TABLE OF CONTENTS

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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 including future earnings, operating results and financial condition.  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 as a result from:

·                  effect of interest rate and currency exchange fluctuations;

·                  competition in the financial services market for both loans and deposits;

·                  our ability to incorporate acquisitions into our operations;

·                  credit quality;

·                  the effect of regulatory and legislative action; and

·                  regional and general economic conditions.

For a discussion of some of the other 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 except as required by law.

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PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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EAST WEST BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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EAST WEST BANCORP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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EAST WEST BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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EAST WEST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2007 and 2006
(Unaudited)

1.              BASIS OF PRESENTATION

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

The interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments 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, 2007 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 condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2006.

2.              SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Standards

In March 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 156, Accounting for Servicing of Financial Assets, 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 one-time 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.  The Company adopted SFAS No. 156 on January 1, 2007.  The adoption did not have a material impact on the Company’s consolidated financial statements.  The Company has elected not to fair value servicing assets and liabilities as of each reporting period as

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permitted by SFAS No. 156, but instead continue to amortize servicing assets and liabilities in accordance with current practice.

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.  FIN 48 provides a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions with respect to positions taken or expected to be taken in income tax returns.  Specifically, 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.   Pursuant to the adoption of FIN 48 on January 1, 2007, the Company recorded a net decrease to retained earnings of $4.6 million related to the measurement of a position that the Company had taken with respect to the tax treatment of regulated investment companies (RICs).  See Notes 7 and 9 to the condensed consolidated financial statements presented elsewhere herein.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, Quantifying Financial Misstatements, which expresses the Staff’s views regarding the process of quantifying financial statement misstatements.  Registrants are required to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements.  The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the “rollover” (current year income statement perspective) and “iron curtain” (current year balance sheet perspective) approaches.  The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors.  This guidance did not have any impact on the Company’s financial condition and results of operations.

In September 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance  Arrangements, which requires employers to recognize an obligation associated with endorsement split-dollar life insurance arrangements that extend into the employee’s postretirement period.  EITF 06-4 is effective for financial statements issued for fiscal years beginning after December 31, 2007.  The adoption of this statement is not expected to have a material impact to the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides a single definition of fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands required disclosures about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 12, 2007, and interim periods within those years.  The provisions of SFAS No. 157 should be applied on a prospective basis.  The Company is currently evaluating the impact that this statement will have on the Company’s consolidated financial statements.

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In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, which requires employers to fully recognize obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements.  The provisions of SFAS No. 158 require employers to (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status in the year in which the changes occur through comprehensive income in stockholders’ equity.  The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006.  The Company adopted this statement on December 31, 2006.  The adoption did not have a material impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.  SFAS No. 159 would allow the Company a one-time irrevocable election to measure certain financial assets and liabilities on the balance sheet at fair value and report the unrealized gains and losses on the elected items in earnings at each subsequent reporting date.  This standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  Management does not expect this guidance to have a material effect on the Company’s financial condition and results of operations.

3.              STOCK-BASED COMPENSATION

The Company issues stock options and restricted stock to employees under share-based compensation plans.  The Company adopted SFAS No. 123(R), Share-Based Payment, 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 Accounting Principles Board (“APB”) Opinion No. 25.  Accordingly, no stock option expense was recorded in periods prior to December 31, 2005.

During the three and six months ended June 30, 2007, total combined compensation cost recognized in the consolidated statements of income related to stock options and restricted stock awards amounted to $1.7 million and $3.1 million, respectively, with their related tax benefits of $698 thousand and $1.3 million, respectively.  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.

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

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period and contractual terms of 7 years.  Stock options issued prior to July 2002 had contractual terms of 10 years.

A summary of activity for the Company’s stock options as of and for the six months ended June 30, 2007 is presented below:

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:

(1)             The expected term (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 term.

(3)             The expected dividend yield is based on the Company’s prevailing dividend rate at the time of grant.

(4)             The risk-free rate is based on the U.S. Treasury strips in effect at the time of grant equal to the stock option’s expected term.

During the three and six months ended June 30, 2007 and 2006, information related to stock options is presented as follows:

As of June 30, 2007, total unrecognized compensation cost related to stock options amounted to $4.5 million.  The cost is expected to be recognized over a weighted average period of 3.1 years.

