form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

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

For the transition period from __________________ to __________________

Commission file number: 0-21231

UNITED WESTERN BANCORP, INC.

(Exact name of registrant as specified in its charter)

Colorado		84-1233716
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

700 17th Street, Suite 2100 Denver, Colorado		80202
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (303) 595-9898

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 [ Ö ] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T §of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ Ö ] No [ ]

(Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [Ö ] Non-accelerated filer [ ] Smaller reporting company [ ]

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

Act). Yes [ ] No [ Ö ]

Number of shares of Common Stock ($0.0001 par value) outstanding at the close of business on August 7, 2009 was 7,345,874 shares.

- 1 -

PART I - FINANCIAL INFORMATION
ITEM 1.	Financial Statements – (Unaudited)

	Consolidated Balance Sheets
		June 30, 2009 and December 31, 2008.	3

	Consolidated Statements of Operations
		Quarter and six months ended June 30, 2009 and 2008	4

	Consolidated Statements of Shareholders’ Equity
		Six months ended June 30, 2009	6

	Consolidated Statements of Cash Flows
		Six months ended June 30, 2009 and 2008	7

	Notes to Consolidated Financial Statements		9

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		60

ITEM 4.	Controls and Procedures		60


PART II – OTHER INFORMATION
ITEM 1.	Legal Proceedings		61

ITEM 1A.	Risk Factors		61

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		75

ITEM 4.	Submission of Matters to a Vote of Security Holders		75

ITEM 5.	Other Information		75

ITEM 6.	Exhibits		76

SIGNATURES			77

- 2 -

Part I – Financial Information

Item 1. Financial Statements – (Unaudited)

United Western Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except share information)

	June 30,			December 31,
	2009			2008
Assets
Cash and due from banks	$	288,653		$	22,332
Interest-earning deposits		351			548
Total cash and cash equivalents		289,004			22,880
Investment securities - available for sale, at fair value		38,357			59,573
Investment securities - held to maturity (fair value June 30, 2009 - $382,837, December 31, 2008 - $429,526)		443,221			498,464
Loans held for sale - at lower of cost or fair value		279,878			291,620
Loans held for investment		1,265,876			1,249,484
Allowance for credit losses		(25,520	)		(16,183	)
Loans held for investment, net		1,240,356			1,233,301
FHLBank stock, at cost		12,234			29,046
Mortgage servicing rights, net		8,187			9,496
Accrued interest receivable		7,787			8,973
Other receivables		29,990			15,123
Premises and equipment, net		24,730			23,364
Bank owned life insurance		25,703			25,233
Other assets, net		7,294			13,839
Deferred income taxes		11,204			24,100
Foreclosed real estate		3,920			4,417
Total assets	$	2,421,865		$	2,259,429

Liabilities and shareholders' equity
Liabilities:
Deposits	$	1,860,090		$	1,724,672
Custodial escrow balances		41,722			29,697
FHLBank borrowings		216,665			226,721
Borrowed money		118,529			119,265
Junior subordinated debentures owed to unconsolidated subsidiary trusts		30,442			30,442
Income tax payable		2,282			1,140
Other liabilities		22,467			25,543
Total liabilities		2,292,197			2,157,480

Commitments and contingencies (Note 16)
Shareholders' equity:
Preferred stock, par value $0.0001; 5,000,000 shares authorized;		-			-
no shares outstanding
Common stock, par value $0.0001; 50,000,000 shares authorized;
7,341,827 shares at June 30, 2009 and
7,253,391 shares at December 31, 2008 outstanding, respectively		1			1
Additional paid-in capital		24,593			23,856
Retained earnings		107,139			100,348
Accumulated other comprehensive loss		(2,065	)		(22,256	)
Total shareholders' equity		129,668			101,949
Total liabilities and shareholders' equity	$	2,421,865		$	2,259,429
See accompanying notes to consolidated financial statements.

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United Western Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except share information)

	Quarter Ended					Six Months Ended
	June 30,					June 30,
	2009			2008		2009			2008
Interest and dividend income:
Community bank loans	$	15,301		$	13,587	$	30,265		$	27,013
Wholesale residential loans		3,793			4,970		7,869			10,613
Other loans		389			475		459			1,664
Investment securities		6,339			8,057		13,240			16,709
Deposits and dividends		153			405		266			975
Total interest and dividend income		25,975			27,494		52,099			56,974

Interest expense:
Deposits		3,470			2,453		6,752			6,164
FHLBank borrowing		2,366			3,663		4,746			7,456
Other borrowed money		1,759			1,492		3,545			3,258
Total interest expense		7,595			7,608		15,043			16,878

Net interest income before provision for credit losses		18,380			19,886		37,056			40,096
Provision for credit losses		6,278			2,132		10,459			4,023
Net interest income after provision for credit losses		12,102			17,754		26,597			36,073

Noninterest income:
Custodial, administrative and escrow services		171			249		287			523
Loan administration		1,038			1,202		2,195			2,658
Gain on sale of loans held for sale		331			142		379			324
Loss on sale of available for sale investment securities		(46,980	)		-		(46,980	)
Total other-than-temporary impairment losses		(892	)		-		(892	)		-
Portion of loss recognized in other comprehensive income (before taxes)		289			-		289			-
Net impairment losses recognized in earnings		(603	)		-		(603	)		-
Gain on sale of investment in Matrix Financial Solutions, Inc.		-			-		3,567			-
Other		642			629		1,453			1,254
Total noninterest income		(45,401	)		2,222		(39,702	)		4,759

Noninterest expense:
Compensation and employee benefits		6,554			6,127		12,809			12,388
Subaccounting fees		3,983			4,485		7,423			9,700
Amortization of mortgage servicing rights		587			672		1,382			1,381
Lower of cost or fair value adjustment on loans held for sale		252			154		(325	)		565
Occupancy and equipment		823			559		1,615			1,208
Postage and communication		247			228		470			439
Professional fees		944			640		2,040			1,152
Mortgage servicing rights subservicing fees		344			457		711			898
Other general and administrative		6,065			2,378		8,828			4,157
Total noninterest expense		19,799			15,700		34,953			31,888

(Loss) income from continuing operations before income taxes		(53,098	)		4,276		(48,058	)		8,944
Income tax (benefit) provision		(19,360	)		1,281		(17,807	)		2,676
(Loss) income from continuing operations		(33,738	)		2,995		(30,251	)		6,268
Discontinued operations:
Discontinued operations, net of tax		37,736			70		37,525			160
Net Income	$	3,998		$	3,065	$	7,274		$	6,428

See accompanying notes to consolidated financial statements.

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United Western Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except share information)

	Quarter Ended					Six Months Ended
	June 30,					June 30,
	2009			2008		2009			2008
Income from continuing operations per share - basic	$	(4.71	)	$	0.41	$	(4.23	)	$	0.86
Income from continuing operations per share - assuming dilution	$	(4.71	)	$	0.41	$	(4.23	)	$	0.86

Income from discontinued operations per share - basic	$	5.26		$	0.01	$	5.23		$	0.02
Income from discontinued operations per share - assuming dilution	$	5.26		$	0.01	$	5.23		$	0.02

Net income per share - basic	$	0.55		$	0.42	$	1.00		$	0.88
Net income - assuming dilution	$	0.55		$	0.42	$	1.00		$	0.88

Weighted average shares - basic		7,182,516			7,198,357		7,169,446			7,207,878
Weighted average shares - assuming dilution		7,182,516			7,198,357		7,169,446			7,207,878

Dividends declared per share	$	0.06		$	0.06	$	0.12		$	0.12

See accompanying notes to consolidated financial statements.

- 5 -

United Western Bancorp, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(Unaudited)

(Dollars in thousands, except share information)

										Accumulated
					Additional					Other
	Common Stock				Paid-In		Retained			Comprehensive						Comprehensive
	Shares		Amount		Capital		Earnings			Income (loss)			Total			Income
Six Months Ended June 30, 2009

Balance at January 1, 2009		7,253,391	$	1	$	23,856	$	100,348		$	(22,256	)	$	101,949
Cumulative effect of change in accounting principle, adoption of FSP FAS 115-2 and 124-2 (net of tax)		-		-		-		387			(387	)		-
Dividends paid ($0.12 per share)		-		-		-		(870	)		-			(870	)
Issuance of stock to directors		11,923		-		77		-			-			77
Restricted stock grants, net		76,513		-		-		-			-			-
Share-based compensation expense		-		-		660		-			-			660
Comprehensive income:
Net income		-		-		-		7,274			-			7,274		$	7,274
Net unrealized gains on available-for-sale securities, net		-		-		-		-			20,650			20,650			20,650
Other-than-temporary impairment on held-to-maturity securities recorded in other comprehensive income, net											(72	)		(72	)		(72	)
Comprehensive income		-		-		-		-			-			-		$	27,852
Balance at June 30, 2009		7,341,827	$	1	$	24,593	$	107,139		$	(2,065	)	$	129,668

See accompanying notes to consolidated financial statements.

- 6 -

United Western Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Six Months Ended June 30, 2009
	2009			2008
Cash flows from continuing operating activities
Net Income	$	7,274		$	6,428
Income from discontinued operations, net of income tax provision		(37,525	)		(160	)
Adjustments to reconcile income to net cash from continuing operating activities:
Share-based compensation expense		719			598
Depreciation and amortization		705			707
Provision for credit losses		10,459			4,023
Write-down on other-than-temporary impairment of securities		603			-
Amortization of mortgage servicing rights		1,382			1,381
Lower of cost or fair value adjustment on loans held for sale		(325	)		565
Gain on sale of loans held for sale		(379	)		(324	)
Loss on sale of securities available for sale		46,980			-
Gain on sale of investment in Matrix Financial Solutions, Inc.		(3,567	)		-
Net loss (gain) on sale of assets, equipment and foreclosed real estate		614			(3	)
Changes in assets and liabilities:
Loans originated and purchased for sale		(17,213	)		(22,251	)
Principal payments on, and proceeds from sale of, loans held for sale		29,136			72,571
Originated mortgage servicing rights, net		-			(63	)
Increase in other receivables, other assets, and deferred income taxes		(10,091	)		(11,306	)
Decrease in other liabilities and income tax payable		(1,504	)		(4,298	)
Net cash from continuing operating activities		27,268			47,868

Cash flows from continuing investing activities
Loans originated and purchased for investment		(246,309	)		(446,535	)
Principal repayments on loans held for investment		272,634			248,239
Proceeds from sale of available for sale securities		100			-
Proceeds from sale of cost method investment		4,317			-
Proceeds from maturity and prepayment of available for sale securities		7,133			8,473
Purchase of held to maturity securities		-			(2,837	)
Proceeds from the maturity and prepayment of held to maturity securities		55,243			42,202
Proceeds from redemption of FHLBank stock		16,999			12,000
Purchases of premises and equipment		(2,260	)		(4,877	)
Proceeds from sale of foreclosed real estate		2,799			2,764
Net cash from continuing investing activities		110,656			(140,571	)
Continued

See accompanying notes to consolidated financial statements.

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United Western Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows – continued

(Unaudited)

(Dollars in thousands)

	Six Months Ended June 30, 2009
	2009			2008
Cash flows from continuing financing activities
Net increase in deposits	$	135,418		$	47,552
Net increase in custodial escrow balances		12,025			12,605
Net (decrease) increase in FHLBank borrowings		(10,056	)		25,247
Borrowed money - proceeds from repurchase agreements		(2,736	)		4,110
Borrowed money - advances on revolving line, net		2,000			1,500
Repurchase of common stock		-			(1,605	)
Dividends paid		(870	)		(875	)
Net cash from continuing financing activities		135,781			88,534

Cash flows from discontinued operations:
Operating cash flows		(7,934	)		999
Investing cash flows		353			(730	)
Financing cash flows		-			-
Net cash from discontinued operations		(7,581	)		269

Increase (decrease) in cash and cash equivalents		266,124			(3,900	)
Cash and cash equivalents at beginning of the period		22,880			40,806
Cash and cash equivalents at end of the period	$	289,004		$	36,906

Supplemental disclosure of non-cash activity
Loans transferred to foreclosed real estate and other assets	$	2,734		$	3,025
Loans securitized and transferred to securities available for sale	$	-		$	18,003
Note receivable received in sale of assets of discontinued operations	$	46,050		$	-
Issuance of common stock to directors	$	77		$	62

Supplemental disclosure of cash flow information
Cash paid for interest	$	14,782		$	16,952
Cash paid for income taxes	$	1,189		$	3,488

See accompanying notes to consolidated financial statements.

- 8 -

United Western Bancorp, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

June 30, 2009

1. Basis of Presentation and Significant Accounting Policies

United Western Bancorp, Inc. (the “Company”) is a unitary thrift holding company and, through its subsidiaries, a diversified financial services company headquartered in Denver, Colorado. The Company’s operations are conducted primarily through United Western Bank® (the “Bank”), UW Trust Company (“UW Trust”) (formerly known as Sterling Trust Company), see Note 17 Discontinued Operations – Sale of UW Trust Assets for further discussion, Matrix Financial Services Corporation (“Matrix Financial”), and UW Investment Services, Inc. (“UW Investment”), all of which are wholly owned subsidiaries of the Company.

Through the Bank, we are focused on expanding our community-based banking network across Colorado’s Front Range market and selected mountain communities by strategically positioning banking offices in those locations. The Colorado Front Range area spans the Eastern slope of Colorado’s Rocky Mountains – from Pueblo to Fort Collins, and includes the metropolitan Denver marketplace. At June 30, 2009, the Bank had eight branches in the Colorado Front Range marketplace (downtown Denver, Boulder, Cherry Creek, Loveland, Fort Collins, Longmont, Hampden Office and Centennial) and a loan production office serving Aspen and the Roaring Fork Valley. We plan to grow the Bank network to an estimated ten to twelve community bank locations over the next three to five years. We originate Small Business Administration (“SBA”) loans on a national basis. In addition to the community-based banking operations of the Bank, we also offer deposit services to institutional customers, as well as custodial escrow and paying agent lines of business through UW Trust.

We refer to certain assets as “wholesale,” by which we mean that prior to December 2005 our Bank was mainly engaged in acquiring assets (e.g., residential loans, multifamily loans, and other loan assets) primarily on an indirect basis through relationships with large mortgage originators, loan brokers, and other market participants.

The consolidated financial statements of the Company and its subsidiaries in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the information and notes necessary to constitute a complete set of financial statements under GAAP applicable to annual periods. Accordingly, they should be read in conjunction with the financial information contained in the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of only normal recurring accruals unless otherwise disclosed in this Form 10-Q) necessary for a fair presentation have been included. The results of operations for the interim periods disclosed herein are not necessarily indicative of results that may be expected for the full year or any future period. The Company has evaluated subsequent events for potential recognition and/or disclosure through August 7, 2009, the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

Significant Accounting Estimates

The Company has established various accounting estimates that govern the application of GAAP in the preparation and presentation of the Company’s consolidated financial statements. Certain accounting estimates involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of income and expenses during the reporting period which management considers to be critical accounting estimates. The judgments, assumptions and estimates used by management are based on historical experience, management’s experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ materially from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

The Company views the allowance for credit losses, the valuation of loans held for sale, the valuation of investment securities and the determination of temporary vs. other-than-temporary impairment of securities as critical accounting estimates that require significant judgments, assumptions and estimates be used in preparation of its consolidated financial statements. See further detail in this Note for a detailed description of the Company’s process and methodology related to the allowance for credit losses and the valuation of loans held for sale. See Note 3. Investment Securities for a detailed description of the Company process and methodology related to the valuation of investment securities and other-than-temporary impairment of securities.

Allowance for Credit Losses

The allowance for credit losses is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of probable credit losses inherent in the loan held for investment portfolio (“loan portfolio’). The allowance, in the judgment of management, is necessary to reserve for estimated losses inherent in the loan portfolios. The allowance for credit losses includes allowance allocations calculated in accordance with Statement of Financial Accounting Standards (“SFAS”) 5, “Accounting for Contingencies,” and SFAS 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS 118. The level of the allowance reflects management’s continuing evaluation of loan loss experience, specific credit risks, current loan portfolio quality, industry and loan type concentrations, economic and regulatory conditions and unidentified losses inherent in the loan portfolios, as well as trends in the foregoing.

The allowance for credit losses consists of four components: pools of homogeneous residential loans with similar risk characteristics, commercial loans with similar risk characteristics (e.g., multifamily, construction and development, commercial real estate and commercial), individual loans that are measured for impairment, and a component representing an estimate of inherent, probable but undetected losses, which also contemplates the imprecision in the credit risk models utilized to calculate the allowance.

Pools of homogeneous residential loans with similar risk characteristics are assessed for probable losses based on loss migration analysis where loss factors are updated regularly based on actual experience. The analysis examines historical loss experience and the related internal gradings of loans charged off. The loss migration analysis also considers inherent but undetected losses within the portfolio.

Commercial loans with similar risk characteristics (e.g., multifamily, construction and development, commercial real estate and commercial) are assessed for probable losses based on loss migration analysis where loss factors are updated regularly based on our own loss experience, the collective experience of our credit risk management team, and industry data. The analysis also incorporates the related internal gradings of loans charged off and other factors, including our asset quality trends and national and local economic conditions.

The portion of the allowance established for loans measured for impairment reflects expected losses resulting from analyses developed through specific allocations for individual loans. The Company considers a loan impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan. Loss on impaired loans is typically measured using the fair value of collateral, as such loans are usually collateral dependent, but may be measured using either the present value of expected future cash flows discounted using the loan rate, or the market price of the loan. All loans considered impaired are included in nonperforming loans. The Company generally evaluates its residential loans collectively due to their homogeneous nature; however, individual residential loans may be considered for impairment based on the facts and circumstances of the loan. Accordingly, potentially impaired loans of the Bank may include residential loans, commercial loans, real estate construction loans, commercial real estate mortgage loans and multifamily loans classified as nonperforming loans.

The last component of the allowance for credit losses is a portion which represents the estimated inherent but undetected probable losses and the imprecision in the credit risk models utilized to calculate the allowance. This component of the allowance is primarily associated with commercial loans (i.e., multifamily, construction and development, commercial real estate and commercial). The unallocated portion of the allowance for credit losses reflects the growing Colorado concentration in commercial real estate, construction and development loans, national multifamily and certain commercial real estate loans for which the migration analysis does not yet reflect a complete credit cycle due to the overall seasoning of such loans and ongoing uncertainty with respect to other loans in our community bank and wholesale lending portfolios.

Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. Credit losses are charged against the allowance when management considers the loan uncollectible. While management uses its professional judgment and the information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Bank’s loan portfolios, national and Colorado economic conditions, changes in interest rates and other factors.

Loans Held for Investment

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are classified as loans held for investment. These loans are reported at the principal balance outstanding net of unearned discounts and purchase premiums. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs and purchase premiums, are deferred and recognized in interest income using the level-yield method without anticipating prepayments and includes amortization of deferred loan fees, purchase premiums and costs over the loan term. Net loan commitment fees or costs for commitments are deferred and amortized into fee income or other expense on a straight-line basis over the commitment period in accordance with FASB Interpretation No. 45, “Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34.”

Loans originated or purchased without the intent to hold for the foreseeable future or until maturity are carried at the lower of net cost or fair value on an aggregate portfolio basis. The amount by which cost exceeds fair value, if any, is accounted for as a loss through a valuation allowance. Changes in the valuation allowance are included in the determination of income in the period in which those changes occur and are reported in the Consolidated Statements of Income - Noninterest expense as lower of cost or fair value adjustment.

Loans are considered sold when the Bank surrenders control over the transferred assets to the purchaser, with standard representations and warranties, and when the risks and rewards inherent in owning the loans have been transferred to the buyer. At such time, the loan is removed from the general ledger and a gain or loss is recorded on the sale. Gains and losses on loan sales are determined based on the difference between the allocated cost basis of the assets sold and the proceeds, which includes the fair value of any assets or liabilities that are newly created as a result of the transaction. Losses related to recourse provisions are accrued as a liability at the time such additional losses are determined, and recorded as part of noninterest expense.

Community Bank Loans

Community bank loans include commercial real estate loans, construction and development loans, commercial loans, multifamily loans and consumer loans. Within this population are loans originated by the Bank’s SBA division. The majority of community bank loans are originated as assets held for investment. Currently, we intend to hold for the foreseeable future or to maturity all community bank loans, except SBA 504 loans and the guaranteed portions of originated SBA 7a loans. We generally elect to sell certain SBA 504 loans and the guaranteed portions of SBA 7a loans. These sales assist the Company in managing industry concentrations, capital, and interest rate risk, and are a normal part of our operations. At June 30, 2009 and December 31, 2008, community bank loans included multifamily and SBA originated loans totaling $82.6 million and $83.7 million, respectively, that were classified as held for sale.

Wholesale loans include purchased residential loans and purchased guaranteed portions of SBA 7a loans. We did not acquire any wholesale loans in 2009 or 2008 other than loans we are required to repurchase from our GNMA mortgage servicing portfolio. Such loans are government guaranteed as to principal and interest. At June 30, 2009 and December 31, 2008, wholesale loans included residential loans totaling $201.2 million and $212.1 million, respectively, which were classified as loans held for sale. See Note 5 – Loans to the consolidated financial statements for a break out of all wholesale loans.

The Company and its subsidiaries file consolidated federal and state income tax returns. The subsidiaries are charged for the taxes applicable to their profits calculated on the basis of filing separate income tax returns. The Bank qualifies as a savings and loan association for income tax purposes. The consolidated effective tax rate is affected by the resolution of uncertain tax positions identified under FASB Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes” the level of utilization of New Markets Tax Credits and the level of tax-exempt interest income in proportion to the level of net income.

Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At June 30, 2009 and December 31, 2008, management believed it was more likely than not that the deferred taxes would be realized and, accordingly, there was no valuation allowance. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would ultimately be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are classified as income tax expense in the consolidated statement of income and accrued in other liabilities.

Effective January 1, 2009, the Company adopted FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividend equivalents, whether paid or unpaid, are participating securities and shall be included in the computation of earnings per share pursuant to the “two-class” method as specified in SFAS No. 128, “Earnings Per Share.” The two-class method is an earnings allocation methodology that determines earnings per share separately for each class of stock and participating security. Participants in our equity compensation plan who are granted restricted stock are allowed to retain cash dividends paid on nonvested shares, and therefore, the Company’s nonvested restructured stock awards qualify as participating securities under FSP EITF 03-6-1. All previously reported earnings per common share data has been retrospectively adjusted to conform to the new computation methodology.

Certain reclassifications have been made to the consolidated financial statements and related notes for prior quarters to conform to the current quarter’s presentation, including the effects of discontinued operations. See Note 17 – Discontinued Operations to the consolidated financial statements for a discussion of the impact of the sale of UW Trust assets.

In prior years’ financial statements, the Company presented the valuation allowance to reduce loans held for sale to the lower of cost or fair value in two components, one an allowance for credit losses that separately considered credit loss exposure and one valuation allowance that separately considered market risk factors. Management has reclassified prior period financial statements to reflect the valuation allowance to reduce loans held for sale at the lower of cost or fair value as one valuation allowance balance. Also, included in these reclassifications was a retrospective change in the presentation of loans held for sale. In prior years, we presented community bank loans and wholesale loans on the face of the balance sheet, with details of the components of loans held for sale and loans held for investment in the footnotes. In the June 30, 2009 financial statements, we presented loans held for sale and loans held for investment on the face of the balance sheet. In Notes 4 and 5 to the consolidated financial statements, we provide a break-down of community bank loans and wholesale loans within loans held for investment and loans held for sale.

In the financial statements for the quarter and six months ended June 30, 2008, the provision for credit losses was presented as $2,080,000 and $3,616,000, respectively. In the financial statements for the quarter and six months ended June 30, 2009, the provision for credit losses for the quarter and six months ended June 30, 2008, is presented on the face of the income statement as $2,132,000, and $4,023,000, respectively, which is attributed to the allowance for credit losses for loans held for investment.

In the financial statements for the quarter and six months ended June 30, 2008, the lower of cost or fair value adjustment was disclosed within other general and administrative expenses of noninterest expense as $207,000 and $974,000, respectively. In the financial statements for the quarter and six months ended June 30, 2009 the lower of cost or market adjustment for the quarter and six months ended June 30, 2008, is presented on the face of the income statement as $154,000 and $565,000, respectively.

2. Earnings Per Common Share

Earnings per common share is computed using the two-class method prescribed by SFAS 128, “Earnings Per Share.” Basic earnings per share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include non-vested stock awards. Non-vested stock awards are considered participating securities because holders of these securities receive non-forfeitable dividends at the same rate as holders of the Company’s common stock. The application of the two-class method did not have a material impact on the results for the periods shown below.

The following table sets forth the calculation of earnings per share. There were no dilutive securities for any period presented. Earnings allocable to participating securities were included with (loss) income from continuing operations:

	Quarter Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	(Dollars in thousands)

(Loss) income from continuing operations	$	(33,738	)	$	2,995		$	(30,251	)	$	6,268
Income from discontinued operations		37,736			70			37,525			160
Net Income	$	3,998		$	3,065		$	7,274		$	6,428
Earnings allocable to participating securities		(79	)		(52	)		(128	)		(78	)
Net income for earnings per share	$	3,919		$	3,013		$	7,146		$	6,350
Weighted average shares - basic and diluted		7,182,516			7,198,357			7,169,446			7,207,878

Stock options for 1,024,376 and 971,783 shares of common stock were not considered in computing diluted earnings per common share for June 30, 2009 and June 30, 2008, respectively, because they were antidilutive.

3. Investment Securities

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio at June 30, 2009 and December 31, 2008, and the corresponding amounts of unrealized gains and losses therein:

	June 30, 2009									December 31, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Mortgage-backed securities – agency/residential	$	13,022	$	130	$	(76	)	$	13,076	$	15,804	$	47	$	(223	)	$	15,628
Mortgage-backed securities – private/residential		-		-		-			-		47,386		-		(31,452	)		15,934
Collateralized mortgage obligations-private/residential		27,709		-		(2,639	)		25,070		32,017		-		(4,229	)		27,788
SBA securities		213		-		(2	)		211		226		-		(3	)		223
Total	$	40,944	$	130	$	(2,717	)	$	38,357	$	95,433	$	47	$	(35,907	)	$	59,573

Proceeds from sales of securities available for sale were $373,000 for the three months and six months ended June 30, 2009. A gross loss of $46,980,000 was realized on the sale. As previously announced on July 1, 2009, we sold 100% of our mortgage-backed securities collateralized by option adjustable rate residential loans with an unpaid principal balance of $47.3 million. Each of the five securities sold was rated AA by nationally recognized rating agencies at the time of acquisition. However, in the period from April 2008 through June 2009, the securities were progressively downgraded until they were graded significantly below investment grade. As a result of the downgrades of the securities, and because the securities were lower tranche securities in relation to other securities issued in the same security structure, the Bank was required to assign large amounts of capital for the purposes of determining the Bank’s regulatory risk-based capital ratio. Consequently, management elected to sell the securities, which provided regulatory capital relief to the Bank in spite of the loss incurred.

There were no securities sold or called during the three months or six months ended June 30, 2008.

The following table summarizes the amortized cost and fair value of the held-to-maturity investment securities portfolio at June 30, 2009 and December 31, 2008, and the corresponding amounts of unrealized gains and losses therein:

	June 30, 2009									December 31, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Mortgage-backed securities – agency	$	19,479	$	694	$	-		$	20,173	$	21,218	$	872	$	-		$	22,090
Mortgage-backed securities – private		134,634		387		(28,934	)		106,087		145,515		1,663		(30,664	)		116,514
Collateralized mortgage obligations-private		240,221		-		(30,186	)		210,035		278,633		-		(38,252	)		240,381
SBA securities		48,887		-		(2,345	)		46,542		53,098		-		(2,557	)		50,541
Total	$	443,221	$	1,081	$	(61,465	)	$	382,837	$	498,464	$	2,535	$	(71,473	)	$	429,526

At June 30, 2009 and December 31, 2008, substantially all of the Company’s investment securities were pledged to secure public deposits, FHLBank borrowings, repurchase agreements and for other purposes, as required or permitted by law.

The following table presents information pertaining to securities available for sale and held to maturity with gross unrealized losses aggregated by investment category and length of time that individual securities have been in continuous loss position as follows:

	June 30, 2009										December 31, 2008
	Less than 12 months					12 months or more					Less than 12 months					12 months or more
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	(Dollars in thousands)
Mortgage-backed securities – agency, available for sale	$	-	$	-		$	5,834	$	(76	)	$	9,826	$	(146	)	$	2,543	$	(77	)
Mortgage-backed securities – private, available for sale		-		-			-		-			-		-			15,934		(31,452	)
Collateralized mortgage obligations-private, available for sale		-		-			25,070		(2,639	)		23,018		(3,497	)		4,769		(732	)
SBA securities, available for sale		143		(2	)		-		-			147		(3	)		-		-
Mortgage-backed securities – agency, held to maturity		-		-			-		-			-		-			-		-
Mortgage-backed securities – private, held to maturity		1,292		(442	)		100,535		(28,492	)		54,236		(11,104	)		55,793		(19,560	)
Collateralized mortgage obligations-private, held to maturity		30,163		(3,010	)		179,872		(27,176	)		71,450		(21,519	)		169,069		(16,733	)
SBA securities, held to maturity		-		-			46,542		(2,345	)		-		-			50,541		(2,557	)
Total	$	31,598	$	(3,454	)	$	357,853	$	(60,728	)	$	158,677	$	(36,269	)	$	298,649	$	(71,111	)

The amortized cost and estimated fair value of investment securities portfolio as of June 30, 2009, are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	Available for Sale				Held to Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
SBA securities
Within 1 year	$	–	$	–	$	–	$	–
Over 1 year through 5 years		-		-		2,758		2,282
After 5 years through 10 years		-		-		26,426		25,564
Over 10 years		213		211		19,703		18,696
Subtotal		213		211		48,887		46,542
Mortgage-backed securities
After 5 years through 10 years		844		861		-		-
Over 10 years		39,887		37,285		394,334		336,295
Subtotal		40,731		38,146		394,334		336,295
Total	$	40,944	$	38,357	$	443,221	$	382,837

Temporary vs. Other-Than-Temporary Impairment

The Company views the determination of whether an investment security is temporarily or other-than-temporarily impaired as a critical accounting policy, as the estimate is susceptible to significant change from period to period because it requires management to make significant judgments, assumptions and estimates in the preparation of its consolidated financial statements. Management considers whether an investment security is other-than-temporarily impaired under the guidance promulgated in FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” The Company assesses individual securities in its investment securities portfolio for impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. An investment is impaired if the fair value of the security is less than its carrying value at the financial statement date. When a security is impaired, the Company then determines whether this impairment is temporary or other-than-temporary. In estimating other-than-temporary impairment (“OTTI”) losses, management assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Management utilizes cash flow models to segregate impairments principally on selected non-agency mortgage backed securities to distinguish between impairment related to credit losses and impairment related to other factors. To assess for OTTI, management considers, among other things, (i) the severity and duration of the impairment; (ii) the ratings of the security; (iii) the overall transaction structure (e.g., the Company’s position within the structure, the aggregate, near term financial performance of the underlying collateral, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, and discounted cash flows); and (iv) the timing and magnitude of a break in modeled cash flows.

Management considers whether an investment security is within the scope of EITF 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” and EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,” at the time of purchase by review of the rating assigned. To date, all securities acquired by the Company have been agency securities or had an assigned rating of AA or higher at the time of acquisition.

As of June 30, 2009, the Company’s securities portfolio consisted of 110 separate securities, 82 of which were in an unrealized loss position. The Company’s securities are discussed in greater detail below:

Mortgage-backed Securities – Agency

At June 30, 2009 the Bank owned 35 securities, with an unpaid principal balance of $33 million, issued by U.S. government-sponsored sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the U.S. government has affirmed its commitment to support. Of these 35 securities, seven have an unrealized loss each of which is less than 250 basis points. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2009.

Mortgage-backed Securities – Non-agency

The Company’s mortgage-backed securities portfolio includes 72 non-agency securities, of which 70 were in an unrealized loss position, with a fair value of $341 million which had gross unrealized losses of approximately $62 million. At June 30, 2009, based on the carrying value and the lowest rating assigned, the securities portfolio consisted of 44% securities rated A or higher, 8% BBB rated securities and 48% securities rated below investment grade. Based on the highest rating assigned, approximately 82% of the portfolio is investment grade. Overall delinquencies for this subcategory remain satisfactory; however, reflecting the overall U.S. mortgage market, delinquencies increased in the current quarter. Management expects these delinquency levels to level off in the last half of 2009 based on their performance to date, and on the expected effects of loan restructuring programs underway. At June 30, 2009, management expects full recovery as the securities approach their maturity date or repricing date or if market yield for such investments decline.

Included in collateralized mortgage obligations – private, held to maturity were securities that are collateralized by prime CMO securities. These securities have an amortized cost of $201 million of prime securities and $39 million of Alt-A securities, of which $166.9 million has received one or more ratings declines by rating agencies since acquisition. The remainder of this category remains AAA rated by at least one agency. Payments continue to be made for each of these securities. Based on our analysis and our review of the independent analyses performed by third parties on these securities and other securities in our portfolio, the Company believes the decline in fair value of securities deemed temporarily impaired is due to current temporary conditions in the marketplace. For the $180 million of securities in this category with fair value price estimates below amortized cost for twelve months or more, less than one percent cumulative losses have been realized to date. Credit support for these securities has increased from 5.3% at origination to 6.7% at June 30, 2009. The vast majority of this category consists of prime loans, with a weighted average loan-to-value of 69% at origination, and only 3% of loans with a loan-to-value ratio in excess of 80% at origination. Overall delinquencies for this subcategory remain satisfactory; however, reflecting the overall U.S. mortgage market, delinquencies increased in the quarter ended June 30, 2009. Management expects these delinquency levels to level off in the last half of 2009 based on their performance to date, and on the expected effects of loan restructuring programs underway. At June 30, 2009, management expected full recovery as the securities approach their maturity date or repricing date or if market yield for such investments decline.

Included in mortgage-backed securities – private, held to maturity, were securities that are collateralized primarily by prime hybrid mortgages. These securities have a total amortized cost of $135 million, of which $114 million, or 85%, have received one or more ratings declines by the ratings agency since acquisition. This category includes five securities collateralized by Alt-A mortgages totaling $20 million. Payments continue to be made for all of these securities. Based on our analysis and our review of the independent analyses performed by third parties on these securities and other securities in our portfolio, the Company believes the decline in fair value of securities deemed temporarily impaired is mainly due to current temporary conditions in the marketplace. While $100.5 million of these securities has had a fair value price estimate below amortized cost for twelve months or more, current credit support levels have increased from 5.9% at origination to 7.1% at June 30, 2009. Such support tranches are expected to continue to increase as subordinate tranches to these securities pay off and cash flows are allocated within the CMO structure. Management expects delinquency levels to level off as private loan restructuring programs and the Homeowners Affordability and Stability Plan are implemented. Within this category, management recognized OTTI on two securities where it was deemed appropriate due to various factors in our analysis.

During 2008, the Company incurred OTTI on two private-label held-to-maturity collateralized mortgage obligations, which had an amortized cost of $9.4 million. The securities were written down to the estimated fair value of $5.3 million, representing an OTTI of $4.1 million. All principal and interest payments have been made to date in accordance with the terms of each security. Although the securities have continued to perform in accordance with their terms, the securities were deemed OTTI based on the extent and duration of the decline in fair value below amortized cost given consideration to liquidity in the marketplace at the time and uncertainty of a recovery of expected future cash flows. These two securities evidenced further impairment at June 30, 2009, after the adoption of FSP FAS 115-2 and, accordingly, the Company incurred a charge of $603,000, reflected in other noninterest income, to reflect the credit loss of the additional OTTI.

The Company’s SBA pooled securities consist of 16 securities each of which was in an unrealized loss position. Such securities are guaranteed as to principal by the SBA. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these SBA pooled securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2009.

The table below presents a roll forward of the credit losses recognized in earnings for debt securities held and not intended to be sold:

	Other-than-temporary
	Loss Recognized as
	Credit Loss in Earnings
	(Dollars in thousands)
Beginning balance of credit losses at April 1, 2009	$	3,300
Current period credit losses		603
Total credit losses		3,903
Previously recognized other-than-temporary loss related to non-credit losses		-
Ending balance of credit losses at June 30, 2009	$	3,903

In the event securities demonstrate additional deterioration through an increase in defaults or loss severity that indicate the Company will not recover its anticipated cash flows or if the duration of relatively significant impairments in these securities does not reverse, the Company will incur other-than-temporary impairments, which may result in material charges to earnings in future periods.

4. Loans Held for Sale

Loans held for sale consist of the following:

	June 30, 2009		December 31, 2008
	(Dollars in thousands)
Community bank loans:
Commercial real estate	$	56,097	$	49,031
Multifamily		22,229		29,074
SBA originated, guaranteed portions		4,181		5,370
Purchase premiums, net		131		177
Wholesale loans:
Residential		199,901		212,083
Purchase premiums, net		1,270		1,352
		283,809		297,087
Less valuation allowance to reduce loans held for sale to the lower of cost or fair value		3,931		5,467
Loans held for sale, net	$	279,878	$	291,620

Activity in the valuation allowance to carry loans held for sale at the lower of cost or fair value is summarized as follows:

	Six months Ended
	June 30, 2009			June 30, 2008
	(Dollars in thousands)
Balance at beginning of period	$	5,467		$	3,021
(Benefit)/provision to (reduce)/increase the carrying value of loans held for sale to the lower of cost or fair value		(325	)		565
Charge-offs		(1,212	)		(128	)
Recoveries		1			1
Balance at end of period	$	3,931		$	3,459

5. Loans Held for Investment

Loans held for investment consist of the following:

	June 30, 2009			December 31, 2008
	(Dollars in thousands)
Community bank loans:
Commercial real estate	$	453,283		$	434,399
Construction and development		408,408			401,009
Commercial		161,308			134,435
Multifamily		25,223			20,381
Consumer		43,150			49,440
Premium, net		192			216
Unearned fees, net		(5,333	)		(3,565	)
Wholesale loans:
Residential		101,824			125,630
SBA purchased, guaranteed portions		71,149			80,110
Premium on SBA purchased, guaranteed portions		6,348			7,084
Premium, discount, net		324			345
		1,265,876			1,249,484
Less allowance for credit losses		25,520			16,183
Loans held for investment, net	$	1,240,356		$	1,233,301

Activity in the allowance for credit losses on loans held for investment is summarized as follows:

	Six months Ended
	June 30, 2009			June 30, 2008
	(Dollars in thousands)
Balance at beginning of period	$	16,183		$	8,000
Provision for credit losses		10,459			4,023
Charge-offs		(1,162	)		(261	)
Recoveries		40			-
Balance at end of period	$	25,520		$	11,762

The following lists information related to nonperforming loans held for investment and held for sale:

	June 30, 2009		December 31, 2008
	(Dollars in thousands)
Loans on nonaccrual status in the held for investment portfolio	$	28,426	$	8,647
Loans on nonaccrual status in the held for sale portfolio		10,360		13,252
Total nonperforming loans	$	38,786	$	21,899

The aggregate unpaid principal balance of government-sponsored accruing loans that were past due 90 or more days was $6.7 million and $6.5 million at June 30, 2009 and December 31, 2008, respectively. These accruing loans are not included in the balances of nonperforming loans above.

Impaired loans, as defined under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” totaled $32.7 million and $3.3 million at June 30, 2009 and December 31, 2008, respectively. The related allowance allocated to impaired loans was $5.8 million and $1.7 million at June 30, 2009 and December 31, 2008, respectively. There was no interest recognized in the periods on loans while they were considered impaired. Included in impaired loans was one loan totaling $11.2 million, which was deemed impaired due to a concessionary rate granted to the borrower during the first quarter of 2009. This loan is performing under its revised terms and remains on accrual at June 30, 2009.

6. Mortgage Servicing Rights

The activity in the mortgage servicing rights is summarized as follows:

	Six months Ended
	June 30, 2009			June 30, 2008
	(Dollars in thousands)
Balance at beginning of period	$	10,356		$	12,831
Originations		73			63
Amortization		(1,382	)		(1,381	)
Balance before valuation allowance at end of period		9,047			11,513

Valuation allowance for impairment of mortgage servicing rights
Balance at beginning of period		(860	)		(860	)
Balance at end of period		(860	)		(860	)
Mortgage servicing rights, net	$	8,187		$	10,653

The estimated fair value of mortgage servicing rights at June 30, 2009, was $8,187,000. The Company determined fair value in accordance with SFAS 157. See Note 15 - Fair Value of Financial Assets to the consolidated financial statements for a discussion of the fair value determination.

During the six months ended June 30, 2009 and 2008, the Company recognized originated mortgage servicing rights of $73,000 and $63,000, respectively. The amounts of originated mortgage servicing rights recognized in 2009 and 2008 were the result of the sale of the guaranteed portions of originated SBA 7a loans collateralized by mortgages. The mortgage servicing rights were determined based upon the relative fair value of the servicing asset in comparison to the guaranteed portion of the loan sold, the unguaranteed portion retained, and the servicing asset.

The Company’s servicing portfolio (excluding subserviced loans), is comprised of the following:

	June 30, 2009				December 31, 2008
			Principal				Principal
	Number		Balance		Number		Balance
	of Loans		Outstanding		of Loans		Outstanding
	(Dollars in thousands)
Freddie Mac		1,477	$	56,973		1,666	$	63,205
Fannie Mae		5,296		280,403		5,842		308,019
Ginnie Mae		4,143		225,983		4,747		251,435
VA, FHA, conventional and other loans		3,378		263,348		3,550		279,091
Total servicing portfolio		14,294	$	826,707		15,805	$	901,750

The Company’s custodial escrow balances shown in the accompanying consolidated balance sheets at June 30, 2009 and December 31, 2008, pertain to payments held in escrow in respect of taxes and insurance and the float on principal and interest payments on loans serviced and owned by the Company. The custodial accounts are maintained at the Bank in noninterest-bearing accounts. The balance of custodial accounts fluctuates from month to month based on the pass-through of the principal and interest payments to the ultimate investors and the timing of taxes and insurance payments.

Deposit account balances are summarized as follows:

	June 30, 2009								December 31, 2008
	Amount		Percent			Weighted Average Rate			Amount		Percent			Weighted Average Rate
	(Dollars in thousands)
Savings accounts	$	459		0.02	%		0.25	%	$	299		0.02	%		0.25	%
NOW and DDA accounts		582,389		31.31			0.19			624,064		36.18			0.17
Money market accounts		1,007,588		54.17			0.65			958,837		55.60			0.79
Subtotals		1,590,436		85.50			0.48			1,583,200		91.80			0.55
Certificate accounts		269,654		14.50			2.55			141,472		8.20			3.53
Total deposits	$	1,860,090		100.00	%		0.78	%	$	1,724,672		100.00	%		0.79	%

The following table presents concentrations of deposits at the Bank at the dates presented:

	June 30, 2009		December 31, 2008
	(Dollars in thousands)
UW Trust Company	$	5,067	$	31,915
Matrix Financial Solutions, Inc.		208,952		203,329
Legent Clearing, LLC		94,610		120,178
Other Deposit Concentrations		1,194,160		1,130,860

UW Trust Company – represents fiduciary assets under administration by UW Trust, a wholly owned subsidiary of the Company, that are in NOW, demand and money market accounts. Included in this balance at UW Trust is a series of accounts for one life settlement agent for special asset acquisitions and administration with a balance of $917,000 and $30.4 million at June 30, 2009 and December 31, 2008, respectively. Management elected to restructure this relationship and terminate certain elements of business with respect to this large life settlement agent account. The restructured relationship will now allow the Company to pursue business in the same industry on a non-exclusive basis subject to approval by the Texas Department of Banking.

Matrix Financial Solutions, Inc. (“MFSI”) – represents customer assets under administration by MFSI that are in NOW and money market accounts. The Company sold its approximate 7% interest in MFSI, during the first quarter of 2009.

Legent Clearing, LLC – represents institutional deposits received through Legent Clearing, LLC, that are in NOW and money market accounts. Certain officers of the Company hold an indirect minority interest in Legent Clearing, LLC.

Other Deposit Concentrations – represents deposit funds from six institutional relationships maintained by the Bank as of June 30, 2009 and December 31, 2008. Included in other deposit concentrations are institutional balances from Equity Trust, with balances of $841.7 million and $822.8 million at June 30, 2009 and December 31, 2008, respectively. The balances from Equity Trust include the custodial deposits associated with the UW Trust asset sale, which is discussed in Note 17 Discontinued Operations – Sale of UW Trust Assets.

Included in certificate accounts are approximately $79.5 million and $35.0 million of brokered deposits as of June 30, 2009 and December 31, 2008, respectively.

The aggregate amount of certificate accounts with a balance greater than $100,000 or more (excluding brokered deposits) was approximately $50.5 million and $40.1 million of June 30, 2009 and December 31, 2008, respectively.

8. FHLBank Borrowings

The Bank obtains FHLBank borrowings from FHLBank of Topeka, which is the FHLBank that serves Denver, Colorado, and utilizes FHLBank of Topeka as its primary correspondent bank. Prior to the Bank’s change of domicile in 2002, borrowings were obtained from FHLBank of Dallas. Certain long-term borrowings that existed at that time with FHLBank of Dallas are still outstanding under their original terms.

The balances of FHLBank borrowings are as follows:

	June 30, 2009		December 31, 2008
	(Dollars in thousands)
FHLBank of Topeka borrowings	$	190,000	$	200,000
FHLBank of Dallas borrowings		26,665		26,721
	$	216,665	$	226,721

Available unused borrowings from FHLBank of Topeka totaled $226,242,000 at June 30, 2009.

Borrowed money is summarized as follows:

	June 30, 2009		December 31, 2008
	(Dollars in thousands)
Borrowed Money
Revolving line of credit to a third-party financial institution, through September 30, 2009, renewable annually, collateralized by the common stock of the Bank; interest at 30-day LIBOR plus 3%; (3.32% at June 30, 2009), none available at June 30, 2009	$	30,000	$	28,000
Subordinated debt securities, interest payments due quarterly at three-month LIBOR plus 2.75% (3.37% at June 30, 2009), maturing February 13, 2014		10,000		10,000
Assets sold under agreements to repurchase:
Company structured repurchase agreements		75,000		75,000
Customer repurchase agreements		3,529		6,265
Total	$	118,529	$	119,265

The Company’s $30 million revolving line of credit to a third-party financial institution was renewed on June 29, 2009 until September 30, 2009. This facility is for general corporate purposes. The Company must comply with certain financial and other covenants contained in the credit agreement including, among other things, the maintenance by the Bank of specific asset quality ratios, and “well capitalized” regulatory capital ratios. Also, the credit agreement limits the Company’s ability to incur additional debt above specified levels. The Company was in compliance with the covenants as of June 30, 2009. The amendment to the credit agreement calls for a payment of $5 million prior to September 30, 2009 at which time the facility will be reduced to $25 million.

Assets sold under agreements to repurchase are agreements in which the Bank acquires funds by selling securities to another party under a simultaneous agreement to repurchase the same securities at a specified price and date. The Bank’s structured repurchase agreements each contain an option that is held by the counterparty to terminate the agreement on the call date or quarterly thereafter. The Bank enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements.

The Bank structured repurchase agreements at June 30, 2009 are as follows:

Counterparty	JP Morgan			JP Morgan			Citigroup
Principal balance	$	25,000,000		$	25,000,000		$	25,000,000
Base interest rate		4.97	%		4.91	%		4.49	%
Stated maturity date	September 28, 2011			November 21, 2011			February 21, 2012
Call date	December 28, 2009			November 23, 2009			November 23, 2009

10. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts

The Company sponsored three trusts that have outstanding balances as of June 30, 2009. These trusts were formed in the years 200, 2004 and 2005 for the purpose of issuing corporation-obligated mandatorily redeemable capital securities (the “capital securities”) to third-party investors and investing the proceeds from the sale of such capital securities exclusively in junior subordinated debt securities of the Company (the “debentures”). The debentures held by each trust are the sole assets of that trust. Distributions on the capital securities issued by each trust are payable semiannually or quarterly at a rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees.

The following table presents details on the junior subordinated debentures owed to unconsolidated subsidiary trusts at June 30, 2009.

	Trust II			Trust VI			Trust VIII
	(Dollars in thousands)
Date of issue	March 28, 2001			August 30, 2004			June 30, 2005
Amount of trust preferred securities issued	$	12,000		$	10,000		$	7,500
Rate on trust preferred securities		10.18	%		6.43	%		5.86	%
Maturity	June 8, 2031			October 18, 2034			July 7, 2035
Date of first redemption	June 8, 2011			October 18, 2009			July 7, 2010
Common equity securities issued	$	400		$	310		$	232
Junior subordinated deferrable interest debentures owed	$	12,400		$	10,310		$	7,732
Rate on junior subordinated deferrable interest debentures		10.18	%		6.43	%		5.86	%

11. Regulatory Matters

The Company. The Company is a unitary thrift holding company and, as such, is subject to the regulation, examination and supervision of the Office of Thrift Supervision (“OTS”).

United Western Bank. The Bank is subject to various regulatory capital requirements administered by the OTS. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s and the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet commitments as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier 1 capital (as defined in the regulations) to total assets (as defined in the regulations). The Bank’s Tier 1 capital consists of shareholder’s equity excluding unrealized gains and losses on securities available for sale, less a portion of the Bank’s mortgage servicing asset that is disallowed for capital.

The Tier 1 and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, allocated by risk weight category, and certain off-balance-sheet items (primarily loan commitments). The leverage ratio is calculated by dividing Tier 1 capital by adjusted total assets.

The Bank has been notified by the OTS that, as of its most recent regulatory examination, it is regarded as well capitalized under the regulatory framework for prompt corrective action. Such determination has been made based on the Bank’s Tier 1, total capital, and leverage ratios. There have been no conditions or events since this notification that management believes would change the Bank’s categorization as well capitalized under the aforementioned ratios. For a discussion of conditions or events that could change the Bank’s categorization please see Item II. – Risk Factors.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of June 30, 2009
Total Capital (to Risk Weighted Assets)	$	192,671		10.2	%	$	151,564		8.0	%	$	189,455		10.0	%
Core Capital (to Adjusted Tangible Assets)		172,367		7.2			95,612		4.0			119,407		5.0
Tier 1 Capital (to Risk Weighted Assets)		172,367		9.1			N/A		N/A			113,673		6.0

As of December 31, 2008
Total Capital (to Risk Weighted Assets)	$	189,536		10.6	%	$	143,719		8.0	%	$	179,648		10.0	%
Core Capital (to Adjusted Tangible Assets)		174,034		7.7			91,049		4.0			113,812		5.0
Tier 1 Capital (to Risk Weighted Assets)		174,034		9.7			N/A		N/A			107,811		6.0

12. Stock-Based Compensation

A summary of the Company’s stock option and non-vested stock awards activity, and related information, is as follows:

	Six Months Ended June 30, 2009
				Non-Vested Restricted Stock Awards Outstanding					Stock Options Outstanding
	Shares Available for Grant			Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Exercise Price
Balance January 1, 2009		1,027,307			104,248		$	19.84		1,034,535		$	19.37

Granted		(121,658	)		86,348			9.44		35,310			9.37
Forfeited		41,630			(9,835	)		19.02		(31,795	)		20.15
Director shares		(11,923	)		-			-		-			-
Stock awards vested		-			(21,626	)		20.12		-
Balance June 30, 2009		935,356			159,135		$	14.21		1,038,050		$	19.01

Fully vested and shares expected to vest total approximately 975,000 at June 30, 2009.

The Company’s shareholders approved the 2007 Equity Incentive Plan (the “2007 Plan”) at the 2007 annual meeting, which the Board of Directors subsequently amended on December 17, 2008, to make minor revisions for purposes of complying with Section 409A of the Internal Revenue Code of 1986, as amended. The 2007 Plan provides a variety of long-term equity based incentives to officers, directors, employees and other persons providing services to the Company and authorizes the Compensation Committee to grant options as well as other forms of equity based incentive compensation, such as restricted stock awards, stock appreciation rights, performance units and supplemental cash payments. At June 30, 2009, there were 159,135 non-vested restricted stock awards outstanding. These awards vest 20% annually on the anniversary date of the grant over a five-year period. Unrecognized stock-based compensation expense related to non-vested stock awards was $2.1 million as of June 30, 2009. At such date, the weighted average period over which this unrecognized expense was expected to be recognized was 3.9 years.

In light of the approval of the 2007 Plan by the Company’s shareholders on May 17, 2007, the Company does not intend to grant any additional stock options under the Company’s prior stock option plan.

The fair value of each stock option award is estimated on the date of grant using the Hull-White model, an enhanced trinomial lattice-based model, which takes into account certain dynamic assumptions about interest rates, expected volatility, expected dividends, employee exercise patterns, forfeitures and other factors. Expected volatility is based primarily on historical volatility of the closing price of the Company’s common stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant with a term equal to the life of the option. The expected term of options granted is derived using the lattice-based model and represents the period of time that options granted are expected to be outstanding and post-vesting employee behavior by group of employee. Forfeitures are estimated outside of the Hull-White model based on attrition studies performed annually. As the Board has declared regular $0.06 quarterly dividends, these are considered in the option valuation. The weighted-average fair value of options granted during the three months ended June 30, 2009 was $3.10 per share. The intrinsic value of outstanding options at June 30, 2009, was $0. Outstanding stock options have a weighted average remaining contractual term of 7.3 years, and future compensation expense associated with those options is approximately $1.8 million. The remaining expense is expected to be recognized over the weighted average period of 2.6 years. Options outstanding and exercisable were granted at stock option prices that were not less than the fair market value of the common stock on the date the options were granted and no option has a term in excess of ten years. Employee options vest ratably over a five-year period.

The following weighted-average assumptions were used to estimate the fair value of options granted during the periods:

	Six Months Ended
	June 30, 2009	June 30, 2008
Expected volatility	57.80 % - 69.40 %	25.20 % - 25.90 %
Expected dividend yield	2.54 % - 3.04 %	1.27 % - 1.40 %
Risk-free interest rate	2.90 % - 3.27 %	3.55 % - 3.88 %
Expected term (in years)	6.19 - 6.47	6.10 - 7.20
Weighted average grant date fair value	$1.98 - $3.10	$3.13 - $ 4.27

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (“ESPP”). As of June 30, 2009, there were 145,005 ESPP Shares available for future issuance. The price at which ESPP Shares are sold under the ESPP is 85% of the lower of the fair market value per share of common stock on the enrollment date or the purchase date. It is presently estimated that 26,812 shares will be issued through the ESPP for 2009. The expenses associated with such share-based payments were $22,000 and $24,000 for the quarters ended June 30, 2009 and June 30, 2008, respectively, and $44,000 and $48,000 for the six months ended June 30, 2009 and June 30, 2008, respectively.

Income tax expense was as follows:

	Six Months Ended
	June 30, 2009			June 30, 2008
	(Dollars in thousands)
Current income tax (benefit) provision	$	(15,055	)	$	4,531
Deferred income tax (benefit)		(2,752	)		(1,855	)
Income tax (benefit) expense from continuing operations	$	(17,807	)	$	2,676

Income tax expense from discontinued operations (Note 17)	$	20,620		$	89

Effective tax rate		27.9	%		30.1	%

The Company’s effective tax rate for the three months ended June 30, 2009 and 2008 is below the statutory tax rate due to: (i) realization of New Markets Tax Credits, which have been deployed at a subsidiary of the Bank, which were $624,000 and $593,000 for the six months ended June 30, 2009 and June 30, 2008, respectively; (ii) tax exempt earnings, which principally relate to income from bank owned life insurance, and (iii) a change in apportionment due to an increase in income allocable to the State of Texas in 2009.

At June 30, 2009 and December 31, 2008, the Company had accrued $348,000 related to unrecognized tax benefits. This amount is accrued in other liabilities in the consolidated balance sheet.

Interest and penalties associated with the liability for unrecognized benefits is approximately $245,000 at June 30, 2009 and December 31, 2008, and is included in other liabilities in the consolidated balance sheet.

14. Segment Information

Under SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” the Company has three reportable segments: (i) a community banking subsidiary, (ii) a custodial escrow and paying agent services subsidiary, and (iii) a mortgage banking subsidiary. The remaining subsidiaries are included in the “all others” category and consist primarily of the parent company operations. The Company’s segments are more fully described in Note 2 to the audited financial statements in the Company’s Form 10-K for the year ended December 31, 2008.

				Custodial and
	Community			Advisory			Mortgage			All
	Banking			Services			Banking			Others			Total
	(Dollars in thousands)
Quarter ended June 30, 2009:
Revenues from external customers:
Interest income	$	25,676		$	-		$	223		$	76		$	25,975
Noninterest income		1,550			172			913			(1,056	)		1,579
Loss on available for sale securities		(46,980	)		-			-			-			(46,980	)
Intersegment revenues		40			19			38			(49	)		48
Segment income (loss) from continuing operations before income taxes		(47,803	)		14			(161	)		(5,148	)		(53,098	)

Six Months ended June 30, 2009:
Revenues from external customers:
Interest income	$	51,562		$	-		$	434		$	103		$	52,099
Noninterest income		2,084			288			1,973			2,933			7,278
Loss on available for sale securities		(46,980	)		-			-			-			(46,980	)
Intersegment revenues		87			41			77			(57	)		148
Segment income (loss) from continuing operations before income taxes		(44,371	)		(1	)		(417	)		(3,269	)		(48,058	)

Segment assets		2,360,450			3,271			5,960			52,184			2,421,865

Quarter ended June 30, 2008:
Revenues from external customers:
Interest income	$	27,049		$	-		$	396		$	49		$	27,494
Noninterest income		700			251			1,080			191			2,222
Intersegment revenues		222			24			164			(19	)		391
Segment income (loss) from continuing operations before income taxes		6,314			133			(177	)		(1,994	)		4,276

Six Months ended June 30, 2008:
Revenues from external customers:
Interest income	$	56,066		$	-		$	753		$	155		$	56,974
Noninterest income		1,399			527			2,416			417			4,759
Intersegment revenues		549			55			376			(94	)		886
Segment income (loss) from continuing operations before income taxes		12,753			262			(162	)		(3,909	)		8,944

Segment assets		2,143,073			3,695			3,747			23,411			2,173,926

15. Fair Value of Financial Assets

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset in an orderly transaction between market participants at the measurement date. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets for assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1:

Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2:

Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3:

Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets carried at fair value or the lower of cost or fair value.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

Financial assets and financial liabilities measured at fair value on a recurring basis include the following:

Available for sale securities. Securities available for sale are comprised of agency securities and nonagency securities (private label) collateralized mortgage obligations.

·	Agency securities are reported at fair value using Level 1 inputs. Management believes Level 1 is appropriate for agency securities due to the relative availability of pricing transparency for such securities in the marketplace.

Nonagency securities (private label) collateralized mortgage obligations are reported at fair value using Level 2 inputs. Management believes Level 2 is appropriate for these securities because the Company obtains fair value measurements from four sources. Two are widely known pricing services including an independent pricing service that was utilized by the FHLBank Topeka to determine the collateral value of such securities in the borrowings obtained by the Bank. The third source is an independent consultant that performs fair market valuation for securities identified by management as requiring additional analysis in order to ascertain fair value in accordance with SFAS 157. Generally, if the pricing services’ value of the security are reasonably comparable and appears reasonable given the characteristics of the underlying loan pool that determine the fair value of the security, that price is utilized as estimated fair value. Management believes such prices represent observable market data per se, and are based, in part, upon dealer quotes. Generally, if there are significant disparities in the prices between the pricing services, and the security has an unpaid principal balance of over $2 million, and there is an unrealized loss of over $1 million, the Company considers whether the pricing service fair value estimate is based on sufficient market activity and the performance characteristics of the loan pool underlying the particular security and conclude whether the pricing service has provided an estimate that represents fair value in accordance with SFAS 157. Management has direct observable data for these securities based on this pricing service and based on other market data that is available. This data that is available includes market research of various well known firms and includes information on yield, duration, repayment, defaults, delinquency and other factors. Management is comfortable with the data utilized by the pricing service based on its review of documentation and discussion with personnel from these entities. The last source is an internal model which is used to validate the selection of the other three sources and is an income approach model.

At December 31, 2008 the Company owned nonagency securities collateralized by payment-option-adjustable-rate mortgages, which were reported at fair value using Level 3 inputs. The fair value of payment-option-adjustable-rate mortgages were determined through an independent third party using cash flow models and assumptions as to the future performance of the underlying loan pools. Management concluded that this value was based on unobservable market data because the fair value was determined through proprietary cash flow models. While management believes the assumptions used by the third party were reasonable, since the cash flow models were based on assumptions about future events and future performance of the underlying collateral, they were based on unobservable market data. Further, management believes the valuation of payment-option-adjustable-rate mortgage backed securities was less certain due to the age of the securities as these were a 2006 vintage origination and the behavior of these instruments was comparatively unknown as compared to other mortgage-backed securities that did not have performance history in stressed markets.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis. These instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and liabilities measured at fair value on a non-recurring basis include the following:

Loans held for sale. Loans held for sale include residential, multifamily and SBA originated loans, which are reported in the aggregate at the lower of cost or fair value using Level 3 inputs. For these loans, the Company obtains fair value using a cash flow model. The fair value measurements consider observable data that may include loan type, spreads for other similar whole loans and mortgage-backed securities, prepayment speeds, servicing values, index values, and when applicable, outstanding investor commitments. Management makes certain adjustments to the data inputs that it believes other market participants would consider in estimating the fair value of the Company’s residential held for sale portfolio including: delinquency, existence of government guarantees, seasoning, loan to value ratios, FICO scores, foreclosure levels, loss severities, among other factors. During the first half of 2009, interest rates and spreads on residential loans held for sale contracted, which favorably impacted valuations of residential loans held for sale; however, an increase in delinquencies substantially offset the impact of interest rates and spreads. The Company recorded a recovery to its previously established valuation allowance of $325,000 that increased the carrying value of residential loans held for sale to reflect fair value. The remaining change in value from December 31, 2008, when the balance was $212,083,000, was due to repayments of $11.7 million and $524,000 transferred to real estate owned.

Mortgage servicing rights. Mortgage servicing rights are reported at the lower of cost or fair value using Level 3 inputs. Management engages an independent third party to perform a valuation of its mortgage servicing rights periodically. Mortgage servicing rights are valued in accordance with SFAS 140 using discounted cash flow modeling techniques that require management to make estimates regarding future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors. Certain adjustments to inputs are made to reflect the specific characteristics of the Company's portfolio. During the six months ended June 30, 2009, the change in value of the asset versus December 31, 2008, was due to amortization.

Impaired securities. Held to Maturity securities deemed other-than-temporarily impaired are reported at the estimated fair value of the security using Level 3 inputs. Level 3 is appropriate for these securities as there is very little trading volume of such securities and, as a result, the Company relies upon a valuation of these securities using a cash flow forecast model that incorporates elements of market participants prepared by an independent third party. The methodology used to determine estimated fair value is identical to the methodology discussed above in Available for sale securities and that is subject to the same levels of review.

Impaired loans. Certain impaired loans are reported at the fair value of the underlying collateral if management concludes repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. During the quarter ended June 30, 2009, impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for credit losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $21.5 million were reduced by specific valuation allowance allocations totaling $5.8 million to a total reported fair value of $15.7 million utilizing Level 3 valuation inputs. The provision for credit losses on impaired loans made during the quarter ended June 30, 2009 totaled $1.5 million, and for the six months ended June 30, 2009 totaled $3.5 million.

The following represents assets measured at fair value on a recurring basis as of June 30, 2009 and December 31, 2008. The valuation methodology used to measure the fair value of these securities is described earlier in this Note (There are no liabilities measured at fair value):

	Quoted Prices in		Significant		Significant
	Active Markets for		Other Observable		Other Unobservable		Total
	Identical Assets		Inputs		Inputs		Fair
Description	(Level 1)		(Level 2)		(Level 3)		Value
	(Dollars in thousands)
Assets at June 30, 2009:
Investment securities available-for-sale
Mortgage backed securities-agency/residential	$	13,076	$	-	$	-	$	13,076
SBA securities		-		211		-		211
Collateralized mortgage obligations private		-		25,070		-		25,070
Total investment securities available-for-sale	$	13,076	$	25,281	$	-	$	38,357


Assets at December 31, 2008:
Investment securities available-for-sale
Mortgage backed securities-agency/residential	$	15,628	$	-	$	-	$	15,628
SBA securities		-		223		-		223
Collateralized mortgage obligations		-		27,788		-		27,788
Mortgage-backed securities collateralized by option arm mortgage loans		-		-		15,934		15,934
Total investment securities available-for-sale	$	15,628	$	28,011	$	15,934	$	59,573

The table below presents a reconciliation of the securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2009.

	Investment securities available-for sale
	(Dollars in thousands)
	Three Months			Six Months
Balance beginning of period	$	18,327		$	15,934
Loss realized in earnings		(46,980	)		(46,980	)
Included in other comprehensive income		29,048			31,452
Settlements		(395	)		(406	)
Transfers in and/or out of Level 3		-			-
Balance June 30, 2009	$	-		$	-

The following represents financial assets measured at fair value on a nonrecurring basis as of June 30, 2009 and December 31, 2008. The valuation methodology used to measure the fair value of these assets is described earlier in the Note.

	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable		Total
	Identical Assets		Inputs		Inputs		Fair
Description	(Level 1)		(Level 2)		(Level 3)		Value
	(Dollars in thousands)
Assets at June 30, 2009:
Loans held for sale		-		-	$	279,878	$	279,878
Impaired loans		-		-		15,699		15,699
Mortgage Servicing Rights		-		-		8,187		8,187
Other-than-temporarily impaired securities		-		-		4,350		4,350

Assets at December 31, 2008:
Loans held for sale		-		-	$	291,620	$	291,620
Impaired loans		-		-		1,658		1,658
Mortgage Servicing Rights		-		-		9,496		9,496
Other-than-temporarily impaired securities		-		-		6,581		6,581

Nonfinancial assets measured on a nonrecurring basis are summarized below:

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Total

Identical Assets

Inputs

Fair

Description

(Level 1)

(Level 2)

(Level 3)

Value

(Dollars in thousands)

Assets at June 30, 2009:

Foreclosed real estate

3,920

Foreclosed real estate consists of residential or commercial assets acquired through loan foreclosure or deed in lieu of loan foreclosure. When assets are transferred to foreclosed real estate such assets are held for sale and are initially recorded at fair value, less estimated selling costs when acquired, establishing a new cost basis. Fair value is generally determined via appraisal. Costs after acquisition are generally expensed. If the fair value of the asset declines, a write-down is recorded through expense.

During the six months ended June 30, 2009 there were no transfers out of Level 3 financial assets.

SFAS 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating SFAS 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The carrying amounts and estimated fair value of financial instruments are as follows:

	June 30, 2009				December 31, 2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	289,004	$	289,004	$	22,880	$	22,880
Investment securities – available for sale		38,357		38,357		59,573		59,573
Investment securities – held to maturity		443,221		382,837		498,464		429,526
Loans held for sale, net		279,878		279,878		291,620		291,620
Loans held for investment, net		1,240,356		1,226,048		1,233,301		1,239,399
FHLBank stock		12,234		N/A		29,046		N/A
Accrued interest receivable		7,787		7,787		8,973		8,973

Financial liabilities:
Deposits	$	1,860,090	$	1,860,508	$	1,724,672	$	1,727,182
Custodial escrow balances		41,722		41,722		29,697		29,697
FHLBank borrowings		216,665		228,382		226,721		242,620
Borrowed money		118,529		123,098		119,265		124,630
Junior subordinated debentures		30,442		29,712		30,442		29,759
Accrued interest payable		2,147		2,147		1,902		1,902

The following methods and assumptions used by the Company in estimating the fair value of the financial instruments are described in the Company’s Annual Report on Form 10-K.

16. Commitments and Contingencies

The Company is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to a varying degree, elements of credit and interest- rate risk in excess of the amount recognized in the consolidated balance sheets.

A summary of the contractual amount of significant commitments follows:

	June 30, 2009		December 31, 2008
	(Dollars in thousands)
Commitments to extend credit:
Loans secured by mortgages	$	58,562	$	110,249
Construction and development loans		80,633		151,195
Commercial loans and lines of credit		51,772		65,362
Consumer loans		789		340
Total commitments to extend credit	$	191,756	$	327,146
Standby letters of credit	$	9,880	$	12,077

The Company’s exposure to credit loss, in the event of nonperformance by the other party, to off-balance sheet financial instruments with credit risk is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments with credit risk.

Commitments to extend credit are agreements to lend to, or provide a credit guarantee for, a customer as long as there is no violation of any condition established in the contract. Such instruments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Because many of these instruments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis, and the amount of collateral or other security obtained is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party.

Contingencies – Legal

The Company and its subsidiaries are from time to time party to various litigation matters, in most cases involving ordinary and routine claims incidental to the Company’s business. The Company accrues liabilities when it is probable future costs will be incurred and such costs can be reasonably estimated. Such accruals are based upon developments to date, the Company’s estimates of the outcome of these matters and its experience in contesting, litigating and settling other matters. Because the outcome of most litigation matters is inherently uncertain, the Company will accrue a loss for a pending litigation matter if the loss is probable and can be reasonably estimated. Based on evaluation of the Company’s litigation matters and discussions with external legal counsel, management believes that an adverse outcome on the matters noted in the Company’s Annual Report on Form 10-K, against which no accrual for loss has been made at June 30, 2009, is reasonably possible but not probable, and that the outcome with respect to one or more of these matters, if adverse, is reasonably likely to have a material adverse impact on the consolidated financial position, results of operations or cash flows of the Company.

The legal contingencies of the Company are more fully described in the Company’s Form 10-K for the year ended December 31, 2008 under Item 3. Legal Proceedings and in Note 21 to the audited financial statements. During the six months ended June 30, 2009, there were no material changes to the information previously reported except as disclosed below and in Part II, Item 1, Legal Proceedings.

United Western Bancorp, Inc. United Heritage Financial Group, Inc. and United Heritage Life Insurance Company v. First Matrix Investment Services Corporation et. al. On October 27, 2006, a complaint was filed against the Company and First Matrix, along with two former employees of First Matrix, in Idaho State District Court alleging violations of state securities laws, the Idaho Consumer Protection Act and fraud arising from the sale of an approximately $1.70 million mortgage backed bond from First Matrix to one of the plaintiffs. The case, which was subsequently removed to the U.S. District Court in Idaho on December 12, 2006, is based on the plaintiffs’ claims that First Matrix should have made certain disclosures regarding the risk of the withdrawal of a USDA government guarantee of the bond, which withdrawal subsequently occurred and the bond went into default. The Company and First Matrix may seek indemnification for the claims made against them in this case from the underwriter or from other potentially responsible parties. While the defendants’ liability, if any, to the plaintiffs in this case is uncertain at this time, the Company believes that the defendants have meritorious defenses to the plaintiffs’ claims.

United Western Bank. Ward Enterprises, LLC v. Daniel E .McCabe et. al. including United Western Bank. In February 2008, the plaintiff filed a complaint in Colorado District Court for the City and County of Denver seeking damages from the holders of an institutional account at the Bank, the Bank, and a former employee of the Bank, for breach of fiduciary duties due to the plaintiff and aiding and abetting the conversion of approximately $1.84 million of plaintiff’s funds by the holder of the institutional account maintained at the Bank. This litigation is presently stayed pending the outcome of related proceedings filed in the United States Bankruptcy Court for the Southern District of New York. While the defendants’ liability, if any, to the plaintiff in this case is uncertain at this time, the Company believes that the defendants have meritorious defenses to the plaintiff’s claims.

United Western Bank. Anita Hunter et. al. v. Citibank, N.A et. al. including United Western Bank. The Bank received this class action complaint in July of 2009 brought by seven named plaintiffs on behalf of a class of approximately 330 similarly situated people residing throughout the United States, each of whom lost substantial sums ("Exchange Funds") entrusted to seven qualified intermediaries (“QIs”) to facilitate their respective Internal Revenue Code Section 1031 Exchanges. According to the complaint, the QIs were controlled by an individual named Edward Okun and certain other individuals who would gain access to the Exchange Funds and convert the Exchange Funds to their own use for personal gain. The plaintiffs seek class certification for all similarly situated plaintiffs who lost Exchange Funds when they placed such funds using the QIs. One of the QIs maintained accounts at the Bank for the purpose of holding Exchange Funds. The plaintiffs allege that the Bank knowingly aided and abetted breaches of fiduciary duties by Mr. Okun by facilitating wire transfers of Exchange Funds from accounts at the QI at the Bank to accounts controlled by Mr. Okun and his related entities at other financial institutions. While the Bank’s liability, if any, to the plaintiffs in this case is uncertain at this time, the Company believes that the Bank has meritorious defenses to the plaintiffs’ claims.

United Western Bank. Highpoint Vista, LLC et. al. v. United Western Bank et. al. In July 2009, the plaintiffs, who are borrowers and/or guarantors on a $20.5 million loan secured by real estate, filed a complaint in the Colorado District Court for the City and County of Denver against the Bank and an officer of the Bank, seeking damages in excess of $10 million dollars against the Bank for breach of contract, breach of the covenant of good faith and fair dealing, breach of fiduciary duties and negligent misrepresentation. The plaintiffs allege that the Bank entered into an agreement with the borrowers whereby the Bank would issue a letter of credit to a third party, extend the maturity date on the real estate loan and approve the recording of a second deed of trust on the real estate securing the Bank’s loan and that the Bank failed to execute such letter of credit, extend the maturity date and approve the recording of a second deed of trust on the real estate, thereby causing damages to plaintiffs. While the Bank’s liability, if any, to the plaintiffs in this case is uncertain at this time, the Company believes that the Bank has meritorious defenses to the plaintiffs’ claims.

Contingencies – Guarantees

The Company maintains a liability related to its legacy mortgage banking operations at Matrix Financial for estimated losses on mortgage loans expected to be repurchased or on which indemnification is expected to be provided. The Company regularly evaluates the adequacy of this repurchase liability based on trends in repurchase and indemnification requests, actual loss experience, and other relevant factors including economic conditions. Total loans repurchased during the six months ended June 30, 2009 and 2008 were $99,000 and $394,000, respectively. Loans indemnified that remain outstanding at June 30, 2009 totaled $5.9 million, of which $2.1 million were guaranteed as to principal by FHA. Losses net of recoveries charged against the liability for estimated losses on repurchase and indemnification were $0 and $445,000 for the six months ended June 30, 2009 and 2008, respectively. At June 30, 2009 and December 31, 2008, the liability for estimated losses on repurchase and indemnification was $1.1 million and $1.2 million, respectively, and was included in other liabilities in the consolidated balance sheets.

In connection with the May 2006 sale of ABS School Services, LLC, the Company and Equi-Mor Holdings, Inc., a wholly owned subsidiary of the Company, guaranteed, for a five year period, the repayment of the loans sold to the purchaser up to an aggregate amount of $1.65 million, creating a recourse obligation for the Company. During the second quarter of 2009, the Company incurred no losses against its guarantee. The balance of the estimated liability at June 30, 2009 and December 31, 2008, was $445,000, and is included in other liabilities in the consolidated balance sheets.

17. Discontinued Operations – Sale of UW Trust Assets

As announced on June 29, 2009, the Company completed the sale of certain assets of UW Trust Company (formerly known as Sterling Trust Company) to Equity Trust Company and its affiliate, Sterling Administrative Services, LLC (together, the “Buyers”), for a purchase price of $61.4 million, subject to adjustment as provided for in the definitive purchase agreement governing the transaction. The assets sold were associated with the custodial IRA and qualified employee benefit plan businesses of UW Trust. Under the terms of the sale, UW Trust received 25% of the purchase price in cash, $15.3 million, and financed the remaining 75% through a purchase money note, $46.0 million. The purchase money note is secured by all the assets of the Buyers as well as an assignment of the subaccounting agreement inclusive of all contract rights and fees relating to them. The note provides for level principal payments over the seven year term and may be prepaid without penalty at any time. The rate of interest is the prime rate, currently 3.25%, with a floor and a cap of 2.25% and 4.25%, respectively. Management engaged a third party to assess the value of the purchase money note received from the sale and concluded that a discount of 4.2% was required to reflect the fair value of the note. Accordingly, the gain on sale was reduced by $1.9 million, which will be amortized into income as a yield adjustment on the note over its term.

As a result of the sale, the Company recorded an after tax gain of approximately $36.1 million for the quarter and six months ended June 30, 2009, which is included in discontinued operations for the same periods. The operating results associated with the sale of UW Trust assets have been retrospectively presented as discontinued operations beginning January 1, 2008. The operating results of UW Trust previously included in the Company’s custodial and advisory services segment, and now included in income from discontinued operations, net of income taxes are presented in the table below.

After the sale, UW Trust Company will retain and continue to operate its custodial escrow and paying agent lines of business.

	Quarter Ended				Six months Ended
	June 30, 2009		June 30, 2008		June 30, 2009		June 30, 2008
Net interest income after provision for credit losses	$	-	$	-	$	-	$	-
Noninterest income		4,904		2,331		7,410		4,617
Noninterest expense		2,432		2,222		5,256		4,368
Operating income before taxes from discontinued operations		2,472		109		2,154		249
Income tax provision		875		39		768		89
Operating income from discontinued operations		1,597		70		1,386		160
Gain on sale of certain assets and operations of UW Trust net of income tax provision of $19,852, $0, $19,852, $0, respectively		36,139		-		36,139		-
Income from discontinued operations, net of income taxes	$	37,736	$	70	$	37,525	$	160

Income from discontinued operations of UW Trust, per share - basic and diluted	$	5.26	$	0.01	$	5.23	$	0.02

Premises and equipment with a book value of $2,596,000 at December 31, 2008 was included in other assets and carried at the lower of cost or fair value. These assets were sold to the Buyers in connection with the sale of UW Trust assets.

18. Impact of Recently Issued Accounting Standards

SFAS 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51.” SFAS 160 amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as a minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 was effective for the Company on January 1, 2009 and the impact of this was not material to the Company’s financial statements.

SFAS 141R, “Business Combination (Revised 2007).” SFAS 141R replaces SFAS 141, “Business Combinations,” and applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any noncontrolling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS 141, whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141. SFAS 141R also identifies related disclosure requirements for business combinations. This Statement is effective for business combinations closing on or after January 1, 2009 and did not have a material impact on the Company.

FSP SFAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP SFAS 157-4 affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. FSP SFAS 157-4 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. FSP SFAS 157-4 also amended SFAS 157, “Fair Value Measurements,” to expand certain disclosure requirements. The Company adopted the provisions of FSP SFAS 157-4 as of April 1, 2009. The adoption of FSP SFAS 157-4 did not significantly impact the Company’s financial statements.

FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” FSP SFAS 115-2 and SFAS 124-2 (i) change existing guidance for determining whether an impairment is other-than- temporary to debt securities and (ii) replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under FSP SFAS 115-2 and SFAS 124-2, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-temporary are required to be reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. Through the period ended March 31, 2009, the Company recognized cumulative other-than-temporary impairment (“OTTI”) charges of $4.1 million for two securities. The Company adopted the FSP effective April 1, 2009 and reversed $624,000 for the non-credit portion of the cumulative OTTI charge. The adoption was recognized as a cumulative effect adjustment that increased retained earnings and decreased accumulated other comprehensive income $387,000, net of tax of $237,000, as of April 1, 2009. As a result of implementing the new standard, the amount of OTTI recognized in earnings for the second quarter of 2009 was $603,000. See Note 3 - Investment Securities to the consolidated financial statements for additional information.

FSP SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” FSP SFAS 107-1 and APB 28-1 amend SFAS 107, “Disclosures about Fair Value of Financial Instruments,” to require an entity to provide disclosures about fair value of financial instruments in interim financial information and amends Accounting Principles Board (APB) Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. Under FSP SFAS 107-1 and APB 28-1, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the consolidated balance sheet, as required by SFAS 107. The adoption of this FSP at June 30, 2009 did not have a material impact on the results of operations or financial position of the Company as it only required disclosures which are included in Note 15 to the consolidated financial statements.

FSP SFAS 141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP SFAS 141R-1 amends the guidance in SFAS 141R to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS 5, “Accounting for Contingencies,” and FASB Interpretation (FIN) No. 14, “Reasonable Estimation of the Amount of a Loss.” FSP SFAS 141R-1 removes subsequent accounting guidance for assets and liabilities arising from contingencies from SFAS 141R and requires entities to develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies. FSP SFAS 141R-1 eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, entities are required to include only the disclosures required by SFAS 5. FSP SFAS 141R-1 also requires that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value in accordance with SFAS 141R. FSP SFAS 141R-1 is effective for assets or liabilities arising from contingencies the Company acquires in business combinations occurring after January 1, 2009.

SFAS 165 “Subsequent Events.” SFAS 165 provides guidance on management’s assessment of subsequent events. SFAS 165 does not significantly change past practice because the guidance is similar to other existing authoritative literature. SFAS 165 clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued SFAS 165 requires management to disclose the date through which subsequent events have been evaluated and whether that is the date the financial statements were issued. SFAS 165 was effective for interim periods ending after June 15, 2009. The adoption of SFAS 165 did not have a significant impact on the Company’s financial statements.

SFAS 166 “Accounting for Transfers of Financial Assets, an amendment of FASB Statement 140.” SFAS 166 removes the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” to qualifying special-purpose entities. SFAS 166 clarifies the objective of paragraph 9 of SFAS 140 is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. SFAS 166 defines the term participating interest to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. Further, SFAS 166 eliminates the concept of guaranteed mortgage securitizations and enhances disclosure requirements. SFAS 166 will be effective January 1, 2010. Management has not completed its evaluation of this standard to determine if it will have a significant impact on the Company’s financial statements.

SFAS 167, “Amendments to FASB Interpretation No. 46(R),” SFAS 167 amends FIN 46 (Revised December 2003), “Consolidation of Variable Interest entities,” to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. SFAS 167 will be effective January 1, 2010, and is not expected to have a significant impact on the Company’s financial statements.

SFAS 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162.” SFAS 168 replaces SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles” and establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. SFAS 168 will be effective for the Company’s financial statements for periods ending after September 15, 2009. SFAS 168 is not expected have a significant impact on the Company’s financial statements.

This discussion and analysis of United Western Bancorp, Inc.’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. The words “us,” “we,” the “Company” or similar terms refer to United Western Bancorp, Inc. and its wholly owned subsidiaries unless we indicate otherwise. The “Bank” refers to United Western Bank.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to significant risks and uncertainties. Forward-looking statements include information concerning our future results, interest rates, loan and deposit growth, operations, development and growth of our community bank network and our business strategy. Forward-looking statements sometimes include terminology such as “may,” “will,” “expects,” “anticipates,” “predicts,” “believes,” “plans,” “estimates,” “potential,” “projects,” “goal,” “intends,” “should” or “continue” or the negative of any such terms or other variations thereon or comparable terminology. However, a statement may still be forward looking even if it does not contain one of these terms. As you consider forward-looking statements, you should understand that these statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions that could cause actual performance or results to differ materially from those in the forward-looking statements. These factors include, but are not limited to: the successful implementation of our community banking strategies and growth plans; the timing of regulatory approvals or consents for new branches or other contemplated actions; the availability of suitable and desirable locations for additional branches; the continuing strength of our existing business, which may be affected by various factors, including but not limited to interest rate fluctuations, level of delinquencies, defaults and prepayments, general economic conditions, and conditions specifically related to the financial and credit markets, competition, legal and regulatory developments, and future additional risks and uncertainties currently unknown to us. Additional information concerning these and other factors that may cause actual results to differ materially from those anticipated in forward-looking statements is contained in the “Item 1A. Risk Factors” of this Form 10-Q, in “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and in the Company’s other periodic reports and filings with the Securities and Exchange Commission. The Company cautions investors not to place undue reliance on the forward-looking statements contained in this Quarterly Report.

Any forward-looking statements made by the Company speak only as of the date on which the statements are made and are based on information known to us at that time. We do not intend to update or revise the forward-looking statements made in this Quarterly Report after the date on which they are made to reflect subsequent events or circumstances, except as required by law.

Net income for the quarter ended June 30, 2009 was $4.0 million, or $.55 per diluted share, compared with $3.3 million, or $.45 per diluted share, for the first quarter of 2009. Net income for the second quarter was impacted by several significant items including: the gain on sale of UW Trust assets of $36.1 million, net of tax, and this amount is included in the results of discontinued operations for the quarter. The loss on sale of $29.2 million, net of tax, from the sale of mortgage-backed securities owned. During the second quarter of 2009, we sold 100% of our mortgage-backed securities collateralized by option adjustable rate residential loans with an unpaid principal balance of $47.3 million. Each of the five securities was rated AA by nationally recognized rating agencies at acquisition. However, in the period from April 2008 through June 2009, the securities were progressively downgraded until they were graded significantly below investment grade. As a result of the downgrades of the securities, and because the securities were lower tranche securities in relation to other securities issued in the same security structure, the Bank was required to assign large amounts of capital for the purposes of determining the Bank’s regulatory risk-based capital ratio. Consequently the Bank elected to sell the securities, which provided regulatory capital relief to the Bank in spite of the loss incurred. Other items impacting the results for the second quarter of 2009 included a loss on the disposition of two legacy assets owned by a non-core subsidiary of $1.8 million, a $672,000 loss at the UWBK Colorado Fund, incurred on a loan related to a loan that paid off in full at the Bank, a $1.1 million special assessment from the FDIC, and higher provision for credit losses.

For the quarter ended June 30, 2009, we incurred a net loss from continuing operations of $33.7 million, or $4.70 per share. For the quarter ended June 30, 2008, the Company earned $3.0 million from continuing operations, or $.41 per diluted share. The items discussed above, as well as the continuing impact of the recession, caused the decline in operating results.

Net interest income before provision for credit losses declined by $1.5 million, or 8%, from the second quarter of 2008 to the second quarter of 2009 as a result of higher levels of liquidity that we maintained on our balance sheet. We continue to market deposits to our customer base; however, in the current environment we are cautious in our deployment of that liquidity and believe it is prudent to maintain higher than normal levels of liquidity on the balance sheet. Between the quarter ended June 30, 2009, and the quarter ended June 30, 2008, we grew average interest bearing liabilities by $252 million, while $130 million of that deposit growth is reflected as an increase in average interest-earning deposits, principally Fed Funds sold and balances due from the Federal Reserve and FHLBank, which yielded 16 basis points. As a result, net interest margin decreased 60 basis points to 3.32% for the second quarter of 2009, compared to 3.92% for the second quarter of 2008.

Total assets at June 30, 2009 were $2.42 billion, which represents an increase of $163 million from December 31, 2008. The increase in assets was the result of our successful marketing of deposits, including custodial escrow balances, which grew $147 million. Of this growth in deposits, $101 million was in community bank deposits, with the remainder in institutional and wholesale deposits growth. At June 30, 2009, cash was $289 million, a $266 million increase over December 31, 2008 when cash balances were $23 million. Total loans, before the allowance for credit losses, increased $4.6 million and this includes the $44 million note, net of discount that we received in connection with the sale of UW Trust assets. The balance sheet strategy that we implemented in 2008 included a reduction in loan growth relative to earlier periods, a reduction in land lending and a reduction in the extension of new construction commitments. Total shareholders’ equity increased by $27.7 million, to $129.7 million at June 30, 2009, compared to $101.9 million at December 31, 2008, due to net income and a $20 million increase in the accumulated other comprehensive loss as a result of the sale of the mortgage-backed securities discussed above. Our leverage ratio increased to 5.35% at June 30, 2009 compared to 4.51% at December 31, 2008, and our book value per share increased to $17.66 at June 30, 2009, from $14.06, at December 31, 2008.

Nonperforming loans increased in the first half of 2009 and total nonperforming held for investment loans reached $28.4 million at June 30, 2009. Total nonperforming assets were $42.7 million at June 30, 2009, or 1.76% of total assets, compared to $26.3 million, or 1.17%, of total assets, at December 31, 2008. At June 30, 2009, nonperforming community bank loans held for investment were $24.6 million or 2.26% of the community bank portfolio vs. $4.6 million or .45% at December 31, 2008. The increase was principally caused by the economic conditions faced by our customers. Nonperforming residential loans increased from year end, and were $12.7 million at June 30, 2009, compared to $9.7 million at December 31, 2008.

A discussion of the Company’s results of continuing operations is presented below. Certain reclassifications have been made to make prior periods comparable. The financial statement information for the quarter ended June 30, 2008, and six months ended June 30, 2008 reflect the operating results associated with the assets sold by UW Trust Company, as discontinued operations.

Recent Market Developments

The economy is experiencing a significant recession along with high unemployment. Declines in the housing market due to falling home prices and increased foreclosures and unemployment have resulted in substantial declines in mortgage-related asset values, which have had a dramatic negative impact on government-sponsored entities and major commercial and investment banks.

	For the Quarter Ended June 30,
	2009								2008
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
	(Dollars in thousands)
Assets
Interest-earning assets
Community bank loans:
Commercial real estate loans	$	373,633		$	5,523		5.93	%	$	286,604		$	4,718		6.62	%
Construction and development loans		387,275			4,760		4.93			299,432			4,351		5.84
Originated SBA loans		150,053			2,083		5.57			102,589			1,903		7.46
Multifamily loans		48,800			572		4.69			51,841			784		6.05
Commercial loans		104,343			1,502		5.77			112,025			1,742		6.25
Consumer and other loans		67,495			861		5.12			7,457			89		4.80
Total community bank loans		1,131,599			15,301		5.42			859,948			13,587		6.35

Wholesale assets:
Residential loans		314,005			3,793		4.83			381,762			4,970		5.21
Purchased SBA loans and securities		128,551			662		2.07			162,120			926		2.30
Mortgage-backed securities		472,651			6,066		5.13			583,533			7,606		5.21
Total wholesale assets		915,207			10,521		4.60			1,127,415			13,502		4.79

Interest-earning deposits		144,839			60		0.16			14,958			75		1.98
FHLBank stock		27,834			93		1.34			39,802			330		3.33
Total interest-earning assets		2,219,479		$	25,975		4.69	%		2,042,123		$	27,494		5.40	%

Non-interest earning assets
Cash		48,407								18,600
Allowance for credit losses		(23,412	)							(12,138	)
Premises and equipment		27,120								20,676
Other assets		94,982								82,835
Total non-interest bearing assets		147,097								109,973
Total assets	$	2,366,576							$	2,152,096

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts	$	357		$	-		0.24	%	$	274		$	1		0.79	%
Money market and NOW accounts		1,451,845			1,848		0.51			1,170,455			2,189		0.75
Certificates of deposit		201,332			1,622		3.23			27,305			263		3.87
FHLBank borrowings		216,674			2,366		4.32			440,110			3,663		3.29
Repurchase agreements		79,541			915		4.55			78,346			629		3.18
Borrowed money and junior subordinated debentures		70,420			844		4.74			51,458			863		6.63
Total interest-bearing liabilities		2,020,169			7,595		1.50	%		1,767,948			7,608		1.71	%

Noninterest-bearing liabilities:
Demand deposits (including custodial escrow balances)		210,149								247,729
Other liabilities		23,314								22,531
Total non-interest bearing liabilities		233,463								270,260

Shareholders' equity		112,944								113,888

Total liabilities and shareholders equity	$	2,366,576							$	2,152,096

Net interest income before provision for credit losses				$	18,380							$	19,886
Interest rate spread							3.19	%							3.69	%
Net interest margin							3.32	%							3.92	%
Ratio of average interest-earning assets to averag interest-bearing liabilities							109.87	%							115.51	%

	Quarter Ended June 30,
	2009 vs. 2008
	Increase (Decrease) Due to Change in
	Volume			Rate			Total
	(Dollars in thousands)
Interest-earning assets:
Community bank loans:
Commercial real estate loans	$	2,072		$	(1,267	)	$	805
Construction and development loans		2,046			(1,637	)		409
Originated SBA loans		1,369			(1,189	)		180
Multifamily loans		(44	)		(168	)		(212	)
Commercial loans		(113	)		(127	)		(240	)
Consumer and other loans		766			6			772
Wholesale assets:								-
Residential loans		(834	)		(343	)		(1,177	)
Purchased SBA loans and securities		(178	)		(86	)		(264	)
Mortgage-backed securities		(1,425	)		(115	)		(1,540	)
Interest-earning deposits		232			(247	)		(15	)
FHLBank stock		(79	)		(158	)		(237	)
Total interest-earning assets		3,812			(5,331	)		(1,519	)

Interest-bearing liabilities:
Money market and NOW accounts		1,059			(1,400	)		(341	)
Certificates of deposit		1,494			(135	)		1,359
FHLBank borrowings		(3,607	)		2,310			(1,297	)
Repurchase agreements		10			276			286
Borrowed money and junior subordinated debentures		538			(557	)		(19	)
Total interest-bearing liabilities		(506	)		494			(12	)
Change in net interest income before provision for credit losses	$	4,318		$	(5,825	)	$	(1,507	)

	Six Months Ended June 30,
	2009								2008
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
	(Dollars in thousands)
Assets
Interest-earning assets
Community bank loans:
Commercial real estate loans	$	381,520		$	11,138		5.89	%	$	257,957		$	8,728		6.80	%
Construction and development loans		386,639			9,390		4.90			290,208			9,137		6.33
Originated SBA loans		144,049			3,973		5.56			100,901			3,999		7.97
Multifamily loans		49,211			1,203		4.89			50,497			1,602		6.38
Commercial loans		108,905			3,048		5.64			101,641			3,386		6.70
Consumer and other loans		59,769			1,513		5.10			6,249			161		5.18
Total community bank loans		1,130,093			30,265		5.40			807,453			27,013		6.73

Wholesale assets:
Residential loans		323,305			7,869		4.87			400,833			10,613		5.30
Purchased SBA loans and securities		132,428			998		1.52			168,151			2,896		3.46
Mortgage-backed securities		485,315			12,701		5.23			591,105			15,477		5.24
Total wholesale assets		941,048			21,568		4.58			1,160,089			28,986		5.00

Interest-earning deposits		93,443			79		0.17			17,128			231		2.67
FHLBank stock		28,437			187		1.33			39,860			744		3.75
Total interest-earning assets		2,193,021		$	52,099		4.77	%		2,024,530		$	56,974		5.64	%

Non-interest earning assets
Cash		36,714								18,315
Allowance for credit losses		(21,769	)							(11,378	)
Premises and equipment		26,798								19,500
Other assets		95,404								81,956
Total non-interest bearing assets		137,147								108,393
Total assets	$	2,330,168							$	2,132,923

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Passbook accounts	$	342		$	-		0.24	%	$	254		$	1		0.82	%
Money market and NOW accounts		1,425,705			3,813		0.54			1,162,272			5,571		0.96
Certificates of deposit		176,210			2,939		3.36			29,372			592		4.05
FHLBank borrowings		220,512			4,746		4.28			416,145			7,456		3.54
Repurchase agreements		79,870			1,820		4.53			77,509			1,478		3.77
Borrowed money and junior subordinated debentures		69,436			1,725		4.94			51,450			1,780		6.84
Total interest-bearing liabilities		1,972,075			15,043		1.53	%		1,737,002			16,878		1.93	%

Noninterest-bearing liabilities:
Demand deposits (including custodial escrow balances)		226,889								259,470
Other liabilities		22,459								21,525
Total non-interest bearing liabilities		249,348								280,995

Shareholders' equity		108,745								114,926

Total liabilities and shareholders equity	$	2,330,168							$	2,132,923

Net interest income before provision for credit losses				$	37,056							$	40,096
Interest rate spread							3.24	%							3.71	%
Net interest margin							3.40	%							3.99	%
Ratio of average interest-earning assets to average interest-bearing liabilities							111.20	%							116.55	%

	Six Months Ended June 30,
	2009 vs. 2008
	Increase (Decrease) Due to Change in
	Volume			Rate			Total
	(Dollars in thousands)
Interest-earning assets:
Community bank loans:
Commercial real estate loans	$	3,719		$	(1,309	)	$	2,410
Construction and development loans		2,621			(2,368	)		253
Originated SBA loans		1,409			(1,435	)		(26	)
Multifamily loans		(40	)		(359	)		(399	)
Commercial loans		230			(568	)		(338	)
Consumer and other loans		1,354			(2	)		1,352
Wholesale assets:								-
Residential loans		(1,933	)		(811	)		(2,744	)
Purchased SBA loans and securities		(522	)		(1,376	)		(1,898	)
Mortgage-backed securities		(2,746	)		(30	)		(2,776	)
Interest-earning deposits		228			(380	)		(152	)
FHLBank stock		(171	)		(386	)		(557	)
Total interest-earning assets		4,149			(9,024	)		(4,875	)

Interest-bearing liabilities:
Money market and NOW accounts		1,066			(2,824	)		(1,758	)
Certificates of deposit		2,465			(118	)		2,347
FHLBank borrowings		(4,008	)		1,298			(2,710	)
Repurchase agreements		45			297			342
Borrowed money and junior subordinated debentures		514			(569	)		(55	)
Total interest-bearing liabilities		82			(1,916	)		(1,834	)
Change in net interest income before provision for credit losses	$	4,067		$	(7,108	)	$	(3,041	)

	June 30, 2009		December 31, 2008
	(Dollars in thousands)
Construction type breakdown:
Construction - 1-4 family	$	102,892	$	89,434
Construction - commercial		128,250		100,402
Construction - multifamily		57,583		63,693
Construction - 1-4 (consumer)		18,007		24,085
Total construction		306,732		277,614

Land type breakdown:
Land development		89,295		100,823
Undeveloped land		11,338		21,480
Undeveloped land (consumer)		1,043		1,092
Total development		101,676		123,395
Total construction and development	$	408,408	$	401,009

			To serve until
			the Annual Meeting
Name of Nominee	Total Votes For	Total Votes Withheld	of Shareholders
Bernard C. Darré	4,598,569	1,758,173	2012
Lester Ravitz	4,597,048	1,759,684	2012
Robert T. Slezak	4,596,639	1,760,093	2012

	Director's
Name	Term Expires
Scot T. Wetzel	2010
William D. Snider	2010
Jeffrey R. Leeds	2010
Guy A. Gibson	2011
James H. Bullock	2011
Michael J. McCloskey	2011

Total Votes For	6,348,096
Total Votes Against	568
Total Abstentions	8,068

31.1		Rule 13a-14(a) or Rule 15d-14(a)/15d-14(a) Certification of Scot T. Wetzel
31.2		Rule 13a-14(a) or Rule 15d-14(a)/15d-14(a) Certification of William D. Snider
31.3		Rule 13a-14(a) or Rule 15d-14(a)/15d-14(a) Certification of Benjamin C. Hirsh
32.1		Section 1350 Certification of Scot T. Wetzel
32.2		Section 1350 Certification of William D. Snider
32.3		Section 1350 Certification of Benjamin C. Hirsh

Dated:	August 7, 2009	/s/ Scot T. Wetzel
		Scot T. Wetzel
		President and
		Chief Executive Officer
		(Principal Executive Officer)

Dated:	August 7, 2009	/s/ William D. Snider
		William D. Snider
		Chief Financial Officer
		(Principal Financial Officer)

Dated:	August 7, 2009	/s/ Benjamin C. Hirsh
		Benjamin C. Hirsh
		Chief Accounting Officer
		(Principal Accounting Officer)

Exhibit Number		Description

31.1		Rule 13a-14(a) or Rule 15d-14(a)/15d-14(a) Certification of Scot T. Wetzel

31.2		Rule 13a-14(a) or Rule 15d-14(a)/15d-14(a) Certification of William D. Snider

31.3		Rule 13a-14(a) or Rule 15d-14(a)/15d-14(a) Certification of Benjamin C. Hirsh

32.1		Section 1350 Certification of Scot T. Wetzel

32.2		Section 1350 Certification of William D. Snider.

32.3		Section 1350 Certification of Benjamin C. Hirsh