		$	29.15		3.2	$	0

At September 30, 2011, 2,267,713 shares were available under the Company’s 2005 Incentive Plan for future grants.

In addition to stock options, the Company also grants restricted stock units to eligible employees. On February 21, 2008, restricted stock units for 82,291 shares were granted. Upon vesting of restricted stock units, the Company issued 15,006 shares of common stock at the closing price of $9.64 per share on February 21, 2010, and 12,633 shares of common stock at the closing price of $18.79 per share on February 21, 2011. Restricted stock units granted in 2008 have a maximum term of five years and vest in approximately 20% annual increments subject to continued employment with the Company.

In March 2011, the Company again granted restricted stock units for 65,243 shares. The closing price of the Company’s common stock on the date of the grant was $16.14 for the 15,069 restricted stock units granted on March 15, 2011 and $16.15 for the 50,174 restricted stock

units granted on March 23, 2011. These restricted stock units granted in March 2011 are scheduled to vest in March 2013.

The following table presents information relating to the restricted stock units as of September 30, 2011:


	Units
Balance at December 31, 2010		38,960
Granted		65,243
Forfeited		(2,080	)
Vested		(12,633	)

Balance at September 30, 2011		89,490

The compensation expense recorded related to the restricted stock units was $213,000 for the three months ended September 30, 2011, and $82,000 for the three months ended September 30, 2010. For the nine months ended September 30, compensation expense recorded was $523,000 in 2011 and $245,000 in 2010. Unrecognized stock-based compensation expense related to restricted stock units was $1.2 million at September 30, 2011, and is expected to be recognized over the next 1.4 years.

The following table summarizes the tax short-fall from share-based payment arrangements:


	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2011			2010			2011			2010
Short-fall of tax deductions in excess of grant-date fair value	$	(5	)	$	(263	)	$	(276	)	$	(362	)
Benefit of tax deductions on grant-date fair value		5			263			348			362

Total benefit of tax deductions	$	—		$	—		$	72		$	—

6. Investment Securities

The following table reflects the amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment securities as of September 30, 2011, and December 31, 2010:


	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Securities Held-to-Maturity
U.S. government sponsored entities	$	99,955	$	1,818	$	—	$	101,773
State and municipal securities		129,710		3,904		216		133,398
Mortgage-backed securities		996,101		45,221		—		1,041,322
Corporate debt securities		9,970		—		537		9,433

Total securities held-to-maturity	$	1,235,736	$	50,943	$	753	$	1,285,926

Securities Available-for-Sale
U.S. treasury securities	$	—	$	—	$	—	$	—
U.S. government sponsored entities		350,015		1,516		83		351,448
State and municipal securities		1,870		25		8		1,887
Mortgage-backed securities		210,469		11,057		508		221,018
Collateralized mortgage obligations		18,194		611		120		18,685
Asset-backed securities		177		—		6		171
Corporate debt securities		432,582		534		25,687		407,429
Mutual funds		6,000		79		—		6,079
Preferred stock of government sponsored entities		569		1,783		—		2,352
Trust preferred securities		45,501		598		25		46,074
Other equity securities		1,468		760		—		2,228

Total securities available-for-sale	$	1,066,845	$	16,963	$	26,437	$	1,057,371

Total investment securities	$	2,302,581	$	67,906	$	27,190	$	2,343,297


	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Securities Held-to-Maturity
U.S. government sponsored entities	$	99,921	$	2,639	$	—	$	102,560
State and municipal securities		130,107		—		8,946		121,161
Mortgage-backed securities		600,107		5,230		1,653		603,684
Corporate debt securities		9,967		—		13		9,954

Total securities held-to-maturity	$	840,102	$	7,869	$	10,612	$	837,359

Securities Available-for-Sale
U.S. treasury securities	$	125,573	$	—	$	6,745	$	118,828
U.S. government sponsored entities		830,269		1,653		6,840		825,082
State and municipal securities		1,875		—		157		1,718
Mortgage-backed securities		627,574		14,854		123		642,305
Collateralized mortgage obligations		24,719		590		115		25,194
Asset-backed securities		245		—		5		240
Corporate debt securities		374,489		1,374		6,438		369,425
Mutual funds		4,000		—		73		3,927
Preferred stock of government sponsored entities		569		150		—		719
Trust preferred securities		14,549		58		170		14,437
Other equity securities		1,468		224		—		1,692

Total securities available-for-sale	$	2,005,330	$	18,903	$	20,666	$	2,003,567

Total investment securities	$	2,845,432	$	26,772	$	31,278	$	2,840,926

The amortized cost and fair value of investment securities at September 30, 2011, 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
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	10,081	$	10,104	$	99,955	$	101,773.00
Due after one year through five years		183,381		181,749		—		—
Due after five years through ten years		687,624		671,599		24,827		24,940
Due after ten years (1)		185,759		193,919		1,110,954		1,159,213

