The following discussion should be read together with the Company's consolidated financial statements, related notes and supplementary data of the Company and its subsidiaries, which are included under Item 8. The following discussion contains forward-looking statements that reflect plans, estimates and beliefs. The actual results of the Company could differ materially from those discussed in the forward-looking statements.

Critical Accounting Policies

The SEC defines critical accounting policies as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The Company's significant accounting policies are described in Note 1 in the Notes to the Consolidated Financial Statements. Not all of these accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management believes that the following policies could be considered critical within the SEC's definition.

Reserves and Contingencies. The Company must manage and control certain inherent risks in the normal course of its business. These include, credit risk, fraud risk, operations and settlement risk, and interest rate risk. The Company has established reserves for risk of losses, including the allowance for loan losses and tax contingencies. The allowance for loan losses represents Management's estimate of the probable losses that have occurred as of the date of the financial statements, as further described in Note 1 in the Notes to the Consolidated Financial Statements. As a matter of internal policy, the Company recognizes as charge-offs the amount of any specific reserves required for loans that are classified as impaired.

As of December 31, 2008, the Company provided a 100% valuation allowance against the net deferred tax assets, resulting in a reduction in the benefit for income taxes of approximately $26.9 million for 2008. This valuation allowance was established based upon Management's evaluation of the Company's current prospects for generating future taxable income consideration of its current regulatory capital level. The deferred tax valuation allowance will be reviewed on a periodic basis and, if conditions warrant, adjusted to reflect any amount that is expected to be realized.

If the Company prevails in a matter for which an accrual has been established or is required to pay an amount exceeding recorded reserves, the financial impact will be reflected in the period in which the matter is resolved.

Goodwill and Intangible Assets. At December 31, 2008, the Company had $18.9 million of goodwill and $13.5 million of core deposit intangible assets which were recorded in connection with various business combinations. While generally accepted accounting principles require core deposit intangible assets be amortized against expense over their estimated useful lives, goodwill is not amortized but periodically tested for impairment. Management performs an impairment analysis on an annual basis (as of September 30), or more frequently if circumstances indicate an impairment may exist. As a result of an internal evaluation, a goodwill impairment charge of $27.0 million was recognized during the first quarter of 2008.

In connection with the annual goodwill impairment test, the Company engaged a nationally recognized consulting firm with expertise in the area of financial institution valuation to perform a goodwill impairment analysis. As a result of this analysis, the Company recognized an additional goodwill impairment valuation charge of $82.0 million during the third quarter of 2008. This impairment analysis required management to make subjective judgments regarding a variety of factors, including but not limited to competitive forces, customer behaviors and attrition, changes in revenue growth trends and delivery channel costs, changes in discount rates and specific industry and market valuation conditions. Additional information is included in Note 9 of the Notes to Consolidated Financial Statements.

Foreclosed Real Estate and Other Foreclosed Assets. As of December 31, 2008, approximately 75% of the Company's loan portfolio was secured by real estate. In the event of customer default, the Company's principal source of repayment is derived through the foreclosure and ultimate liquidation of real estate collateral. Upon receiving title to a property, the Company transfers the related balance from loans to other real estate owned in an amount equal to the lesser of the carrying value of the loan less estimated selling costs, or the appraised amount of the property less estimated selling costs and market discount. Any loss realized upon the initial transfer to other real estate owned is recognized as a loan charge-off.

The estimated selling costs are based upon current real estate commission rates for comparable properties. Appraised values are discounted if, in the opinion of management, the values do not fully reflect current market conditions. In determining the amount of a market discount, if any, management considers bona fide offers received on the subject or similar properties, the level of supply of similar properties, management's judgment of other property specific attributes and expectations about future market conditions.

The Company complies in all respects with regulatory guidance regarding real estate appraisals prepared by third parties, including a requirement that appraisal firms be approved and that appraisal reports be reviewed by properly credentialed staff appraisers. In addition, updated property appraisals are generally procured every six months if a property has not been sold. Any additional impairment, along with any costs associated with insurance or maintenance, are recognized as a charge to current period earnings.

