UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of each exchange on which Registered
Common Stock, par value $.0001 per share		The NASDAQ Global Stock Market
Preferred Share Purchase Rights

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 þ No o

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 (§232.405 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 o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of common stock held by non-affiliates of the registrant, based on the closing sales price of such stock on the NASDAQ Stock Market on June 30, 2009, the close of the registrant’s most recently completed second quarter, was $69,380,000. For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such executive officers, directors and 10% beneficial owners are affiliates. As of March 11, 2010, 29,358,580 shares of the registrant’s common stock were outstanding.

Portions of the Company’s definitive proxy statement for the Annual Meeting of Shareholders to be held May 13, 2010 are incorporated by reference into Part III of this Form 10-K.

 

 

TABLE OF CONTENTS

		Page
PART I
Item 1. Business			2
Item 1A. Risk Factors			20
Item 1B. Unresolved Staff Comments			34
Item 2. Properties			34
Item 3. Legal Proceedings			34
Item 4. Removed and Reserved
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			37
Item 6. Selected Financial Data			40
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			43
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			80
Item 8. Financial Statements and Supplementary Data			81
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			81
Item 9A. Controls and Procedures			81
Item 9B. Other Information			82
PART III
Item 10. Directors, Executive Officers and Corporate Governance			82
Item 11. Executive Compensation			82
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			82
Item 13. Certain Relationships and Related Transactions, and Director Independence			82
Item 14. Principal Accountant Fees and Services			82
PART IV
Item 15. Exhibits and Financial Statement Schedules			82
Exhibit 21
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 32.1
Exhibit 32.2
Exhibit 32.3

PART I

Item 1.		Business

The disclosures set forth in this item are qualified by Item 1A. “Risk Factors” and Item 7. “Management’s Discussion and Analysis — Forward Looking Statements” and other cautionary statements set forth elsewhere in this report.

United Western Bancorp, Inc.

General. United Western Bancorp, Inc., headquartered in Denver, Colorado, is a unitary thrift holding company. The words “United Western Bancorp,” “us,” “we,” or the “Company” refer to United Western Bancorp, Inc. and its wholly owned subsidiaries, unless we indicate otherwise. Through our principal subsidiary, United Western Bank^®, (“United Western Bank” or 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, as well as certain mountain communities. As of December 31, 2009, we had eight full service banking locations in the Colorado Front Range marketplace (downtown Denver, Cherry Creek, Hampden, Centennial, Boulder, Loveland, Fort Collins and Longmont), and a loan production office servicing the Aspen and Roaring Fork Valley market areas. We plan to continue to grow the United Western Bank network in a more cost effective manner, including potentially through branch acquisitions. In addition to the community-based banking operations of United Western Bank, we also offer cost effective deposits and deposit services on a national basis to a variety of customers, including those involved in the processing services industries (e.g., securities settlement, mortgage banking, custodial), as well as escrow and paying agent and trust account management services through our wholly owned subsidiary, UW Trust Company.

United Western Bancorp, Inc. was incorporated in Colorado in June 1993. Until September 9, 2006, we were known as “Matrix Bancorp, Inc.” The trading symbol for our common stock on the NASDAQ Global Market is “UWBK.”

Community Bank Business Strategy

We have completed the fourth year of our community bank business strategy. This strategy has included the development of a branch network within the Colorado Front Range and selected mountain community markets and building a balance sheet that includes community bank loan and deposit products. We are developing a service-focused business that serves the community in which our management team and employees work and live. As we view the landscape of today’s deposit marketplace we believe the competition for community banking deposits, both retail and business, will be substantial and will continue to increase as the dominant national banks increase their branch presence further, and as retail and business customers migrate away from bank branches to other platforms. In this regard, we have continued to capitalize on our longstanding core deposit base through the development of processing and trust deposit relationships (which includes securities clearing and settlement, custodial, trust and escrow) that provide a stable, long-lived and inexpensive alternative to the traditional branch banking concept. We anticipate that our management will evaluate various additional sources to this deposit gathering strategy, and in the future, we may consider acquiring deposits from processing businesses that have significant deposit generating capacity that is incidental to their primary purpose.