Total	$	1,066,845	$	1,057,371	$	1,235,736	$	1,285,926

(1)	Equity securities are reported in this category

Proceeds from sales of mortgage-backed securities were $759.7 million and repayments of mortgage-backed securities were $83.6 million during the first nine months of 2011 compared to proceeds from sales of 726.1 million and repayment of $187.1 million during the same period a year ago. Proceeds from sales and repayments of other investment securities were $503.6 million during the first nine months of 2011 compared to $65.1 million during the same period a year ago. Proceeds from maturity and calls of investment securities were $467.7 million during the first nine months of 2011 compared to $2.3 billion during the same period a year ago. Gains of $20.2 million and no losses were realized on sales and calls of investment securities during the first nine months of 2011 compared to gains of $9.7 million and losses of $67,000 realized for the same period a year ago.

At September 30, 2011, all of the Company’s mortgage-backed securities were rated as investment grade except for three non-agency issues. Two issues not rated investment grade had a par amount of $433,000 and an unrealized loss of $63,000. The other issue was rated below investment grade by one rating agency and investment grade by another rating agency had a par amount of $7,255,000 and an unrealized loss of $499,000. The unrealized losses resulted from increases in credit spreads subsequent to the date that these securities were purchased. Based on the Company’s analysis at September 30, 2011, there was no “other-than-temporary” impairment in these securities due to the low loan to value ratio for the loans underlying these securities and the credit support provided by junior tranches of these securitizations. The Company has the ability and intent to hold the securities for a period of time sufficient for a recovery of cost for those three non-agency mortgage-backed securities issues.

The Company’s unrealized loss on investments in corporate bonds relates to a number of investments in bonds of financial institutions, all of which were investment grade at the date of acquisition and as of September 30, 2011, except for one issue, of which the Company owns $5 million of par value, by a regional bank which was downgraded to below investment grade during the fourth quarter of 2010. The unrealized losses were primarily caused by the widening of credit spreads since the dates of acquisition. The contractual terms of those investments do not permit the issuers to settle the security at a price less than the amortized cost of the investment. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investment. Therefore, it is expected that these debentures would not be settled at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold this investment until a recovery of fair value, which may be maturity, it does not consider its investments in corporate bonds to be other-than-temporarily impaired at September 30, 2011.

The temporarily impaired securities represent 21.2% of the fair value of investment securities as of September 30, 2011. Unrealized losses for securities with unrealized losses for less than twelve months represent 4.0%, and securities with unrealized losses for twelve months or more represent 8.7%, 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. At September 30, 2011, 31 issues of securities had unrealized losses for 12 months or longer and 34 issues of securities had unrealized losses of less than 12 months.

At September 30, 2011, management believed the impairment was temporary and, accordingly, no impairment loss has been recognized in our condensed consolidated statements of operations. 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 debt securities that have declined below their cost before their anticipated recovery.

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 September 30, 2011, and December 31, 2010:


	As of September 30, 2011
	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
State and municipal securities	$	8,469	$	19		2	$	8,354	$	197		6	$	16,823	$	216		8
Corporate debt securities		9,433		537		1		—		—		—		9,433		537		1

Total securities held-to-maturity	$	17,902	$	556		3	$	8,354	$	197		6	$	26,256	$	753		9

Securities Available-for-Sale
U.S. government sponsored entities	$	99,932	$	83		1	$	—	$	—		—	$	99,932	$	83		1
State and municipal securities		—		—		—		1,358		8		1		1,358		8		1
Mortgage-backed securities		784		5		7		149		2		3		933		7		10
Mortgage-backed securities-Non-agency		—		—		—		6,856		501		2		6,856		501		2
Collateralized mortgage obligations		—		—		—		712		120		4		712		120		4
Asset-backed securities		—		—		—		171		6		1		171		6		1
Corporate debt securities		204,736		13,191		19		122,902		12,496		14		327,638		25,687		33
Trust preferred securities		8,312		25		4		—		—		—		8,312		25		4

Total securities available-for-sale	$	313,764	$	13,304		31	$	132,148	$	13,133		25	$	445,912	$	26,437		56

Total investment securities	$	331,666	$	13,860		34	$	140,502	$	13,330		31	$	472,168	$	27,190		65


	As of December 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
State and municipal securities	$	121,161	$	8,946		122		—		—		—	$	121,161	$	8,946		122
Mortgage-backed securities		89,439		1,653		2		—		—		—		89,439		1,653		2
Corporate debt securities		9,954		13		1		—		—		—		9,954		13		1

Total securities held-to-maturity	$	220,554	$	10,612		125	$	—	$	—		—	$	220,554	$	10,612		125

Securities Available-for-Sale
U.S. Treasury securities	$	118,828	$	6,745		5	$	—	$	—		—	$	118,828	$	6,745		5
U.S. government sponsored entities		578,118		6,840		12		—		—		—		578,118		6,840		12
State and municipal securities		1,718		157		2		—		—		—		1,718		157		2
Mortgage-backed securities		354		4		7		32		1		1		386		5		8
Mortgage-backed securities-Non-agency		—		—		—		10,127		118		3		10,127		118		3
Collateralized mortgage obligations		—		—		—		887		115		4		887		115		4
Asset-backed securities		—		—		—		240		5		1		240		5		1
Corporate debt securities		310,630		6,438		30		—		—		—		310,630		6,438		30
Mutual funds		3,927		73		1		—		—		—		3,927		73		1
Trust preferred securities		10,384		170		2		—		—		—		10,384		170		2

Total securities available-for-sale	$	1,023,959	$	20,427		59	$	11,286	$	239		9	$	1,035,245	$	20,666		68

Total investment securities	$	1,244,513	$	31,039		184	$	11,286	$	239		9	$	1,255,799	$	31,278		193

Investment securities having a carrying value of $1.60 billion at September 30, 2011, and $1.80 billion at December 31, 2010, were pledged to secure public deposits, other borrowings, treasury tax and loan, Federal Home Loan Bank advances, securities sold under agreements to repurchase, interest rate swaps, and foreign exchange transactions.

At September 30, 2011, securities purchased under agreements to resell were $80.0 million at a rate of 0.07% and matured in October, 2011.

7. Loans

Most of the Company’s business activity is predominately with Asian customers located in Southern and Northern California; New York City; Houston and Dallas, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; and Hong-Kong. The Company has no specific industry concentration, and generally its loans are collateralized with real property or other pledged collateral of the borrowers. Loans are generally expected to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the secured collateral.

The components of loans in the condensed consolidated balance sheets as of September 30, 2011, and December 31, 2010, were as follows:


	September 30, 2011			December 31, 2010
	(In thousands)
Type of Loans:
Commercial loans	$	1,821,059		$	1,441,167
Real estate construction loans		249,003			409,986
Commercial mortgage loans		3,748,524			3,940,061
Residential mortgage loans		967,396			852,454
Equity lines		215,315			208,876
Installment and other loans		15,845			16,077

Gross loans		7,017,142			6,868,621
Less:
Allowance for loan losses		(209,116	)		(245,231	)
Unamortized deferred loan fees		(8,360	)		(7,621	)

Total loans, net	$	6,799,666		$	6,615,769

Loans held for sale	$	1,276		$	2,873

The Company transferred the only held for sale loan of $2.9 million at December 31, 2010, to other real estate owned (“OREO”) in January 2011 and sold two held for sale loans of $2.4 million with a net gains of $109,000 in the second quarter of 2011. During the third quarter of 2011, the Company sold a held for sale loan at its carrying value. As of September 30, 2011, held for sale loans were comprised of one commercial mortgage loan of $776,000 and one construction loan of $500,000.

The Company identified impaired loans with a recorded investment of $320.3 million at September 30, 2011, compared to $382.0 million at December 31, 2010. We considered all non-accrual loans to be impaired. For impaired loans, the amounts previously charged off represent 23.6% at September 30, 2011, and 23.3% at December 31, 2010, of the contractual balances for impaired loans. The following table presents the average balance and interest income recognized related to impaired loans for the period indicated:


	Impaired Loans
	Average Recorded Investment								Interest Income Recognized
	For the three months ended				For the nine months ended				For the three months ended				For the nine months ended
	September 30,				September 30,				September 30,				September 30,
	2011		2010		2011		2010		2011		2010		2011		2010
	(In thousands)
Commercial loans	$	55,599	$	31,574	$	49,370	$	35,669	$	264	$	36	$	789	$	122
Real estate construction loans		78,307		88,496		83,011		95,010		488		243		1,461		729
Commercial mortgage loans		180,554		238,708		225,195		234,045		895		940		3,100		2,120
Residential mortgage and equity lines		17,798		11,558		17,252		10,813		9		15		28		37

Subtotal	$	332,258	$	370,336	$	374,828	$	375,537	$	1,656	$	1,234	$	5,378	$	3,008

The following table presents impaired loans and the related allowance for credit losses as of the dates indicated:


	Impaired Loans
	September 30, 2011						December 31, 2010
	Unpaid Principal Balance		Recorded Investment		Allowance		Unpaid Principal Balance		Recorded Investment		Allowance
	(In thousands)