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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, 2007, including changes during the six months then ended, is presented below:

The weighted average fair values of restricted stock awards granted during the six months ended June 30, 2007 and 2006 were $38.71 and $36.28, respectively.

The Company also grants performance restricted stock with two-year cliff vesting to an executive officer.  The number of shares that the executive will receive under these stock awards will ultimately depend on the Company’s achievement of specified performance targets over specific two-year performance periods.  At the end of each 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 approximately between 25% and 125%.  The final performance percentages on which the payouts will be based, considering performance metrics established for the performance periods, 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 each 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 these stock awards varies for each grant representing a maximum total of 86,091 shares to date.

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

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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 $100.9 million and core deposit premium of $8.6 million for this transaction.

The following table provides detailed information on the acquisition of Standard Bank in March 2006:

The 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 the period.  The pro forma information is not necessarily indicative of the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable period presented, nor is it necessarily indicative of the results of operations in future periods.

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(1)             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.

5.  SECURITIES PURCHASED UNDER RESALE AGREEMENTS

On January 5, 2007, the Company entered into a new long-term transaction involving the purchase of securities under a resale agreement (“resale agreement”) totaling $100.0 million.  The resale agreement has a term of ten years with an interest rate that is fixed at 8.00% for the first two years and thereafter becomes floating rate subject to a switch condition if the three-month Libor rate falls below 5.00%.  If the three-month Libor rate falls below 5.00% after two years, the quarterly floating rate will be based on a specified interest rate.  If the three-month Libor rate does not fall below 5.00% after the first two years, the interest rate on this resale agreement will continue to be fixed at 8.00% until the switch condition becomes applicable.  Once the switch condition applies, the quarterly floating rate calculation basis will be used for the remainder of the term.  The counterparty has the right to a quarterly call after the first two years.  The collateral for this resale agreement consists of mortgage-backed securities and debt securities held in safekeeping by a third party custodian.

On May 17, 2007, the Company entered into a new long-term resale agreement totaling $50.0 million.  The resale agreement has a term of fifteen years with an interest rate that is fixed at 10.00% for the first two years and thereafter is subject to a quarterly floating rate calculation basis for the remainder of the term.  The counterparty has the right to a quarterly call after the first two years.  The collateral for this resale agreement consists of U.S. government sponsored enterprise mortgage-backed securities and debt securities held in safekeeping by a third party custodian.  This resale agreement replaced a security in the amount of $50.0 million that was called during the second quarter of 2007.

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6.  DEBT ISSUANCE

On March 30, 2007, the Company issued $20.0 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 VIII (“Trust VIII”), a wholly-owned subsidiary of the Company.  The proceeds from the debt securities are loaned by Trust VIII to the Company and are included in long-term debt in the accompanying Condensed Consolidated Balance Sheet.  The securities issued by Trust VIII have a scheduled maturity of June 6, 2037 and bear interest at a per annum rate based on the three-month Libor plus 140 basis points, payable on a quarterly basis.  At June 30, 2007, the interest rate on the junior subordinated debt was 6.76%.  The junior subordinated debt issued qualifies as Tier I capital for regulatory reporting purposes.  The Company did not issue any new junior subordinated debt securities during the second quarter of 2007.

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 condensed consolidated financial statements.  As of June 30, 2007 and December 31, 2006, commercial and standby letters of credit totaled $616.3 million and $519.0 million, respectively.  Total undisbursed loan commitments amounted to $2.60 billion and $2.24 billion, respectively, as of June 30, 2007 and December 31, 2006.  In addition, the Company has committed to fund mortgage and commercial loan applications in process amounting to $422.9 million and $366.6 million as of June 30, 2007 and December 31, 2006, respectively.

Guarantees — From time to time, the Company sells or securitizes loans with recourse in the ordinary course of business.  For loans that have been sold or securitized 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, 2007, loans sold or securitized with recourse were comprised of residential single family and multifamily loans, totaling $253.0 million.  As of December 31, 2006, loans sold with recourse were comprised solely of single family mortgage loans, and totaled $26.5 million. The increase in loans sold or securitized with recourse as of June 30, 2007 is due to $229.7 million in multifamily loans that were securitized through Fannie Mae during the second quarter of 2007.  The Company’s recourse reserve related to sold or securitized loans totaled $1.5 million and $68 thousand as of June 30, 2007 and December 31, 2006, 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, 2007 and December 31, 2006, the amount of loans sold without recourse totaled $2.2 billion and $1.49 billion, respectively.