Fair Value of Financial Instruments. Effective January 1, 2007, the Company adopted SFAS No. 157, Fair Value Measurements, which among other things, requires enhanced disclosures about financial instruments carried at fair value. SFAS No. 157 establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. See Note 17 of the Notes to Consolidated Financial Statements for additional information about the level of pricing transparency associated with financial instruments carried at fair value.

Executive Overview

Results of Operations

                                                                                          % Change
($ in thousands, except per share)             2008           2007         2006       2008        2007
Interest income                             $  119,670      $ 134,292    $ 93,853       -11 %        43 %
Interest expense                                45,716         50,203      33,567        -9 %        50 %

Net interest income                             73,954         84,089      60,286       -12 %        39 %
Loan loss provision                             97,170         17,341       5,376       460 %       223 %

Net interest (loss) income after loan
loss provision                                 (23,216 )       66,748      54,910      -135 %        22 %
Non-interest income                             18,667         16,316       9,782        14 %        67 %
Non-interest expense                           193,617         70,767      52,705       174 %        34 %

(Loss) Income before income tax
(benefit) provision                           (198,166 )       12,297      11,987     -1711 %         3 %
Income Tax (Benefit) Provision                  (5,806 )        3,759       4,357      -254 %       -14 %

Net (loss) income                           $ (192,360 )    $   8,538    $  7,630     -2353 %        12 %

Basic (loss) earnings per common share      $   (11.18 )    $    0.54    $   0.68
Diluted (loss) earnings per common share    $   (11.18 )    $    0.54    $   0.67

The Company's net loss for 2008 was $192.4 million as compared to net income of $8.5 million in 2007 and $7.6 million in 2006. The diluted loss per share in 2008 was $11.18 as compared to diluted earnings per share in 2007 of $0.54 and $0.67 in 2006. Excluding the goodwill impairment charge of $109.0 million in 2008, which is a non-GAAP disclosure, the net loss would have been $83.4 million, or $4.84 per share.

The return on average assets was -9.32% for 2008 as compared to a return on average assets of 0.45% in 2007 and 0.58% for 2006. Excluding the goodwill impairment charge, the return on average assets would have been -4.04% for the year ended December 31, 2008. The return on average equity for 2008 was -83.46% as compared to a return on average equity for 2007 of 3.36%, and 5.33% for 2006. Excluding the goodwill impairment charge, the return on average equity would have been -36.17% for 2008.

The 2008 financial results were shaped by the following:

• Provision for loan losses of $97.2 million, principally related to an increase in non-performing loans and an overall decline in the residential construction and development markets.

• Net interest margin decreased 106 basis points over the prior year related mainly to declines in the market interest rates, an increase in non-accrual loans and ongoing competitive market pressures to retain deposits.

• Non-interest income increase of $2.4 million, or 14.4%, related mainly to increases in fees and service charges on deposits of $1.7 million, or 18.2%, increases in fees on mortgage loan sales of $668 thousand, or 21%. The other non-interest income category included income of $589 thousand related to the sale of the bankcard portfolio acquired through the Far West Bancorporation (FWBC) merger.

• Non-interest expense increase of $122.9 million, or 174%, mainly related to:

• Goodwill impairment charges totaling $109.0 million.

• Salaries and employee benefits increased by $120 thousand, despite only three quarters of expense recorded in 2007 related to the FWB acquisition, net of costs associated with the reduction in force initiative of $781 thousand.

• Occupancy and equipment costs increased $3.1 million or 25% due to new facilities acquired in the FWBC merger and new financial centers opened during the prior year.

• A full year of amortization of other intangible assets resulting from the FWBC merger as compared to three quarters of expense recognized in 2007.

• Impairment charges related to premises of $693 thousand related mainly to the branch closures which occurred in the first quarter of 2009.

• Other than temporary impairment charge taken on one security of $492 thousand.

• FDIC insurance and other regulatory assessment expense of $2.7 million.

The 2007 financial results were shaped by the following:

• Merger with FWBC on April 1, 2007 which added $350.9 million of gross loans and $383.4 million of deposits.

• Organic loan growth of $196.1 million, or 16%.

• Provision for loan losses of $17.3 million, principally related to an increase in non-performing loans and an overall decline in the residential construction and development markets.

• Net interest margin increase of 3 basis points over the prior year related to the acquired loans and deposits from FWBC. The margin compressed during the second half of the year due primarily to declines in market interest rates in the third and fourth quarters and ongoing competitive market pressures to retain deposits.

• Non-interest expense increase of $18.1 million, or 34%, primarily related to:

• Increase in salaries and employee benefits of $10.9 million, or 36%, principally due to additional full time equivalent employees from the new financial centers acquired in the merger with FWBC along with additional staffing related to mortgage lending operations.

• Occupancy and equipment cost increases of $4.2 million or 52% due to new facilities acquired in the merger with FWBC and new financial centers opened during the year.

• Amortization of intangibles increase of $2.5 million due to the FWBC merger.

Net Interest Income. Net interest income decreased 12.1% to $74.0 million in 2008 compared to $84.1 million in 2007. The decrease in 2008 is primarily due to declining interest rates as the Company is asset sensitive (as discussed under Item 7A Quantitative and Qualitative Disclosures About Market Risk), increases in non-performing assets, and an increase in the cost of funds.

The Company's tax equivalent net interest margin for 2008 was 4.03% as compared to 5.09% in 2007. The tax equivalent net interest margin for 2006 was 5.06%. The earning assets yield decreased to 6.51% as compared to 8.11% in 2007 and 7.86% in 2006. The decrease in the average yield on loans during 2008 was due primarily to decreasing market interest rates and the increase in non-performing loans. The increase in the average yield on loans during 2007 was principally attributed to the acquisition of FWBC's loan portfolio of $350.9 million, which had higher yielding loans. Partially offsetting the increased yield from the FWBC portfolio was the impact of an adjustment to the Company's deferral of loan fees effective January 1, 2007. Prior to January 1, 2007, the Company did not defer loan fees or direct loan origination costs on loans with contractual maturities of one year or less as the amount was deemed immaterial. Based on the increased origination of large short-term loans with increasing fee amounts in 2007, effective January 1, 2007, the Company began deferring all loan fees and loan origination costs. The interest income on loans includes $4.4 million, $5.5 million and $4.8 million in loan fees for the years ended December 31, 2008, 2007 and 2006 respectively. The loan fee income as a percentage of average gross loans decreased to 25 basis points from 34 basis points in the year ended December 31, 2008 as compared to 2007. The decrease for 2008 as compared to 2007 is related to the slowing of production of commercial real estate loans which generated large fees.

The cost of funds decreased to 3.07% in 2008 as compared to 3.88% in 2007 and 3.59% in 2006. The decrease from 2007 is due partially to decreasing market interest rates during the year which is slightly offset by increasing market competition for deposits throughout the year.

The following table sets forth information with regard to average balances of assets and liabilities, and interest income from interest earning assets and interest expense on interest bearing liabilities, resultant yields or costs, net interest income, net interest spread (the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities) and the net interest margin:

                                                                           Year Ended December 31,
                                                  2008                               2007                               2006
                                       Average                            Average                            Average
($ in thousands)                       Balance     Interest     %         Balance     Interest     %         Balance     Interest     %
              Assets
Loans (1)                            $ 1,754,209   $ 116,028   6.61 %   $ 1,585,078   $ 130,980   8.26 %   $ 1,145,558   $  91,743   8.01 %
Taxable securities                        49,863       2,494   5.00 %        44,195       2,240   5.07 %        31,069       1,504   4.84 %
Nontaxable securities (2)                 19,450       1,177   6.05 %        17,127       1,047   6.11 %         9,919         601   6.06 %
Federal Home Loan Bank stock               9,303          97   1.04 %         7,367          45   0.61 %         6,122           6   0.10 %
Overnight deposits with other
banks and other                           12,680         273   2.15 %         5,970         336   5.63 %         3,945         203   5.15 %

Total interest earning assets          1,845,505     120,069   6.51 %     1,659,737     134,648   8.11 %     1,196,613      94,057   7.86 %

Non-interest earning assets              219,468                            226,912                            110,739

Total assets                         $ 2,064,973                        $ 1,886,649                        $ 1,307,352

           Liabilities
Interest bearing demand deposits     $   135,167   $     712   0.53 %   $   130,553   $     996   0.76 %   $    88,936   $     650   0.73 %
Savings and MMDA deposits                498,807       9,904   1.99 %       500,367      15,227   3.04 %       351,697      10,246   2.91 %
Time deposits                            618,594      24,601   3.98 %       493,323      24,079   4.88 %       376,340      15,947   4.24 %

Total interest bearing deposits        1,252,568      35,217   2.81 %     1,124,243      40,302   3.58 %       816,973      26,843   3.29 %

Overnight borrowings                      51,109       1,564   3.06 %        34,422       1,856   5.39 %        39,056       2,019   5.17 %
Junior subordinated debt                  41,239       2,762   6.70 %        36,720       2,754   7.50 %        18,349       1,554   8.47 %
Other borrowings                         146,170       6,173   4.22 %        98,819       5,291   5.35 %        61,585       3,151   5.12 %

Total interest bearing liabilities     1,491,086      45,716   3.07 %     1,294,204      50,203   3.88 %       935,963      33,567   3.59 %

Non-interest bearing demand
deposits                                 319,089                            318,878                            218,230
Other non-interest bearing
liabilities                               24,308                             19,301                              9,955

Total liabilities                      1,834,483                          1,632,383                          1,164,148

    Total Stockholders' Equity           230,490                            254,266                            143,204

Total liabilities and
stockholders' equity                 $ 2,064,973                        $ 1,886,649                        $ 1,307,352

Net interest income and spread                     $  74,353   3.44 %                 $  84,445   4.23 %                 $  60,490   4.27 %

Net interest margin to average
earning assets                                                 4.03 %                             5.09 %                             5.06 %

(1) Includes loans held for sale and non-performing loans in average loans. Interest income includes loan fee income.

(2) Tax-exempt securities income has been presented using a tax equivalent basis and an assumed tax rate of 34%.

The following table sets forth a summary of changes in the components of net interest income due to changes in average interest earning assets and interest earning liabilities and the resultant changes in interest income and interest expense:

                                                    2008 vs 2007                               2007 vs 2006
                                               Increase (decrease) in net interest income due to changes in
($ in thousands)                       Volume            Rate            Total        Volume       Rate        Total
Interest earning assets
Loans (1)                            $   13,938       $   (28,890 )    $ (14,952 )   $ 35,199     $ 4,038     $ 39,237
Securities (2)                              428               (44 )          384        1,044         138        1,182
Overnight deposits with other
banks and FHLB stock                        247              (258 )          (11 )         68         104          172

Total interest earning assets        $   14,613       $   (29,192 )    $ (14,579 )   $ 36,311     $ 4,280     $ 40,591

Interest bearing liabilities
Interest bearing demand deposits     $       35       $      (319 )    $    (284 )   $    304     $    42     $    346
Savings and MMDA deposits                   (47 )          (5,276 )       (5,323 )      4,331         650        4,981
Time deposits                             6,098            (5,576 )          522        4,957       3,175        8,132

Total interest bearing deposits           6,086           (11,171 )       (5,085 )      9,592       3,867       13,459
Overnight borrowings                        897            (1,189 )         (292 )       (240 )        77         (163 )
Junior subordinated debt                    338              (330 )            8        1,556        (356 )      1,200
Other borrowings                          2,528            (1,646 )          882        1,905         235        2,140

Total interest bearing liabilities        9,849           (14,336 )       (4,487 )     12,813       3,823       16,636

Total increase (decrease) in net
interest income                      $    4,764       $   (14,856 )    $ (10,092 )   $ 23,498     $   457     $ 23,955

(1) Includes loans held for sale and non-performing loans in average loans. Interest income includes loan fee income.

(2) Tax-exempt securities income has been presented using a tax equivalent basis and an assumed tax rate of 34%.

The interest rates on loans vary with the degree of risk and amount of the loan, and are further subject to competitive pressures, market rates, the availability of funds and government regulations. As of December 31, 2008 and 2007, approximately 71% and 73%, respectively, of the total loans had interest rates that adjust based on a spread to market reference rates. The market reference rates are based on various indices such as the prime rates of interest charged by money center banks, the Federal Home Loan Bank of Seattle (FHLB) borrowing rates or London Interbank Offering Rates (LIBOR). Some of these rate adjustments are immediate while some will reprice in up to five years.

Provision for Loan Losses. Provision for loan losses was $97.2 million in 2008 as compared to $17.3 million in 2007 and $5.4 million in 2006. The increase in the provision is principally due to the charge-off of $78.6 million of loans during the year. Additionally, the increase in 2008 reflects the deterioration in the residential construction and development segment of the loan portfolio which began in late 2007. The increase in the provision during 2007 as compared to 2006 was principally due to charge-offs totaling $15.3 million related the deterioration in certain segments of the portfolio.

The provision for loan losses is an estimate and the use of different estimates or assumptions could produce a different provision for loan losses. If negative trends and expectations of management do not materialize, the allowance may be high relative to the actual loss performance of the loan portfolio. This may lead to decreased future provisions. Likewise, if positive trends and expectations of management fail to come to fruition, the provision for loan losses in the current period may be inadequate and increased future provisions may be necessary.

Non-interest Income. Non-interest income increased $2.4 million to $18.7 million for 2008 as compared to $16.3 million in 2007. Non-interest income was $9.8 million in 2006. The following table summarizes certain non-interest income categories for the years ended December 31, 2008, 2007 and 2006.

                                          2008 compared to 2007                       2007 compared to 2006
                                                      Dollar      Percent                          Dollar    Percent
($ in thousands)                  2008       2007     Change      Change        2007      2006     Change    Change
Fees and service charges on
deposits                        $ 10,870   $  9,199   $ 1,671          18 %   $  9,199   $ 5,526   $ 3,673        66 %
Fees on mortgage loan sales        3,843      3,175       668          21 %      3,175     1,713     1,462        85 %
Bankcard revenue                   1,266      1,110       156          14 %      1,110       381       729       191 %
Bank owned life insurance          1,089      1,007        82           8 %      1,007       533       474        89 %
Asset sale income                    822        507       315          62 %        507       433        74        17 %
Other                                777      1,318      (541 )       -41 %      1,318     1,196       122        10 %

Total                           $ 18,667   $ 16,316   $ 2,351          14 %   $ 16,316   $ 9,782   $ 6,534        67 %

The increased income related to fees and service charges on deposits in 2008 is mainly attributable to debit card and overdraft fees recognized. The fees on mortgage loan sales increase is related to increased activity due primarily to staffing levels in mortgage lending. Asset sale income increased due primarily to gains recorded on sales of premises and equipment during the year. The decrease in other non-interest income is related mainly to income from a vendor who changed its fee schedule during the year plus merchant fee income changes.

Non-interest Expense. Non-interest expense increased by 174% to $193.6 million in 2008 compared to $70.8 million in 2007. Non-interest expense for 2006 was $52.7 million. The following table summarizes the major non-interest expense categories for the years ended December 31, 2008, 2007 and 2006.

                                           2008 compared to 2007                            2007 compared to 2006
                                                         Dollar       Percent                            Dollar      Percent
($ in thousands)                 2008          2007      change       change        2007       2006      Change      Change
Goodwill impairment            $ 109,000     $     -    $ 109,000         100 %   $     -    $     -    $     -            0 %
Salaries and employee
benefits                          41,332       41,212         120           0 %     41,212     30,284     10,928          36 %
Occupancy and equipment           15,414       12,316       3,098          25 %     12,316      8,110      4,206          52 %
. . .