With no allocated allowance
Commercial loans	$	36,594	$	26,111	$	—	$	41,233	$	27,775	$	—
Real estate construction loans		125,478		82,818		—		102,186		64,274		—
Commercial mortgage loans		169,495		131,342		—		211,717		156,305		—
Residential mortgage and equity lines		8,073		7,468		—		7,823		7,436		—

Subtotal	$	339,640	$	247,739	$	—	$	362,959	$	255,790	$	—

With allocated allowance
Commercial loans	$	22,902	$	18,879	$	2,270	$	13,930	$	7,748	$	2,925
Real estate construction loans		—		—		—		15,429		13,416		7,470
Commercial mortgage loans		44,036		42,220		3,930		98,593		96,449		3,812
Residential mortgage and equity lines		12,475		11,422		1,203		9,811		8,589		978

Subtotal	$	79,413	$	72,521	$	7,403	$	137,763	$	126,202	$	15,185

Total impaired loans	$	419,053	$	320,260	$	7,403	$	500,722	$	381,992	$	15,185

The following table presents the aging of the loan portfolio by type as of September 30, 2011 and as of December 31, 2010:


	As of September 30, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Non-accrual Loans		Total Past Due		Loans Not Past Due		Total
	(In thousands)
Type of Loans:
Commercial loans	$	337	$	1,022	$	—	$	29,723	$	31,082	$	1,789,977	$	1,821,059
Real estate construction loans		—		—		—		49,997		49,997		199,006		249,003
Commercial mortgage loans		10,366		12,715		13,053		97,338		133,472		3,615,052		3,748,524
Residential mortgage and equity lines		948		3,596		—		15,656		20,200		1,162,511		1,182,711
Installment and other loans		300		—		—		—		300		15,545		15,845

Total loans	$	11,951	$	17,333	$	13,053	$	192,714	$	235,051	$	6,782,091	$	7,017,142


	As of December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Non-accrual Loans		Total Past Due		Loans Not Past Due		Total
	(In thousands)
Type of Loans:
Commercial loans	$	7,037	$	2,990	$	—	$	31,498	$	41,525	$	1,399,642	$	1,441,167
Real estate construction loans		14,634		15,425		4,175		53,937		88,171		321,815		409,986
Commercial mortgage loans		12,569		9,430		831		144,596		167,426		3,772,635		3,940,061
Residential mortgage and equity lines		9,934		2,581		—		12,288		24,803		1,036,527		1,061,330
Installment and other loans		—		—		—		—		—		16,077		16,077

Total loans	$	44,174	$	30,426	$	5,006	$	242,319	$	321,925	$	6,546,696	$	6,868,621

The determination of the amount of the allowance for credit losses for impaired loans is based on management’s current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectibility when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. This allowance evaluation process is also applied to troubled debt restructurings since trouble debt restructurings are considered to be impaired loans.

A troubled debt restructuring (“TDR”) is a formal modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including change in the stated interest rate, reduction in the loan balance or accrued interest, or extension of the maturity date that causes significant delay in payment.

At September 30, 2011, accruing TDRs were $126.3 million and non-accrual TDRs were $44.1 million compared to accruing TDRs of $136.8 million and non-accrual TDRs of $28.1 million at December 31, 2010. The Company has allocated specific reserves of $2.1 million to accruing TDRs and $1.2 million to non-accrual TDRs at September 30, 2011, and $3.6 million to accruing TDRs and $1.3 million to non-accrual TDRs at December 31, 2010. The following table presents TDRs that were modified during the first nine months ended September 31, 2011, and during the third quarter of 2011.


	TDRs Modified During the First Nine Months of 2011
	Accruing TDRs						Non-Accruing TDRs
	No. of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		No. of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)						(In thousands)

Commercial loans		3	$	13,026	$	13,025		4	$	8,161	$	2,161
Real estate construction loans		2		36,848		26,544		1		7,382		7,382
Commercial mortgage loans		4		27,482		16,062		2		1,248		1,248
Residential mortgage and equity lines		2		1,125		1,125		1		451		451

Total		11	$	78,481	$	56,756		8	$	17,242	$	11,242


	TDRs Modified During the Third quarter of 2011
	Accruing TDRs						Non-Accrual TDRs
	No. of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		No. of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)						(In thousands)

Commercial loans		1	$	14	$	14		1	$	363	$	363
Real estate construction loans		2		36,848		26,545		—		—		—
Commercial mortgage loans		3		23,708		14,270		—		—		—
Residential mortgage and equity lines		1		624		624		1		451		451

Total		7	$	61,194	$	41,453		2	$	814	$	814

Accruing TDRs at September 30, 2011, were comprised of loans collateralized by ten retail shopping and commercial use buildings of $71.6 million, eight office and commercial use buildings of $27.6 million, two hotels of $13.2 million, eight single family residences of $13.1 million, one land of $724,000, and two commercial loans of $45,000. We expect that the troubled debt restructuring loans on accruing status as of September 30, 2011, which are all performing in accordance with their restructured terms, will continue to comply with the restructured terms because of the reduced principal or interest payments on these loans.

Modifications of the loan terms during the first nine months of 2011 were in form of changes in the stated interest rate, reduction in the loan balance or accrued interest, or extension of the maturity date. Modifications involving a reduction of the stated interest rate were for the periods ranging from six months to five years. Modification involving an extension of the maturity date were for period ranging from nine months to four years. For the first nine months, charge-offs for accruing TDRs were $13.4 million for 2011 and $333,000 for 2010. A summary of TDRs by type of concession, by type of loan, and related allowance for credit losses as of September 30, 2011, and as of December 31, 2010, is shown below:


	As of September 30, 2011
Accruing TDRs	Principal Deferral		Rate Reduction		Rate Reduction and Forgiveness of Principal		Rate Reduction and Payment Deferral		Total		Allowance
	(In thousands)
Commercial loans	$	13,056	$	1,774	$	—	$	436	$	15,266	$	7
Real estate construction loans		16,820		9,725		—		5,776		32,321		—
Commercial mortgage loans		4,292		37,997		2,050		31,111		75,450		1,976
Residential mortgage loans		1,661		593		—		979		3,233		145

Total accruing TDRs	$	35,829	$	50,089	$	2,050	$	38,302	$	126,270	$	2,128


	As of September 30, 2011
Non-accrual TDRs	Interest Deferral		Principal Deferral		Rate Reduction		Rate Reduction and Forgiveness of Principal		Rate Reduction and Payment Deferral		Total		Allowance
	(In thousands)
Commercial loans	$	—	$	629	$	1,959	$	1,536	$	—	$	4,124	$	1,088
Real estate construction loans		—		14,426		13,664		—		—		28,090		—
Commercial mortgage loans		2,690		5,781		—		—		—		8,471		1
Residential mortgage loans		321		2,300		452		—		317		3,390		97

Total non-accrual TDRs	$	3,011	$	23,136	$	16,075	$	1,536	$	317	$	44,075	$	1,186


	As of December 31, 2010
Accruing TDRs	Principal Deferral		Rate Reduction		Rate Reduction and Forgiveness of Principal		Rate Reduction and Payment Deferral		Total		Allowance
	(In thousands)
Commercial loans	$	1,131	$	1,780	$	—	$	1,114	$	4,025	$	59
Real estate construction loans		752		17,226		—		5,776		23,754		117
Commercial mortgage loans		16,586		70,185		3,459		15,055		105,285		3,363
Residential mortgage loans		2,658		599		—		479		3,736		49

Total accruing TDRs	$	21,127	$	89,790	$	3,459	$	22,424	$	136,800	$	3,588


	As of December 31, 2010
Non-accrual TDRs	Interest Deferral		Principal Deferral		Rate Reduction		Rate Reduction and Payment Deferral		Total		Allowance
	(In thousands)
Commercial loans	$	—	$	—	$	2,310	$	—	$	2,310	$	1,159
Real estate construction loans		—		7,044		—		—		7,044		—
Commercial mortgage loans		1,239		14,112		—		1,113		16,464		75
Residential mortgage loans		340		1,037		—		951		2,328		69

Total non-accrual TDRs	$	1,579	$	22,193	$	2,310	$	2,064	$	28,146	$	1,303

A loan is considered to be in payment default once it is 60 to 90 days contractually past due under the modified terms. Two commercial TDRs of $932,000, two commercial real estate TDRs of $1.3 million, and one residential mortgage TDR of $2.9 million had payments defaults within the previous twelve months ended September 30, 2011. The TDRs that subsequently defaulted incurred $361,000 charge-off during the first nine months ended September 30, 2011.

Under the Company’s internal underwriting policy, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification in order to determine whether a borrower is experiencing financial difficulty.

As of September 30, 2011, there were no commitments to lend additional funds to those borrowers whose loans have been restructured, were considered impaired, or were on non-accrual status.

As part of the on-going monitoring of the credit quality of our loan portfolio, the Company utilizes a risk grading matrix to assign a risk grade to each loan. The risk rating categories can be generally described by the following grouping for non-homogeneous loans:

•

Pass/Watch – These loans range from minimal credit risk to lower than average, but still acceptable, credit risk.

•

Special Mention – Borrower is fundamentally sound and loan is currently protected but adverse trends are apparent that, if not corrected, may affect ability to repay. Primary source of loan repayment remains viable but there is increasing reliance on collateral or guarantor support.