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Litigation — Neither the Company nor the Bank is involved in any material legal proceedings at June 30, 2007.  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 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.  Management has considered this claim as part of its evaluation of the Company’s uncertain tax positions in accordance with the provisions of FIN 48.  Pursuant to the adoption of FIN 48 on January 1, 2007, the Company increased its existing unrecognized tax benefits by $7.1 million, relating to a reduction in the state income tax receivable in connection with its dissolved regulated investment company, East West Securities Company, Inc. (See Note 9).

8.   STOCKHOLDERS’ EQUITY

Earnings Per Share — The actual number of shares outstanding at June 30, 2007 was 60,847,943.  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.

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The following table sets forth earnings per share calculations for the three and six months ended June 30, 2007 and 2006:

(1)             Excludes 25,829 and 176,036 weighted average options outstanding for the three months and six months ended June 30, 2007, respectively, as well as 14,204 and 18,391 weighted average options outstanding for the three and six months ended June 30, 2006, respectively, for which the exercise price exceeded the average market price of the Company’s common stock during these periods.

Stock Repurchase Program — On January 23, 2007, the Company’s Board of Directors authorized a new stock repurchase program to buy back up to $30.0 million of the Company’s common stock.  The repurchase of 775,000 shares was completed during the first quarter of 2007.

On March 20, 2007, the Company’s Board of Directors authorized an increase in the stock repurchase program to buy back up to an additional $50.0 million of the Company’s common stock in 2007.  This new authorization is in addition to the $30.0 million stock repurchase authorized on January 23, 2007.  During the second quarter of 2007, the Company repurchased 400,000 shares at a weighed average cost of $40.29.  As of June 30, 2007, the Company had $34.2 million of repurchase authorization remaining.

Quarterly Dividends — The Company’s Board of Directors declared and paid quarterly common stock cash dividends of $0.10 per share payable on or about May 15, 2007 to shareholders of record on May 1, 2007.  Cash dividends totaling $6.1 million and $12.2 million were paid to the Company’s shareholders during the second quarter and first half of 2007, respectively.

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9.  INCOME TAXES

The Company adopted the provisions of FIN 48 on January 1, 2007.  FIN 48 establishes a single model to address the accounting for uncertain tax positions.  Specifically, FIN 48 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.

As a result of the implementation of FIN 48, the Company increased its existing unrecognized tax benefits by $7.1 million, relating to a reduction in the state income tax receivable in connection with its dissolved regulated investment company, East West Securities Company, Inc.  This receivable was related to the FTB’s position on certain state tax deductions taken by East West Securities Company, Inc. for the 2000, 2001, and 2002 tax years.  The $7.1 million increase in unrecognized tax benefits was recorded as a cumulative effect accounting adjustment to retained earnings of $4.6 million, net of the federal deferred tax impact of $2.5 million.

As of January 1, 2007, the Company had $7.6 million of unrecognized tax benefits that if recognized, would be recorded as a reduction in income tax expense of $5.1 million directly reducing the effective tax rate.  There have been no significant changes to these amounts during the six months ended June 30, 2007.  The Company does not anticipate that the total amount of unrecognized tax benefits will significantly change for the year ending December 31, 2007.

 The Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities.  The Company files income tax returns in the U.S. federal jurisdiction and various states.  The statute of limitation is no longer open for the assessment of U.S. federal income taxes and state authorities, other than the FTB, for years prior to 2003.  The Company is currently under examination by the FTB for tax years 2000 through 2002 and tax years 2000 through 2006 remain open for the assessment of California income and franchise taxes.  The Company is not currently under examination by the Internal Revenue Service or any other income or franchise tax authorities other than the FTB.  Management does not believe that there are any other tax jurisdictions in which the outcome of unresolved issues or claims is likely to be material to the Company’s financial position, cash flows or results of operations.  Management further believes that the Company has made adequate provisions for all income tax uncertainties.

The Company recognizes interest and penalties, if applicable, related to the underpayment of income taxes as a component of income tax expense in the consolidated statement of earnings.  The Company has accrued $837 thousand of interest expense for its unrecognized tax position as of January 1, 2007 and June 30, 2007.

10.   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

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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, 2006.  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.  Noninterest income and noninterest 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.

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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, 2007 and 2006: