Edgar Filing: EAST WEST BANCORP INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

Mark One

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

For the quarterly period ended June 30, 2006

or

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

For the transition period from to .

Commission file number 000-24939

EAST WEST BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

135 N. Los Robles Ave, 7^th Floor, Pasadena, California 91101
(Address of principal executive offices) (Zip Code)

(626) 768-6000
(Registrant’s telephone number, including area code)

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

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

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

Number of shares outstanding of the issuer’s common stock on the latest practicable date: 60,946,788 shares of common stock as of July 31, 2006.

EXPLANATORY NOTE

This Quarterly Report on Form 10-Q/A amends our previously filed Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006. All references in this amendment to this “Quarterly Report on Form 10-Q” or the “Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006” shall refer to this amendment. Readers should note that the only change made in this amendment was to correct a clerical error that appeared on page 14 of the original filing. A correction was made to the first table in Footnote 4 of “Notes to Condensed Consolidated Financial Statements.” Under the column heading of “United National Bank” within such table, the amounts reflected in “Deposits,” “Total liabilities assumed” and “Net assets acquired” have been amended from the previously reported amounts of $936,214, $952,357 and $106,716 (in thousands), respectively, to $865,070, $881,213 and $177,860 (in thousands), respectively.

All other information contained in the original filing remains unchanged.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION			4

	Item 1.	Condensed Consolidated Financial Statements (Unaudited)	4

		Notes to Condensed Consolidated Financial Statements (Unaudited)	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50

	Item 4.	Controls and Procedures	50

PART II - OTHER INFORMATION			51

	Item 1.	Legal Proceedings	51

	Item 1A.	Risk Factors	51

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

	Item 3.	Defaults upon Senior Securities	51

	Item 4.	Submission of Matters to a Vote of Security Holders	51

	Item 5.	Other Information	52

	Item 6.	Exhibits	52

SIGNATURE			53

Forward-Looking Statements

Certain matters discussed in this report may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the environment in which the Company operates and projections of future performance. The Company’s actual results, performance, or achievements may differ significantly from the results, performance, or achievements expected or implied in such forward-looking statements. For discussion of some of the factors that might cause such differences, see the Company’s Form 10-K under the heading “Item 1A. Risk Factors.” The Company does not undertake, and specifically disclaims any obligation to update any forward looking statements to reflect the occurrence of events or circumstances after the date of such statements.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	June 30,			December 31,
	2006			2005
ASSETS
Cash and cash equivalents	$	137,309		$	151,192
Interest-bearing deposits in other banks	663			—
Securities purchased under resale agreements	100,000			50,000
Investment securities available-for-sale, at fair value (with amortized cost of $1,371,882 in 2006 and $873,969 in 2005)	1,353,386			869,837
Loans receivable, net of allowance for loan losses of $75,847 in 2006 and $68,635 in 2005	7,793,273			6,724,320
Investment in Federal Home Loan Bank stock, at cost	48,130			45,707
Investment in Federal Reserve Bank stock, at cost	17,200			12,285
Other real estate owned, net	2,786			299
Investment in affordable housing partnerships	28,280			31,006
Premises and equipment, net	43,671			38,579
Due from customers on acceptances	8,355			6,074
Premiums on deposits acquired, net	23,884			18,853
Goodwill	244,351			143,254
Cash surrender value of life insurance policies	86,480			82,191
Accrued interest receivable and other assets	94,959			82,073
Deferred tax assets	35,564			22,586
TOTAL	$	10,018,291		$	8,278,256

LIABILITIES AND STOCKHOLDERS’ EQUITY
Customer deposit accounts:
Noninterest-bearing	$	1,400,048		$	1,331,992
Interest-bearing	5,726,946			4,926,595
Total deposits	7,126,994			6,258,587

Federal funds purchased	104,000			91,500
Federal Home Loan Bank advances	841,918			617,682
Securities sold under repurchase agreements	725,000			325,000
Notes payable	4,646			8,833
Bank acceptances outstanding	8,355			6,074
Accrued interest payable, accrued expenses and other liabilities	85,613			83,347
Long-term debt	184,023			153,095
Total liabilities	9,080,549			7,544,118

COMMITMENTS AND CONTINGENCIES (Note 7)

STOCKHOLDERS’ EQUITY
Common stock (par value of $0.001 per share)
Authorized – 200,000,000 shares
Issued – 65,785,311 shares in 2006 and 61,419,622 shares in 2005
Outstanding – 60,857,655 shares in 2006 and 56,519,438 shares in 2005	66			61
Additional paid in capital	531,132			389,004
Retained earnings	456,676			393,846
Deferred compensation	—			(8,242		)
Treasury stock, at cost – 4,927,656 shares in 2006 and 4,900,184 shares in 2005	(38,840		)	(37,905		)
Accumulated other comprehensive loss, net of tax	(11,292		)	(2,626		)
Total stockholders’ equity	937,742			734,138
TOTAL	$	10,018,291		$	8,278,256

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees	$	143,426	$	87,334	$	269,297	$	166,230
Investment securities available-for-sale	12,949		5,582		22,164		10,839
Securities purchased under resale agreements	1,896		—		3,243		—
Investment in Federal Home Loan Bank stock	646		680		1,208		1,137
Investment in Federal Reserve Bank stock	218		116		402		220
Short-term investments	113		57		236		99
Total interest and dividend income	159,248		93,769		296,550		178,525

INTEREST EXPENSE
Customer deposit accounts	49,939		19,394		88,828		35,685
Federal Home Loan Bank advances	8,199		7,890		16,907		13,071
Securities sold under repurchase agreements	5,005		—		7,882		—
Long-term debt	3,253		1,465		5,914		2,485
Federal funds purchased	1,208		60		2,327		102
Total interest expense	67,604		28,809		121,858		51,343

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES	91,644		64,960		174,692		127,182
PROVISION FOR LOAN LOSSES	1,333		4,500		4,666		8,870
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	90,311		60,460		170,026		118,312

NONINTEREST INCOME
Branch fees	2,890		1,692		5,429		3,285
Letters of credit fees and commissions	2,159		1,967		4,331		4,504
Ancillary loan fees	1,131		612		1,910		1,129
Net gain on sales of investment securities available-for-sale	145		1,285		1,861		1,733
Income from life insurance policies	916		819		1,812		1,563
Income from secondary market activities	189		992		373		1,184
Net gain on sale of real estate owned	—		—		88		—
Other operating income	689		597		1,205		1,066
Total noninterest income	8,119		7,964		17,009		14,464

NONINTEREST EXPENSE
Compensation and employee benefits	15,831		12,485		32,000		25,339
Occupancy and equipment expense	5,339		3,432		10,116		6,690
Deposit-related expenses	2,642		2,122		4,655		3,762
Amortization of premiums on deposits acquired	1,852		603		3,617		1,206
Amortization of investments in affordable housing partnerships	1,461		1,709		2,726		3,390
Data processing	1,028		654		1,788		1,223
Deposit insurance premiums and regulatory assessments	366		228		682		451
Other operating expenses	10,017		7,168		19,775		14,058
Total noninterest expense	38,536		28,401		75,359		56,119

INCOME BEFORE PROVISION FOR INCOME TAXES	59,894		40,023		111,676		76,657
PROVISION FOR INCOME TAXES	23,249		14,560		42,980		27,675
NET INCOME	$	36,645	$	25,463	$	68,696	$	48,982

EARNINGS PER SHARE
BASIC	$	0.61	$	0.49	$	1.17	$	0.94
DILUTED	$	0.59	$	0.47	$	1.15	$	0.91

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC	60,270		52,338		58,538		52,291
DILUTED	61,619		53,878		59,956		53,921

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

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

BALANCE, DECEMBER 31, 2004	$	57	$	260,152		$	296,175				$	(5,422			)	$	(36,649		)	$	(4			)					$		514,309
Comprehensive income
Net income for the period						48,982																			$	48,982			48,982
Net unrealized loss on investment securities available-for-sale																				(1,006				)	(1,006			)	(1,006			)
Total comprehensive income																									$	47,976
Stock compensation costs											1,371																		1,371
Tax benefit from option exercises			671																										671
Issuance of 121,951 shares pursuant to various stock plans and agreements			2,348																										2,348
Issuance of 93,503 shares under
Restricted Stock Plan	1		3,514								(3,515				)														—
Cancellation of 19,855 shares due to forfeitures of issued restricted stock											633					(633			)										—
Dividends paid on common stock						(5,259				)																			(5,259			)
BALANCE, JUNE 30, 2005	$	58	$	266,685		$	339,898				$		(6,933		)	$	(37,282		)	$		(1,010		)					$	561,416

BALANCE, DECEMBER 31, 2005	$	61	$	389,004		$		393,846			$			(8,242	)	$		(37,905	)	$			(2,626	)					$	734,138
Comprehensive income
Net income for the period						68,696																			$		68,696		68,696
Net unrealized loss on investment securities available-for-sale																				(8,666				)	(8,666			)	(8,666			)
Total comprehensive income																									$		60,030
Elimination of deferred compensation pursuant to adoption of SFAS No. 123(R)			(8,242		)						8,242																		—
Stock compensation costs			2,718																										2,718
Tax benefit from stock option exercises			6,945																										6,945
Tax benefit from vested restricted stock			543																										543
Issuance of 572,716 shares pursuant to various stock plans and agreements	1		5,279																										5,280
Issuance of 3,647,440 shares pursuant to Standard Bank acquisition	4		133,845																										133,849
Issuance of 2,658 shares to Standard Bank employees			105																										105
Cancellation of 27,472 shares due to forfeitures of issued restricted stock			935													(935			)										—
Dividends paid on common stock						(5,866				)																			(5,866			)
BALANCE, JUNE 30, 2006	$	66	$	531,132		$			456,676		$			—		$		(38,840	)	$			(11,292	)					$	937,742

	Six Months Ended June 30,
	2006			2005
	(In thousands)
Disclosure of reclassification amounts:
Unrealized holding loss on securities arising during the period, net of tax benefit of $5,493 in 2006 and $0 in 2005	$	(7,587	)	$	(1	)
Less: Reclassification adjustment for gain included in net income, net of tax expense of $782 in 2006 and $728 in 2005	(1,079		)	(1,005		)
Net unrealized loss on securities, net of tax benefit of $6,275 in 2006 and $728 in 2005	$	(8,666	)	$	(1,006	)

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	68,696		$	48,982

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,720			4,804
Stock compensation cost	2,718			1,371
Deferred taxes	(7,331		)	(969		)
Provision for loan losses	4,666			8,870
Net gain on sales of investment securities, loans and other assets	(2,278		)	(2,831		)
Federal Home Loan Bank stock dividends	(1,299		)	(922		)
Originations of loans held for sale	(10,587		)	(76,590		)
Proceeds from sale of loans held for sale	10,593			77,531
Tax benefit from stock option exercises	(6,945		)	671
Tax benefit from vested restricted stock	(543		)	—
Net change in accrued interest receivable and other assets	(17,103		)	(19,999		)
Net change in accrued interest payable, accrued expenses, and other liabilities	13,053			7,523
Total adjustments	(9,336		)	(541		)
Net cash provided by operating activities	59,360			48,441

CASH FLOWS FROM INVESTING ACTIVITIES
Net loan originations	(925,738		)	(595,535		)
Purchases of:
Securities purchased under resale agreement	(50,000		)	—
Investment securities available-for-sale	(982,533		)	(128,638		)
Loans receivable	—			(1,988		)
Federal Home Loan Bank stock	(11,823		)	(13,440		)
Federal Reserve Bank stock	(4,915		)	(1,050		)
Investments in affordable housing partnerships	—			(12		)
Premises and equipment	(4,720		)	(1,836		)
Proceeds from unsettled securities acquired	225,616			—
Proceeds from sale of:
Investment securities available-for-sale	116,587			63,489
Loans receivable	4,526			—
Premises and equipment	41			1
Other real estate owned	387			—
Maturity of interest-bearing deposits in other banks	396			100
Repayments, maturity and redemption of investment securities available-for-sale	704,118			41,396
Redemption of Federal Home Loan Bank stock	17,837			—
Cash obtained from acquisitions, net of cash paid	98,351			—
Net cash used in investing activities	(811,870		)	(637,513		)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	139,413			561,842
Net increase in federal funds purchased	12,500			13,000
Repayment of Federal Home Loan Bank advances	(48,644,546		)	(7,000		)
Repayment of notes payable on affordable housing investments	(4,187		)	(1,585		)
Payment of debt issue cost	—			(71		)
Proceeds from Federal Home Loan Bank advances	48,798,546			—
Proceeds from securities sold under repurchase agreements	400,000			—
Proceeds from issuance of long-term debt	30,000			50,000
Proceeds from issuance of common stock	1,198			1,565
Proceeds from common stock options exercised	4,081			783
Tax benefit from stock option exercises	6,945			—
Tax benefit from vested restricted stock	543			—
Dividends paid on common stock	(5,866		)	(5,259		)
Net cash provided by financing activities	738,627			613,275

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(13,883		)	24,203
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	151,192			93,075
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	137,309		$	117,278

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	122,767		$	49,146
Income tax payments, net of refunds	35,443			29,987
Noncash investing and financing activities:
Guaranteed mortgage loan securitizations	334,495			117,305
Real estate acquired through foreclosure	2,786			—
Issuance of common stock pursuant to acquisition	133,849			—
Issuance of common stock to employees	105			—

See accompanying notes to condensed consolidated financial statements.

EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)

1. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of East West Bancorp, Inc. (referred to herein on an unconsolidated basis as “East West” and on a consolidated basis as the “Company”) and its wholly owned subsidiaries, East West Bank and subsidiaries (the “Bank”) and East West Insurance Services, Inc. Intercompany transactions and accounts have been eliminated in consolidation. East West also has seven wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities, the Trusts are not consolidated into the accounts of East West Bancorp, Inc.

The interim consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. All adjustments are of a normal and recurring nature. Results for the six months ended June 30, 2006 are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2005.

2. SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Standards

In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 is effective for loans and debt securities acquired by the Company after December 15, 2004. The adoption of this Statement on January 1, 2005 did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment. This Statement supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance and is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or

that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions.

This Statement requires a public entity to measure the cost of employee services received in exchange for award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.

The Company adopted the revised accounting standards for stock based compensation effective January 1, 2006. SFAS No. 123(R) allows for two alternative transition methods. The Company follows the modified prospective method, which requires application of the new Statement to new awards and to awards modified, repurchased or cancelled after the required effective date. Accordingly, prior period amounts have not been restated. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of January 1, 2006 will be recognized as the requisite services are rendered on or after January 1, 2006. The compensation cost of that portion of awards is based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS No. 123. Under the transition provisions of SFAS No. 123(R), the Company has reduced additional paid in capital by $8.2 million, representing the remaining deferred compensation balance in the consolidated statement of stockholders’ equity as of January 1, 2006.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which addresses accounting for changes in accounting principle, changes in accounting estimates, changes required by an accounting pronouncement in the instance that the pronouncement does not include specific transition provisions and error correction. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle and error correction unless impracticable to do so. SFAS No. 154 states an exception to retrospective application when a change in accounting principle, or the method of applying it, may be inseparable from the effect of a change in accounting estimate. When a change in principle is inseparable from a change in estimate, such as depreciation, amortization or depletion, the change to the financial statements is to be presented in a prospective manner. SFAS No. 154 and the required disclosures are effective for accounting changes and error corrections in fiscal years beginning after December 15, 2005.

In November 2005, the FASB issued Staff Position (“FSP”) Nos. FAS 115-1 and 124-1 to address the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. This FSP nullified certain requirements of Emerging Issues Task Force 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-1”), and references existing other than temporary guidance. Furthermore, this FSP creates a three step process in determining when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The FSP is effective for reporting periods beginning after December 15, 2005. The adoption of this FSP did not have a material impact on the Company’s financial condition or results of operations.

During December 2005, the FASB issued FSP Statement of Position (“SOP”) 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit Risk, which addresses the circumstances under which the terms of loan products give rise to such risk and the disclosures or other accounting considerations that apply for entities that originate, hold, guarantee, service, or invest in loan products with terms that may give rise to a concentration of credit risk. The guidance under this FSP is effective for interim and annual periods ending after December 19, 2005 and for loan products that are determined to represent a concentration

of credit risk, disclosure requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, should be provided for all periods presented. The adoption of this FSP did not have a significant impact on the Company’s consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (“SFAS No. 156”), which provides the following: 1) revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. It is not anticipated that adoption will have a material impact on the Company’s consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) which supplements SFAS No. 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. The Interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and reported as a change in accounting principle. FIN 48 is effective for fiscal years beginning after December 15, 2006. It is not anticipated that adoption will have a material impact on the Company’s financial condition, results of operations, or cash flows.

3. STOCK-BASED COMPENSATION

The Company issues stock options and restricted stock to employees under share-based compensation plans. As previously mentioned, the Company adopted SFAS No. 123(R) on January 1, 2006 using the modified prospective method. Under this method, the provisions of SFAS No. 123(R) are applied to new awards and to awards modified, repurchased or canceled after December 31, 2005 and to awards outstanding on December 31, 2005 for which requisite service has not yet been rendered. SFAS No. 123(R) requires companies to account for stock options using the fair value method, which generally results in compensation expense recognition. Prior to December 31, 2005, the Company accounted for its fixed stock options using the intrinsic-value method, as prescribed in APB Opinion No. 25. Accordingly, no stock option expense was recorded in periods prior to December 31, 2005.

The adoption of SFAS No. 123(R) resulted in incremental stock-based compensation expense during 2006. Since we have previously recognized compensation expense on restricted stock awards, the incremental stock-based compensation expense recognized pursuant to SFAS No. 123(R) relates only to issued and unvested stock option grants. The incremental stock-based compensation expense caused income before income taxes to decrease by $551 thousand and net income to decrease by $320 thousand for the quarter ended June 30, 2006. For the six months ended June 30, 2006, incremental stock-based compensation expense reduced income before income taxes by $1.1 million and reduced net income by $621 thousand. The impact of this additional expense on basic and diluted earnings per share was a reduction of $0.01 for both the three

and six months ended June 30, 2006. Cash provided by operating activities decreased by $7.5 million and cash provided by financing activities increased by an identical amount for the first half of 2006 related to excess tax benefits from stock-based payment arrangements.

As required under SFAS No. 123(R), the reported net income and earnings per share for the three and six months ended June 30, 2005 have been presented below to reflect the impact had the Company been required to recognize compensation cost based on the fair value at the grant date for stock options. The pro forma amounts are as follows (amounts are reflected in thousands, except per share data):

	Three Months			Six Months
	Ended			Ended
	June 30, 2005			June 30, 2005
Net income, as reported	$	25,463		$	48,982

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects	414			795

Deduct: Total stock-based employee compensation expense determined using fair value method, net of related tax effects	(1,046		)	(1,713		)
Net income, pro forma	$	24,831		$	48,064

Basic earnings per share
As reported	$	0.49		$	0.94
Pro forma	$	0.47		$	0.92

Diluted earnings per share
As reported	$	0.47		$	0.91
Pro forma	$	0.46		$	0.89

During the three and six months ended June 30, 2006, total compensation cost recognized in the consolidated statements of income related to stock options and restricted stock awards amounted to $1.3 million and $2.7 million, respectively, with their related tax benefits of $530 thousand and $1.1 million, respectively. During the three and six months ended June 30, 2005, total compensation cost recognized in the consolidated statements of income related to restricted stock awards amounted to $714 thousand and $1.4 million, respectively, with their related tax benefits of $300 thousand and $576 thousand, respectively.

Stock Options

The Company issues fixed stock options to certain employees, officers, and directors. Stock options are issued at the current market price on the date of grant with a three-year or four-year vesting period and contractual terms of 7 or 10 years.

A summary of activity for the Company’s stock options as of and for the six months ended June 30, 2006 is presented below:

				Weighted
				Average
				Exercise
	Shares			Price
Outstanding at beginning of period	3,209,183			$	13.51
Granted	227,562			37.15
Exercised	(538,397		)	7.58
Forfeited	(13,325		)	27.22
Outstanding at end of period	2,885,023			$	16.42

Options exercisable at June 30, 2006	2,156,746
Weighted average fair value of options granted during the period	$	10.05

The weighted average grant-date fair value of options granted during the six months ended June 30, 2006 and 2005 was $10.05 and $9.43, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2006	2005	2006	2005
Expected life (1)	4 years	3.5 years	4 years	3.5 years
Expected volatility (2)	27.8%	28.1%	27.8%	28.1%
Expected dividend yield	0.6%	0.6%	0.6%	0.5%
Risk-free interest rate (3)	4.8%	3.8%	4.7%	3.9%

(1) The expected life (estimated period of time outstanding) of stock options granted was estimated using the historical exercise behavior of employees.

(2) The expected volatility was based on historical volatility for a period equal to the stock option’s expected life.

(3) The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

The following table summarizes information about stock options outstanding as of June 30, 2006:

	Options Outstanding				Options Exercisable
				Weighted
		Weighted		Average		Weighted
	Number of	Average		Remaining	Number of	Average
	Outstanding	Exercise		Contractual	Exercisable	Exercise
Range of Exercise Prices	Options	Price		Life	Options	Price
$5.00 to $9.99	671,865	$	5.52	2.4 years	671,865	$	5.52
$10.00 to $14.99	685,875	12.59		5.3 years	685,875	12.59
$15.00 to $19.99	1,005,231	16.88		3.2 years	743,231	16.88
$25.00 to $29.99	118,450	26.60		4.6 years	54,150	26.62
$30.00 to $34.99	51,228	33.94		6.1 years	750	32.92
$35.00 to $39.99	351,374	37.32		6.4 years	625	35.14
$40.00 to $44.99	1,000	42.97		5.4 years	250	42.97
$5.00 to $44.99	2,885,023	$	16.42	4.0 years	2,156,746	$	12.24

During the three and six months ended June 30, 2006 and 2005, activities related to stock options are presented as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
	(In thousands)

Total intrinsic value of options exercised	$	7,583	$	645	$	16,517	$	1,601
Total fair value of options vested	$	41	$	59	$	871	$	1,331

As of June 30, 2006, total unrecognized compensation cost related to stock options amounted to $3.8 million. This cost is expected to be recognized over a weighted average period of 3.4 years.

Restricted Stock

In addition to stock options, the Company also grants restricted stock awards to directors, certain officers and employees. The restricted shares awarded become fully vested after three to five years of continued employment from the date of grant. The Company becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions. The Company records forfeitures of restricted stock as treasury share repurchases.

A summary of the activity for restricted stock as of June 30, 2006, including changes during the six months then ended, is presented below:

			Weighted
			Average
	Shares		Price
Outstanding at beginning of period	431,392		$	30.60
Granted	142,875		36.28
Vested	(66,300	)	18.21
Forfeited	(27,472	)	33.65
Outstanding at end of period	480,495		$	33.82

In March 2006, the Company also granted performance restricted stock with two-year cliff vesting to an executive officer. The number of shares that the executive will receive under this stock award will ultimately depend on the Company’s achievement of specified performance targets. The performance period is January 1, 2006 through December 31, 2007. At the end of the performance period, the number of stock awards issued will be determined by adjusting upward or downward from the target amount of shares in a range between 24% and 124%. The final performance percentage on which the payout will be based, considering performance metrics established for the performance period, will be determined by the Board of Directors or a committee of the Board. If the Company performs below its performance targets, the Board or the committee may, at its discretion, choose not to award any shares. Shares of stock, if any, will be issued following the end of the performance period two years from the date of grant. Compensation costs are accrued over the service period and are based on the probable outcome of the performance condition. The maximum number of shares subject to this grant cannot exceed 41,000 shares.

As of June 30, 2006, total unrecognized compensation cost related to restricted stock awards amounted to $10.8 million. This cost is expected to be recognized over a weighted average period of 3.5 years.

Employee Stock Purchase Plan

The Company adopted the 1998 Employee Stock Purchase Plan (the “Purchase Plan”) providing eligible employees of the Company and its subsidiaries participation in the ownership of the Company through the right to purchase shares of its common stock at a discount. Under the terms of the Purchase Plan, prior to April 2005, employees could purchase shares of the Company’s common stock at the lesser of 85% of the per-share market price at the date of grant or exercise, subject to an annual limitation of common stock valued at $25,000. In April 2005, the terms of the Purchase Plan were amended to allow the employees to purchase shares at 90% of the per-share market price at the date of exercise, maintaining the annual common stock value limitation of $25,000. As of June 30, 2006, the Purchase Plan qualifies as a non-compensatory plan under Section 423 of the Internal Revenue Code and, accordingly, no compensation expense is recognized under the plan.

The Purchase Plan covers a total of 2,000,000 shares of the Company’s common stock. During the six months ended June 30, 2006, 34,319 shares totaling $1.2 million were sold to employees under the Purchase Plan.

4. BUSINESS COMBINATIONS

The Company has completed several business acquisitions that have all been accounted for using the purchase method of accounting. Accordingly all assets and liabilities were adjusted to and recorded at their estimated fair values as of the acquisition date. The excess of purchase price over fair value of net assets acquired, if identifiable, was recorded as a premium on purchased deposits, and if not identifiable, was recorded as goodwill. The estimated tax effect of differences between tax bases and market values has been reflected in deferred income taxes. The results of operations of the acquired entities have been included in the Company’s consolidated financial statements from the date of acquisition.

At the close of business on March 17, 2006, the Company completed the acquisition of Standard Bank, a federal savings bank headquartered in Monterey Park, California. The purchase price was $200.3 million which was comprised of $66.4 million in cash and 3,647,440 shares of East West Bancorp, Inc. common stock. The Company recorded total goodwill of $100.8 million and core deposit premium of $8.6 million for this transaction.

The Company completed the acquisition of United National Bank, a commercial bank headquatered in San Marino, California, at the close of business on September 6, 2005. The purchase price was $177.9 million which was comprised of $71.1 million in cash and 3,138,701 shares of East West Bancorp, Inc. common stock. The Company recorded total goodwill of $99.7 million and core deposit premium of $15.0 million for this transaction.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for these two transactions:

	Standard		United National
	Bank		Bank
	(In thousands)
Cash and cash equivalents	$	165,834	$	120,221
Loans receivable	487,110		666,693
Premises and equipment	3,211		10,434
Core deposit premium	8,648		15,044
Goodwill	100,838		99,711
Other assets	239,585		146,970
Total assets acquired	1,005,226		1,059,073
Deposits	728,994		865,070
Other liabilities	75,960		16,143
Total liabilities assumed	804,954		881,213
Net assets acquired	$	200,272	$	177,860

The unaudited pro forma combined amounts presented below give effect to the acquisition of Standard Bank as if this transaction had been completed as of the beginning of each period. For the three and six months ended June 30, 2005, the unaudited pro forma combined amounts also include the results of operations for United National Bank as if this transaction had been completed as of the beginning of each period. The unaudited pro forma information is not necessarily indicative of the results of operations that would have resulted had the acquisitions

been completed at the beginning of the applicable period presented, nor is it necessarily indicative of the results of operations in future periods.

	Three Months				Six Months
	Ended				Ended
	June 30,				June 30,
	2006 (1)		2005 (3)		2006 (2)		2005 (3)
	(In thousands, except per share data)
Net interest income	$	91,644	$	80,183	$	178,796	$	157,482
Provision for loan losses	1,333		4,665		5,866		9,330
Noninterest income	8,119		9,246		6,801		16,330
Noninterest expense	38,536		35,477		77,587		70,187
Income before provision for income taxes	59,894		49,287		102,144		94,295
Provision for income taxes	23,249		18,222		38,972		34,858
Net income	$	36,645	$	31,065	$	63,172	$	59,437

EARNINGS PER SHARE
BASIC	$	0.61	$	0.53	$	1.05	$	1.01
DILUTED	$	0.59	$	0.51	$	1.03	$	0.98

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC	60,270		59,124		60,070		59,077
DILUTED	61,619		60,664		61,488		60,707

(1) Since the acquisition of Standard Bank was completed on March 17, 2006, there is no difference between the pro forma and actual results of operations for the three months ended June 30, 2006.

(2) The pro forma results of operations for the six months ended June 30, 2006 includes $10.3 million in net realized losses on investment securities that were sold by Standard Bank during the first quarter of 2006. Further, the pro forma results of operations for the six months ended June 30, 2006 reflect interest expense related to junior subordinated debt amounting to $30.0 million that was issued in connection with the acquisition of Standard Bank as if this debt instrument was issued at the beginning of the period.

(3) The pro forma results of operations for both periods in 2005 reflect additional interest expense related to $50.0 million in junior subordinated debt that was issued in connection with the acquisitions of United National Bank and Standard Bank as if these debt instruments were issued at the beginning of each period.

5. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

During the second quarter of 2006, the Company entered into two separate long-term transactions totaling $400.0 million involving the sale of securities under repurchase agreements. The first transaction amounting to $200.0 million has an effective date of April 25, 2006 and a maturity date of April 25, 2016. The interest rate is initially floating for the first two years from April 25, 2006 through April 25, 2008 based on the three-month Libor minus 125 basis points. Thereafter, the rate is fixed at 5.128% for the remainder of the term. As of June 30, 2006, the interest rate on this agreement is 3.85%. The counterparty has the right to call the transaction on April 25, 2008 and quarterly thereafter until maturity. The second transaction, also amounting to $200.0 million, has an effective date of June 6, 2006 and a maturity date of June 6, 2013. The interest rate is initially floating for the first six months from June 6, 2006 through December 6, 2006 based on the three-month Libor minus 255 basis points. Thereafter, the rate is fixed at 5.00% for the remainder of the term. At June 30, 2006, the interest rate on this agreement is 2.72%. The counterparty has the right to call the transaction on December 6, 2006 and quarterly thereafter until maturity.

In June 2006, the Company modified the terms of $50.0 million of its repurchase agreements in response to the increasing interest rate environment. This transaction was initially entered into by the Company in September 2005. Under the original terms of this seven-year agreement, the interest rate for the first year was based on the three-month Libor minus 100 basis points. Thereafter, the rate was fixed at 4.075% through the original maturity date of September 6, 2012. Under the modified terms, the interest rate on this agreement for the period from June 6, 2006 through December 6, 2006 is based on the three-month Libor minus 290 basis points. Thereafter, the rate is fixed at 5.00% through the extended maturity date of June 6, 2013. At June 30, 2006, the interest rate on this repurchase agreement is 2.37%. Under the terms of

the modification, the counterparty has the right to call the transaction on December 6, 2006 and quarterly thereafter until maturity. The difference in the present value of the cash flows under the new terms of the debt instrument is less than 10% of the present value of the remaining cash flows under the original terms. As such, this modification of debt terms is not considered substantial, and therefore, does not constitute an extinguishment of debt in accordance with the provisions of EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments. No gain or loss was recorded in the consolidated statements of income as a result of this debt modification.

6. JUNIOR SUBORDINATED DEBT

On March 15, 2006, the Company issued $30.9 million in junior subordinated debt securities through a pooled trust preferred offering. Similar to previous offerings, these securities were issued through a newly formed statutory business trust, East West Capital Trust VII (“Trust VII”), a wholly-owned subsidiary of the Company. The proceeds from the debt securities are loaned by Trust VII to the Company and are included in long-term debt in the accompanying Condensed Consolidated Balance Sheet. The securities issued by Trust VII have a scheduled maturity of June 15, 2036 and bear interest at a per annum rate based on the three-month Libor plus 135 basis points, payable on a quarterly basis. At June 30, 2006, the interest rate on the junior subordinated debt was 6.68%. The junior subordinated debt issued qualifies as Tier I capital for regulatory reporting purposes.

7. COMMITMENTS AND CONTINGENCIES

Credit Extensions - In the normal course of business, the Company has various outstanding commitments to extend credit that are not reflected in the accompanying interim consolidated financial statements. As of June 30, 2006, undisbursed loan commitments and commercial and standby letters of credit amounted to $2.16 billion and $365.6 million, respectively.

Guarantees – From time to time, the Company sells loans with recourse in the ordinary course of business. For loans that have been sold with recourse, the recourse component is considered a guarantee. When the Company sells a loan with recourse, it commits to stand ready to perform if the loan defaults, and to make payments to remedy the default. As of June 30, 2006 and December 31, 2005, loans sold with recourse, comprised entirely of residential single family mortgage loans, totaled $29.3 million and $31.6 million, respectively. The Company’s recourse reserve related to these loans totaled $67 thousand and $76 thousand as of June 30, 2006 and December 31, 2005, respectively, and is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.

The Company also sells loans without recourse that may have to be subsequently repurchased if a defect that occurred during the loan origination process results in a violation of a representation or warranty made in connection with the sale of the loan. When a loan sold to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred and if such defects give rise to a violation of a representation or warranty made to the investor in connection with the sale. If such a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no such defects, the Company has no commitment to repurchase the loan. As of June 30, 2006 and December 31, 2005, the amount of loans sold without recourse totaled $1.08 billion and $777.6 million, which substantially represents the unpaid principal balance of the Company’s loans serviced for others portfolio.

Litigation - Neither the Company nor the Bank is involved in any material legal proceedings at June 30, 2006. The Bank, from time to time, is a party to litigation which arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. After taking into consideration information furnished by counsel to the

Company and the Bank, management believes that the resolution of such issues will not have a material adverse impact on the financial position, results of operations, or liquidity of the Company or the Bank.

Regulated Investment Company – On December 31, 2003, the California Franchise Tax Board (“FTB”) announced that it is taking the position that certain tax deductions relating to regulated investment companies will be disallowed pursuant to California Senate Bill 614 and California Assembly Bill 1601, which were signed into law in the fourth quarter of 2003. East West Securities Company, Inc. (the “Fund”), a regulated investment company (“RIC”) formed and funded in July 2000 to raise capital in an efficient and economical manner was dissolved on December 30, 2002 as a result of, among other reasons, proposed legislation to change the tax treatments of RICs. The Fund provided state tax benefits beginning in 2000 until the end of 2002, when the RIC was officially dissolved. While the Company’s management continues to believe that the tax benefits realized in previous years were appropriate and fully defensible under the existing tax codes at that time, the Company has deemed it prudent to participate in the voluntary compliance initiative, or “VCI” offered by the State of California to avoid certain potential penalties should the FTB choose to litigate its announced position about the tax treatment of RICs for periods prior to enactment of the legislation described above and should the FTB be successful in that litigation.

Pursuant to the VCI program, the Company filed amended California income tax returns on April 15, 2004 for all affected years and paid the resulting taxes and interest due to the FTB. This amounted to an aggregate payment of $14.2 million for tax years 2000, 2001, and 2002. The Company’s management continues to believe that the tax deductions are appropriate and, as such, refund claims have also been filed for the amounts paid with the amended returns. These refund claims are reflected as assets in the Company’s consolidated financial statements. As a result of these actions—amending the Company’s California income tax returns and subsequent related filing of refund claims—the Company retains its potential exposure for assertion of an accuracy-related penalty should the FTB prevail in its position, in addition to our risk of not being successful in our refund claim for taxes and interest. The Company’s potential exposure to all other penalties, however, has been eliminated through this course of action.

The FTB is currently in the process of reviewing and assessing our refund claims for taxes and interest for tax years 2000 through 2002. Management is continuing to pursue these claims, to monitor developments in the law in this area, and to monitor the status of tax claims with respect to other registered investment companies.

8. STOCKHOLDERS’ EQUITY

Earnings Per Share - The actual number of shares outstanding at June 30, 2006 was 60,857,655. Basic earnings per share are calculated on the basis of the weighted average number of shares outstanding during the period. Diluted earnings per share are calculated on the basis of the weighted average number of shares outstanding during the period plus restricted stock and shares issuable upon the assumed exercise of outstanding common stock options and warrants.

The following table sets forth earnings per share calculations for the three and six months ended June 30, 2006 and 2005:

	Three Months Ended June 30,
	2006						2005
	Net		Number	Per Share			Net		Number	Per Share
	Income		of Shares	Amounts			Income		of Shares	Amounts
	(In thousands, except per share data)
Basic earnings per share	$	36,645	60,270	$	0.61		$	25,463	52,338	$	0.49

Effect of dilutive securities:
Stock options	—		1,091	(0.02		)	—		1,311	(0.02		)
Restricted stock	—		167				—		104	—
Stock warrants	—		91	—			—		125	—
Dilutive earnings per share	$	36,645	61,619	$	0.59		$	25,463	53,878	$	0.47

	Six Months Ended June 30,
	2006						2005
	Net		Number	Per Share			Net		Number	Per Share
	Income		of Shares	Amounts			Income		of Shares	Amounts
	(In thousands, except per share data)
Basic earnings per share	$	68,696	58,538	$	1.17		$	48,982	52,291	$	0.94

Effect of dilutive securities:
Stock options	—		1,150	(0.02		)	—		1,364	(0.03		)
Restricted stock	—		178	—			—		136	—
Stock warrants	—		90	—			—		130	—
Dilutive earnings per share	$	68,696	59,956	$	1.15		$	48,982	53,921	$	0.91

Quarterly Dividends – The Company’s Board of Directors declared and paid quarterly common stock cash dividends of $0.05 per share which was paid May 16, 2006 to shareholders of record on May 3, 2006. Cash dividends totaling $3.0 million were paid to the Company’s shareholders during the second quarter of 2006.

9. BUSINESS SEGMENTS

The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank and the Company overall. The Company has identified four principal operating segments for purposes of management reporting: retail banking, commercial lending, treasury, and residential lending. Information related to the Company’s remaining centralized functions and eliminations of inter-segment amounts have been aggregated and included in “Other.” Although all four operating segments offer financial products and services, they are managed separately based on each segment’s strategic focus. While the retail banking segment focuses primarily on retail operations through the Bank’s branch network, certain designated branches have responsibility for generating commercial deposits and loans. The commercial lending segment, which includes commercial real estate, primarily generates commercial loans and deposits through the efforts of commercial lending officers located in the Bank’s northern and southern California production offices. The treasury department’s primary focus is managing the Bank’s investments, liquidity, and interest rate risk; the residential lending segment is mainly responsible for the Bank’s portfolio of single family and multifamily residential loans.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies described in Note 1 of our annual report on Form 10-K for the year ended December 31,

2005. Operating segment results are based on the Company’s internal management reporting process, which reflects assignments and allocations of capital, certain operating and administrative costs and the provision for loan losses. Net interest income is based on the Company’s internal funds transfer pricing system which assigns a cost of funds or a credit for funds to assets or liabilities based on their type, maturity or re-pricing characteristics. Non-interest income and non-interest expense, including depreciation and amortization, directly attributable to a segment are assigned to that business. Indirect costs, including overhead expense, are allocated to the segments based on several factors, including, but not limited to, full-time equivalent employees, loan volume and deposit volume. The provision for credit losses is allocated based on actual losses incurred and an allocation of the remaining provision based on new loan originations for the period. The Company evaluates overall performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses.

Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results. Results for prior periods have been restated for comparability for changes in management structure or reporting methodologies. Specifically, an adjustment was made to reallocate the credit provided for the Company’s capital to the treasury segment from the “Other” category. The adjustment resulted in an increase in the treasury segment’s pretax profit of $5.7 million and $7.1 million for the three months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, this adjustment resulted in an increase in the treasury segment’s pretax profit of $12.2 million and $9.8 million, respectively.

The following tables present the operating results and other key financial measures for the individual operating segments for the three and six months ended June 30, 2006 and 2005:

	Three Months Ended June 30, 2006
	Retail			Commercial						Residential
	Banking			Lending			Treasury			Lending			Other			Total
	(In thousands)

Interest income	$	54,597		$	66,108		$	15,821		$	17,537		$	5,185		$	159,248
Charge for funds used	(37,782		)	(44,450		)	(21,715		)	(14,045		)	—			(117,992		)
Interest spread on funds used	16,815			21,658			(5,894		)	3,492			5,185			41,256
Interest expense	(33,964		)	(5,060		)	(28,580		)	—			—			(67,604		)
Credit on funds provided	67,793			10,013			40,186			—			—			117,992
Interest spread on funds provided	33,829			4,953			11,606			—			—			50,388
Net interest income	$	50,644		$	26,611		$	5,712		$	3,492		$	5,185		$	91,644

Depreciation and amortization	$	2,754		$	177		$	(513	)	$	275		$	223		$	2,916
Goodwill	182,545			12,170			—			48,679			957			244,351
Segment pretax profit (loss)	31,738			23,894			7,292			2,533			(5,563		)	59,894
Segment assets	2,379,397			3,105,431			1,536,434			2,436,093			560,936			10,018,291

	Three Months Ended June 30, 2005
	Retail			Commercial						Residential
	Banking			Lending			Treasury			Lending			Other			Total
	(In thousands)

Interest income	$	29,929		$	43,629		$	6,437		$	12,856		$	918		$	93,769
Charge for funds used	(16,674		)	(23,774		)	(2,533		)	(7,830		)	—			(50,811		)
Interest spread on funds used	13,255			19,855			3,904			5,026			918			42,958
Interest expense	(12,625		)	(1,728		)	(14,456		)	—			—			(28,809		)
Credit on funds provided	29,618			4,087			17,106			—			—			50,811
Interest spread on funds provided	16,993			2,359			2,650			—			—			22,002
Net interest income	$	30,248		$	22,214		$	6,554		$	5,026		$	918		$	64,960
Depreciation and amortization	$	1,206		$	114		$	(186	)	$	216		$	1,049		$	2,399
Goodwill	32,133			2,142			—			8,569			958			43,802
Segment pretax profit (loss)	16,346			18,464			7,268			5,005			(7,060		)	40,023
Segment assets	1,534,725			2,276,753			749,391			1,838,356			302,359			6,701,584

Six Months Ended June 30, 2006

Retail

Commercia