•

Substandard – These loans are inadequately protected by current sound net worth, paying capacity or pledged collateral. Well-defined weaknesses exist that could jeopardize repayment of debt. Loss may not be imminent, but if weaknesses are not corrected, there is a good possibility of some loss.

•

Doubtful – The possibility of loss is extremely high, but due to identifiable and important pending events (which may strengthen the loan) a loss classification is deferred until the situation is better defined.

•

Loss – These loans are considered uncollectible and of such little value that to continue to carry the loan as an active asset is no longer warranted.

The following table presents loan portfolio by risk rating as of September 30, 2011, and as of December 31, 2010:


	As of September 30, 2011
	Pass/Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Commercial loans	$	1,681,005	$	43,125	$	91,094	$	5,835	$	1,821,059
Real estate construction loans		118,932		24,932		96,951		8,188		249,003
Commercial mortgage loans		3,310,957		77,153		360,414		—		3,748,524
Residential mortgage and equity lines		1,158,638		1,172		22,901		—		1,182,711
Installment and other loans		15,783		62		—		—		15,845


Total gross loans	$	6,285,315	$	146,444	$	571,360	$	14,023	$	7,017,142


Loans held for sale	$	—	$	—	$	776	$	500	$	1,276


	As of December 31, 2010
	Pass/Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Commercial loans	$	1,258,537	$	58,189	$	118,670	$	5,771	$	1,441,167
Real estate construction loans		191,455		53,172		153,857		11,502		409,986
Commercial mortgage loans		3,365,040		143,974		431,047		—		3,940,061
Residential mortgage and equity lines		1,026,216		6,109		28,846		159		1,061,330
Installment and other loans		15,535		542		—		—		16,077


Total gross loans	$	5,856,783	$	261,986	$	732,420	$	17,432	$	6,868,621


Loans held for sale	$	—	$	—	$	2,873	$	—	$	2,873

The allowance for loan losses and the reserve for off-balance sheet credit commitments are significant estimates that can and do change based on management’s process in analyzing the loan portfolio and on management’s assumptions about specific borrowers, underlying collateral, and applicable economic and environmental conditions, among other factors.

The following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment method as of September 30, 2011, and as of December 31, 2010.


	Commercial Loans		Real Estate Construction Loans		Commercial Mortgage Loans		Residential Mortgage Loans and Equity Lines		Consumer and Other Loans		Total
	(In thousands)
September 30, 2011
Loans individually evaluated for impairment
Allowance	$	2,270	$	—	$	3,930	$	1,203	$	—	$	7,403
Balance	$	44,989	$	82,818	$	173,563	$	18,890	$	—	$	320,260

Loans collectively evaluated for impairment
Allowance	$	61,518	$	23,876	$	109,144	$	7,140	$	35	$	201,713
Balance	$	1,776,070	$	166,185	$	3,574,961	$	1,163,821	$	15,845	$	6,696,882

Total allowance	$	63,788	$	23,876	$	113,074	$	8,343	$	35	$	209,116
Total balance	$	1,821,059	$	249,003	$	3,748,524	$	1,182,711	$	15,845	$	7,017,142

December 31, 2010
Loans individually evaluated for impairment
Allowance	$	2,540	$	7,470	$	3,106	$	—	$	—	$	13,116
Balance	$	33,555	$	77,691	$	248,059	$	7,435	$	—	$	366,740

Loans collectively evaluated for impairment
Allowance	$	61,379	$	35,791	$	125,241	$	9,668	$	36	$	232,115
Balance	$	1,407,612	$	332,295	$	3,692,002	$	1,053,895	$	16,077	$	6,501,881

Total allowance	$	63,919	$	43,261	$	128,347	$	9,668	$	36	$	245,231
Total balance	$	1,441,167	$	409,986	$	3,940,061	$	1,061,330	$	16,077	$	6,868,621

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended and for the nine months ended September 30, 2011, and September 30, 2010. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

For the Three Months Ended September 30, 2010 and 2011


	Commercial Loans			Real Estate Construction Loans			Commercial Mortgage Loans			Residential Mortgage and Equity Line			Installment and Other Loans			Total
	(In thousands)
June 30, 2010 Ending Balance	$	60,738		$	42,442		$	144,000		$	8,430		$	40		$	255,650

Provision for possible credit losses		7,266			14,255			(1,920	)		464			1			20,066
Charge-offs		(5,588	)		(9,014	)		(6,605	)		(140	)		—			(21,347	)
Recoveries		963			1,945			428			1			—			3,337

Net charge-offs		(4,625	)		(7,069	)		(6,177	)		(139	)		—			(18,010	)


September 30, 2010 Ending Balance	$	63,379		$	49,628		$	135,903		$	8,755		$	41		$	257,706


June 30, 2011 Ending Balance	$	65,860		$	37,683		$	117,014		$	9,307		$	36		$	229,900


Provision for possible credit losses		(1,366	)		9,324			951			(224	)		(1	)		8,684

Charge-offs		(1,219	)		(23,539	)		(5,264	)		(818	)		—			(30,840	)
Recoveries		513			408			373			78						1,372

Net charge-offs		(706	)		(23,131	)		(4,891	)		(740	)		—			(29,468	)


September 30, 2011 Ending Balance	$	63,788		$	23,876		$	113,074		$	8,343		$	35		$	209,116

For the Nine Months Ended September 30, 2010 and 2011


	Commercial Loans			Real Estate Construction Loans			Commercial Mortgage Loans			Residential Mortgage and Equity Line			Installment and Other Loans			Total
	(In thousands)
2010 Beginning Balance	$	57,815		$	45,086		$	100,494		$	8,480		$	14		$	211,889

Provision for possible credit losses		19,733			37,897			89,981			1,807			25			149,443
Charge-offs		(17,501	)		(38,213	)		(55,892	)		(1,605	)		—			(113,211	)
Recoveries		3,332			4,858			1,320			73			2			9,585

Net charge-offs		(14,169	)		(33,355	)		(54,572	)		(1,532	)		2			(103,626	)


September 30, 2010 Ending Balance	$	63,379		$	49,628		$	135,903		$	8,755		$	41		$	257,706

Reserve for impaired loans	$	3,126		$	11,263		$	8,089		$	980					$	23,458
Reserve for non-impaired loans	$	60,253		$	38,365		$	127,814		$	7,775		$	41		$	234,248
Reserve for off-balance sheet credit commitments	$	575		$	1,933		$	116		$	37		$	3		$	2,664

2011 Beginning Balance	$	63,919		$	43,261		$	128,347		$	9,668		$	36		$	245,231


Provision for possible credit losses		9,516			10,713			5,704			(458	)		(1	)		25,474

Charge-offs		(11,215	)		(34,394	)		(24,083	)		(1,044	)		—			(70,736	)
Recoveries		1,568			4,296			3,106			177						9,147

Net charge-offs		(9,647	)		(30,098	)		(20,977	)		(867	)		—			(61,589	)


September 30, 2011 Ending Balance	$	63,788		$	23,876		$	113,074		$	8,343		$	35		$	209,116

Reserve for impaired loans	$	2,270		$	—		$	3,930		$	1,203		$	—		$	7,403
Reserve for non-impaired loans	$	61,518		$	23,876		$	109,144		$	7,140		$	35		$	201,713
Reserve for off-balance sheet credit commitments	$	757		$	967		$	103		$	34		$	2		$	1,863

8. 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 $80.6 million at September 30, 2011, and $88.5 million at December 31, 2010. At September 30, 2011, and December 31, 2010, 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 condensed consolidated financial statements increased total assets and liabilities by $22.9 million at September 30, 2011, and by $22.8 million at December 31, 2010. Other borrowings for affordable housing limited partnerships were $19.0 million at September 30, 2011, and $19.1 million at December 31, 2010; recourse is limited to the assets of the limited partnerships. Unfunded commitments for affordable housing limited partnerships of $1.5 million as of September 30, 2011, and $4.3 million as of December 31, 2010, were recorded under other liabilities.

9. 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 September 30, 2011		At December 31, 2010
Commitments to extend credit	$	1,533,878	$	1,360,266
Standby letters of credit		58,597		59,876
Other letters of credit		73,705		62,722
Bill of lading guarantees		131		245

Total	$	1,666,311	$	1,483,109

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.

10. Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase were $1.4 billion with a weighted average rate of 4.12% at September 30, 2011, compared to $1.6 billion with a weighted average rate of 4.18% at December 31, 2010. Two long-term securities sold under agreements to repurchase totaling $100.0 million with a weighted average rate of 4.77% matured in March 2011. In May 2011, the Company prepaid a security sold under agreement to repurchase of $50 million with a rate of 4.83% and incurred a prepayment penalty of $1.7 million. Fourteen floating-to-fixed rate agreements totaling $750.0 million have initial floating rates for a period of time ranging from six months to one year, with floating rates ranging from the three-month LIBOR minus 100 basis points to 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 counter parties 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 have initial fixed rates ranging from 1.00% to 3.50% with initial fixed rate terms ranging from six months to 18 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 counter parties have the right to terminate the transaction at par at the floating rate reset date and quarterly thereafter. At September 30, 2011, there was one short-term security sold under an agreement to repurchase of $7.5 million at the rate of 0.80% which matured on October 3, 2011. The table below provides summary data for long-term securities sold under agreements to repurchase as of September 30, 2011:


(Dollars in millions)	Fixed-to-floating																		Floating-to-fixed						Total
Callable		All callable at September 30, 2011																		All callable at September 30, 2011
Rate type		Float Rate																		Fixed Rate
Rate index		8% minus 3 month LIBOR

Maximum rate		3.75	%		3.53	%		3.50	%		3.50	%		3.53	%		3.25	%
Minimum rate		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
No. of agreements		3			1			4			3			1			1			10			4			27
Amount	$	150.0		$	50.0		$	200.0		$	150		$	50		$	50.0		$	550.0		$	200.0		$	1,400.0
Weighted average rate		3.75	%		3.53	%		3.50	%		3.50	%		3.53	%		3.25	%		4.54	%		5.00	%		4.14	%
Final maturity		2014			2014			2014			2015			2015			2015			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 $1.5 billion as of September 30, 2011, and $1.7 billion as of December 31, 2010.

11. Advances from the Federal Home Loan Bank (“FHLB”)

Total advances from the FHLB decreased by $345.0 million to $205.0 million at September 30, 2011, from $550.0 million at December 31, 2010. The Company prepaid advances from the FHLB totaling $200.0 million with a weighted rate of 4.29% during the first quarter of 2011, $100.0 million at a rate of 4.33% in the second quarter of 2011, and $100.0 million at a rate of 4.54% in the third quarter of 2011. Prepayment penalty incurred were $16.8 million in the first nine months of 2011 and $4.5 million in the third quarter of 2011. In January 2010, the Company prepaid advances totaling $65.0 million from the FHLB with a rate of 3.49% and incurred prepayment penalties totaling $909,000. There were no prepaid advances in the second quarter and in the third quarter of 2010. As of September 30, 2011, $205.0 million FHLB advances with weighted average rate of 3.42% were outstanding compared to $550.0 million FHLB advances with weighted average rate of 4.43% at December 31, 2010.

12. Subordinated Note and Junior Subordinated Note

On September 29, 2006, the Bank issued $50.0 million in subordinated debt in a private placement transaction. The debt had an original maturity term of 10 years, was unsecured and bore interest at a rate of three-month LIBOR plus 110 basis points, payable on a quarterly basis. In March 2011, the Company extended the debt for an additional year. As part of the extension agreement, the rate was increased from LIBOR plus 110 basis points to LIBOR plus 330 basis points for 2011 and 2012, after which time it reverts back to LIBOR plus 110 basis points. At September 30, 2011, the per annum interest rate on the subordinated debt was 3.67% compared to 1.40% at December 31, 2010. 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”). These 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 Bancorp, in Junior Subordinated Notes issued by the Bancorp (“Junior Subordinated Notes”). The five special purpose trusts are considered variable interest entities under FIN 46R. Because 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 September 30, 2011, Junior Subordinated Notes totaled $121.1 million with a weighted average interest rate of 2.51% compared to $121.1 million with a weighted average rate of 2.46% at December 31, 2010. The Junior Subordinated Notes have a stated maturity term of 30 years and are currently included in the Tier 1 capital of Bancorp for regulatory capital purposes.

13. Income Taxes

Income tax expense totaled $36.8 million, or an effective tax rate of 33.7%, for the first nine months of 2011, compared to an income tax benefit of $21.4 million, or an effective tax benefit rate of 76.6%, for the same period a year ago. The effective tax rate includes the impact of the utilization of low income housing tax credits and recognition of other tax credits.

As of December 31, 2010, the Company had income tax receivables of approximately $23.5 million, of which $10.6 million relates to the carryback of the Company’s net operating loss for 2009 to the 2007 tax year and $10.3 million relates to the carryback of the Company’s low income housing tax credits

for 2009 to the 2008 tax year. These income tax receivables are included in other assets in the accompanying consolidated balance sheets.

The Company’s tax returns are open for audits by the Franchise Tax Board of the State of California back to 2003. The Internal Revenue Service completed its audit of the Company’s 2007 to 2009 tax years in June 2011 without any significant impact to the current period income tax expense. The California Franchise Tax Board has begun an audit of the Company’s California tax returns for the years 2003 and 2004. The Company does not expect that any such changes would have a material impact on its annual effective tax rate.

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:

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

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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.

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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 and liabilities 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.

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 is 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:

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.

Loans Held for Sale. The Company records loans held for sale at fair value based on quoted prices from third party sale analyses, existing sale agreements or appraisal reports adjusted by sales commission assumptions, 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 then recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value. In connection with the determination of fair value, certain data and information is utilized, including earnings forecasts 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 subject to nonrecurring fair value adjustments is classified as Level 3 measurement.

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 nonr

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