In addition, we believe that opportunities in the community bank sector for increased growth of quality assets may become more restricted due to the protracted nature of the current United States economic downturn. As a consequence, we are considering additional growth in our Small Business Administration (“SBA”) Division loan origination business. The SBA Division is a participant in the national preferred lenders program (“PLP”) of the United States Small Business Administration. With national PLP status, the Bank is able to participate in the PLP nationwide, which encompasses 68 districts spanning all 50 states. We anticipate targeted growth of quality commercial and industrial loans given our outlook for the state economy and our current market share. Additionally, we may consider adding to our origination, holding and servicing of single family residential loans.

Our objective is to increase franchise value by: (i) expanding our community banking and lending activities through the recruitment of experienced community bankers who are knowledgeable about and well-known in the Colorado Front Range and mountain community markets; (ii) developing a branch network within such markets; (iii) building a balance sheet consisting of originated loan products; (iv) leveraging our management experience in developing and managing processing businesses’ deposits and (v) maintaining a strong credit oversight with respect to our lending products.

We believe the banking industry will significantly consolidate in the United States and in Colorado in the future. While we have capitalized on an organic growth plan to date since starting our community banking business plan, we may consider the strategic acquisition of like-minded banking organizations, or acquisitions of community bank deposits, in our targeted markets as part of our business plan going forward.

Regulatory Issues

Effective December 10, 2009, the Company and the Bank, each entered into separate informal Memorandums of Understanding (“Informal Agreements”) with the Office of Thrift Supervision (the “OTS”). The Informal Agreement between the Bank and the OTS provides, among other things, that the Bank’s Board of Directors will (i) adopt a written Capital Plan for the Bank for the OTS Regional Director’s review and comment, and such plan shall address how the Bank will achieve and maintain by June 30, 2010 a Tier 1 core capital ratio of 8% and a total risk-based capital ratio of 12% (as of December 31, 2009, the Bank’s Tier 1 core capital and total risk-based capital ratios were 7.7% and 10.1%, respectively); and; (ii) approve a written Liquidity Contingency Plan to ensure the Bank maintains adequate short-term and long-term liquidity, with such plan to specifically address deposit concentrations and plans to reduce or manage such concentrations. The Informal Agreement also requires the Bank to reduce certain concentrations in construction and land lending and non-agency mortgage backed securities. In addition, the Informal Agreement places restrictions on the level of brokered deposits maintained by the Bank including deposits obtained by our regional banking teams from our community banking customer base offered through the Promontory Interfinancial Network, LLC, known as Certificate of Deposit Account Registry Service^® (“CDARS”). See additional discussion at Item 1. “Business — Regulation and Supervision — Regulatory Informal Agreement — Memorandum of Understanding.”

The OTS and the FDIC conducted a joint field visit at the Company and the Bank, which commenced January 10, 2010. Subsequently, the OTS has provided additional supervisory limitations on the Bank. These limitations include: (i) the Bank may not increase its total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities without prior written notice of non-objection from the OTS; and (ii) the OTS has directed the Bank not to rollover or renew exiting brokered deposits, or accept new brokered deposits without the prior written non-objection from the OTS.

As a result of the Informal Agreements and the additional supervisory limitations, the Company is looking to further increase its capital position by focusing on expense reductions, optimizing the balance sheet for both loans and deposits and risk weighting of assts, as well as evaluating opportunities for margin improvement and improving the overall earnings power of the Company. This may not be sufficient to meet the requirements of the Informal Agreements, so the Company is also looking at various strategic alternatives for the Company to accelerate its compliance with terms of the Informal Agreement.

While management believes that they are instituting the appropriate plans to meet the requirements of the Informal Agreements, as well as the additional supervisory limitations, there is no certainty that the Company can successfully execute on all of the above and meet the capital requirements of the OTS by June 30, 2010. If the Company is unable to comply with the Informal Agreements or additional supervisory limitations the OTS could take additional actions, including issuing an enforcement action.

As we move forward, we may augment our community banking business plan strategy with various alternatives designed to enhance our overall liquidity position and to achieve profitability. These plans may include, but are not limited to, the acquisition or development of processing and other businesses that provide direct or indirect access to consumer and business deposits. We believe this strategy will compliment our deposit growth strategy inherent in our branch network. We are also evaluating alternatives related to single family mortgage loan origination that may assist the Bank in maintaining its asset levels under the qualified thrift lender test (See Item 1. “Business — Regulation and Supervision” as well as provide additional community banking opportunities for the Company. We expect to continue to explore these and other alternatives on a regular basis, although there is no certainty that any proposed business augmentation will be executed and we cannot determine with any degree of certainty if and when we might engage in any acquisition or development of any processing or other business or expanded asset class. Given the current conditions surrounding our informal agreement with the OTS, we expect that any and all such plans and initiatives will require the non-objection or concurrence of the OTS and, perhaps, the FDIC, which has retained regulatory powers over our Bank.

The Subsidiaries

Our core business operations are conducted through operating subsidiaries as described below.

United Western Bank^®. United Western Bank, wholly-owned by the Company, is a federal savings bank that originates commercial real estate, multifamily, single tenant, commercial and industrial, residential and commercial construction and development, and consumer loans. Within certain of these loan types, the Bank also originates Small Business Administration loans under section 7(a) of the Small Business Act (“7(a) loans”) and section 504 of the Small Business Investment Act (“504 loans”) and loans through the utilization of New Markets Tax Credits. United Western Bank also offers personal and business depository banking, as well as treasury services.

At December 31, 2009, the Bank had total assets of $2.5 billion, deposits including custodial escrow balances of $2.0 billion, loans of $1.4 billion, and capital of $188.4 million. The Bank’s deposit base includes $464.9 million of community bank deposits. Additionally, the Bank’s deposit base includes interest-bearing negotiable order of Withdrawal (“NOW”) and money market accounts administered by UW Trust Company, the deposits resulting from transactions in which the Bank acts as the clearing bank for clients of a former joint venture partner, Matrix Financial Solutions, Inc., and noninterest-bearing custodial escrow deposits related to the residential mortgage loan portfolio serviced by Matrix Financial Services Corporation. These additional deposits, as well as other processing and trust deposits, comprise $1.3 billion of the total deposits at the Bank. We anticipate our mix of deposits will change over the course of 2010 as we comply with regulatory requirements. See additional discussion at Item 1. “Business — Regulation and Supervision — Regulatory Informal Agreement — Memorandum of Understanding” and Item 1A. “Risk Factors — Regulatory Risk.”

UW Trust Company and Discontinued Operations. UW Trust Company (“UW Trust”), formerly known as Sterling Trust Company, wholly-owned by the Company and headquartered in Waco, Texas, is a Texas non-bank trust company. On June 27, 2009, UW Trust consummated the sale of certain of its assets. These assets were associated with UW Trust’s self-directed individual retirement account and qualified employee benefit plan administration business. In addition to the assumption of certain UW Trust liabilities, the purchase price for these assets was $61.4 million, of which UW Trust received approximately $15.3 million in cash from the buyers at the closing of the transaction. The remaining portion of the purchase price was financed pursuant to a loan agreement. In connection with the sale, we recorded a pretax gain on the sale of $56.0 million, or approximately $36.1 million net of tax. The operating results of UW Trust Company, which are included in the Company’s custodial and advisory services segment, and which was attributed to the custodial IRA and qualified employee benefit plan businesses sold by UW Trust are presented as discontinued operations. UW Trust has retained and will continue to operate its custodial escrow, paying agent and trust administration lines of business, which management deems a core operation, and thus, UW Trust will continue to be included in segment reporting.

Matrix Financial Services Corporation. Since 2004, Matrix Financial Services Corporation (“Matrix Financial Services”), a wholly-owned subsidiary of the Bank, services, through a third party subservicer, acquired mortgage servicing rights on a nationwide basis through purchases in the secondary market and retention of originated mortgage servicing rights. As of December 31, 2009, Matrix Financial Services was responsible for servicing approximately 13,000 borrower accounts representing $766 million in principal balances. As a servicer of mortgage loans, Matrix Financial Services generally is required to establish custodial escrow accounts for the deposit of borrowers’ payments. These custodial accounts are maintained at the Bank. At December 31, 2009, the custodial escrow account balances related to our servicing portfolio maintained at the Bank were $11.8 million.

UW Investment Services, Inc. UW Investment Services, Inc. (“UWIS”), formerly known as First Matrix Services Corp., a wholly-owned subsidiary of the Company, is registered with the Financial Industry Regulatory Authority (“FINRA”) as a fully disclosed broker-dealer, with its headquarters in Denver, Colorado. Previously, UWIS brokered the sale of fixed income securities to processing and trust clients and focused on the acquisition, brokering, securitization and sale of SBA loans and loan pools and interest only strips associated with the SBA loans and loan pools. SBA loans were acquired by United Western Bank through the brokerage activities of UWIS. UWIS exited the business of brokering fixed income securities after its entire Memphis, Tennessee staff was hired by another firm entering the SBA pooling and securitization business in 2006. In the future, UWIS will provide services that complement our overall community banking business plan, which services may include securities brokerage services, retirement account management and other services.

Other Subsidiaries. The Company has formed certain single purpose subsidiaries that have issued trust preferred securities, which are discussed in Note 11 to the consolidated financial statements. The Company also has subsidiaries that are involved in the New Markets Tax Credits program as discussed below in “Community Bank Lending - New Markets Tax Credits Lending.” The Company also has various other subsidiaries that are not significant to the consolidated entity at this time.

Please see Note 21 to the consolidated financial statements for further financial information about our operating segments.

Lending Activities

General. United Western Bank’s lending activities are principally comprised of originated community bank loans in the Rocky Mountain region, national lending in conjunction with our Preferred Lender Program (“PLP”) status with the SBA and the administration of previously purchased loans. Community bank loans principally consist of commercial real estate, residential and commercial construction and development (“C&D”), commercial and industrial (“C&I”) and consumer loans. Commercial real estate loans are also originated by the Bank’s SBA division, which originates conventional 504 loans and 7(a) loans. In addition, the Bank has three operating subsidiaries, Community Development Funding I, LLC (“CDF I”), Charter Facilities Funding IV, LLC, (“CFF IV”) and Charter Facilities Funding 5, LLC (“CFF 5”). CDF I and CFF IV have originated loans under the New Markets Tax Credits program discussed below in “Community Bank Lending — New Markets Tax Credits Lending.” We intend to originate additional loans in 2010 within CFF 5 under the New Markets Tax Credits program. Purchased loans consist primarily of single-family residential loans, which the Company has not purchased since September 2005, and purchased guaranteed portions of SBA 7(a) loans, which it has not purchased since March 2006.

The majority of the loans and loan balances the Bank originates are variable rate and generally fluctuate with the prime rate as published in the Wall Street Journal or with LIBOR. In the current declining interest rate environment, the Bank also endeavors to price loans with a floor rate with the objective of enhancing our net interest income and margin. The Bank does make some fixed rate loans, on a selective basis, but also endeavors to structure the fixed pricing on these facilities not to exceed five to seven years. Variations from this fixed price alternative usually are related to the government guaranteed SBA loan products and New Markets Tax Credits lending. The pricing of the Bank’s loan products is impacted by the competitive environment in which the Bank operates and as such it is the objective of United Western Bank to price all loan obligations in conjunction with cross selling opportunities and relationship deposits.

The Bank manages the risks of its community bank lending in a number of ways. First, loan approvals are subject to approval guidelines and the dollar amount is stepped by size to Executive and Director Loan Committees and ultimately to the full board of directors of the Bank. Business development and underwriting are separate business functions and loan policies set exposure and concentration limits by borrower, loan and product type, in addition to geographic location of aggregate collateral and portfolio concentrations. The Bank’s loan policies and portfolio monitoring guidelines give specific direction on the underwriting of all loan types, portfolio concentrations and regulatory requirements. See additional discussion of risk management related to lending activities at Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Loan Portfolio,” “Asset Quality” and “Allowance for Credit Losses” in this report.

Community Bank Lending

Commercial Real Estate Lending. United Western Bank originates commercial real estate loans (“CRE”) that are generally secured by one or more of the following kinds of properties: multifamily residential property, owner and non-owner occupied commercial, retail and industrial income property, and single tenant property. The owner occupied component of these loans also includes SBA 504 loans and 7(a) loans. The Bank’s CRE loans are generally made at variable rates that change daily or quarterly based on changes in the prime rate or LIBOR, although some are made at fixed rates. Terms of up to 25 years are offered primarily on SBA loans, but most loans are structured with a balloon payment at the end of approximately five years or amortized over a period of up to ten years. In deciding whether to make a commercial real estate loan, the Bank considers, among other things, the experience and qualifications of the borrower as well as the value and anticipated cash flow of the underlying property due from its tenant mix. Among the additional underwriting factors considered are net operating income of the property before debt service and depreciation, the debt service coverage ratio (the ratio of the property’s free cash flow to debt service requirements), the ratio of the loan amount to the appraised value and cost, and the recourse to the overall creditworthiness of the prospective borrower and guarantor. The Bank’s commercial real estate loans typically range in size from $100,000 to $15 million, with an average balance of $919,000. The Bank’s legal lending limit is approximately $28 million. Loans greater than $15 million, are not often granted and require full Bank board of director approval. See additional discussion at Item 1. “Business — Regulation and Supervision — Regulatory Informal Agreement — Memorandum of Understanding.”

Commercial real estate lending typically involves higher principal amounts than the other types of loans we make. Moreover, the repayment of the loans generally is dependent, in large part, from the cash flow generated from the successful operations of the property collateralizing the loan or the business conducted on the owner occupied property collateralizing the obligation. Secondary sources of repayment are usually the sale or refinance of the subject property with credit enhancement also required in the form of personal guarantees from the majority owners of the subject collateral. As a result, these loans may be more susceptible and adversely affected by conditions in the real estate markets or in the economy in general. For example, if the cash flow from a borrower’s project is reduced due to leases not being obtained or renewed, the borrower’s ability to repay the loan may be impaired. In addition, because many commercial real estate loans have balloon payments due at maturity instead of being fully amortized over the term of a loan, a borrower’s ability to repay may depend on being able either to refinance the loan or sell the underlying property. We monitor the level of commercial real estate loans in the Bank’s loan portfolio individually and in the aggregate. Our internal guideline is to maintain CRE loans at 250% or less of the Bank’s Tier 1 capital plus the allowance for credit losses. At December 31, 2009, CRE loans represented 224% of the Bank’s Tier 1 capital plus the allowance for credit losses.

Residential and Commercial Construction and Development Lending. United Western Bank provides construction and development loans (“C&D”) for the development of land and vertical construction of one-to-four family, multifamily and condominium residences. Loans are also provided for the development of land and vertical construction for retail, office, and other commercial purposes. Underwriting guidelines for C&D facilities generally require presale or preleasing requirements in addition to personal guarantees of the project’s owners or development partners. Land development and construction loans share many of the same risks as discussed above with commercial real estate loans with respect to sale or refinance repayment alternatives. In addition, C&D lending also involves construction related risks because funds are advanced incrementally based on a preapproved construction budget or a percent complete calculation. The loan is secured by the “to be completed” project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation of real property, it can be difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value and loan-to-cost ratios. If the appraisal of the value of the completed project proves to be overstated, the Bank may have inadequate security for the repayment of the loan upon completion of construction of the project and may require collateral re-margin requirement to protect against a potential loss. Accordingly, the Bank generally requires a personal guaranty on all residential and commercial construction and development lending. We monitor the level of C&D loans in the portfolio individually and in the aggregate. Our internal guideline is to maintain C&D loans at 150% or less of the Bank’s Tier 1 capital plus the allowance for credit losses. At December 31, 2009, C&D loans represented 102% of the Bank’s Tier 1 capital plus the allowance for credit losses. See additional discussion at Item 1. “Business — Regulation and Supervision — Regulatory Informal Agreement — Memorandum of Understanding.”

Commercial and Industrial Lending. United Western Bank makes commercial and industrial loans (“C&I”) to small and middle market businesses. C&I borrowers tend to be privately owned operating companies and are generally service providers, distributors, and manufacturers. The loan products offered are primarily working capital and term loans (secured with real estate facilities and equipment) and lines of credit that help customers finance trading assets including accounts receivable and inventory. These loans are typically guaranteed by the owners of the business and subject to underwriting guidelines that include borrowing base parameters and compliance with financial covenants. The collateral securing C&I loans may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business and the volatility of the underlying cash flow. In addition, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent upon the ability of the borrower to collect the amounts due from its customers. Accordingly, the Bank makes commercial loans primarily based on the identified cash flow and capital adequacy of the borrower and secondarily on the underlying collateral provided by the borrower. Commercial loans are made at variable rates that fluctuate with the prime rate. In the future, the Bank anticipates making C&I loans to small to mid sized energy companies, including coal, oil, gas, and “green” oriented businesses like solar and wind power.

Small Business Administration Lending. The Bank’s SBA division is a participant in the national preferred lenders program (“PLP”) of the United States Small Business Administration. With national PLP status, the Bank is able to participate in the PLP nation wide, which encompasses 68 districts spanning all 50 states. The Bank originates SBA 504 loans and 7(a) loans. Under the SBA 504 program, the Bank provides, in conjunction with a Certified Development Company (“CDC”), a conventional loan collateralized by a first lien on commercial real estate or equipment. The SBA 504 program provides for an SBA guarantee of debentures issued for up to a maximum of 40% of the eligible project costs and is subordinated to the primary mortgage originated by the Bank. Pursuant to the American Recovery and Reinvestment Act of 2009 (“ARRA”), which became effective February 17, 2009, additional funding of $730 million, was provided for SBA-backed loans. Of this additional funding, $375 million was directed to temporarily eliminating fees on SBA-backed loans and raising SBA’s guarantee percentage on SBA’s 7(a) Program loans originated after the effective date to 90% with a maximum guarantee of $1.5 million. This funding was exhausted on February 19, 2010, and thus the SBA guarantee on loans approved after February 19, 2010, under the 7(a) Program for loans of this size reverts to 75%. Management believes that additional funding is likely and that the program will be extended through the end of the government’s fiscal year ending in 2010; however, this is subject to approvals by Congress and the President. Generally, this guarantee may become invalid only if the loan does not meet the SBA underwriting, documentation, and servicing guidelines. SBA 7(a) loans, collateralized by real estate, have terms of up to 25 years, while loans collateralized by equipment and working capital have terms of up to ten years and seven years, respectively. A minimum down payment of 10% is required on most 504 loans, but a larger down payment may be required when financing a start up business and the real estate collateral consists of a special purpose or single use property, such as a motel or service station.

New Markets Tax Credits Lending. New Markets Tax Credits (“NMTC”) are awarded under a program administered by the Community Development Financial Institutions Fund, a division of the United States Department of Treasury. The NMTC program permits taxpayers/investors to claim a credit against federal income taxes for each qualified equity investment (“QEI”) made to a designated community development entity. The investor receives a 39% tax credit over a seven year period, in the amount of 5% in years one through three, and 6% in years four through seven. In 2004, the Bank acquired $4.9 million tax credits through a $12.6 million qualifying equity investment it made to its 99.99% owned subsidiary, Community Development Funding I, LLC (“CDF I”). CDF I used the investment proceeds to originate loans eligible under the NMTC program through the Bank. In 2005, the Bank invested $11.0 million in Charter Facilities Funding IV, LLC, another 99.99% owned subsidiary of the Bank (“CFF IV”) and received tax credits of $4.3 million. CFF IV used the investment proceeds to originate loans eligible under the NMTC program through the Bank. In 2006, the Bank made an additional investment of $10 million to CFF IV, making the Bank eligible for an additional $3.9 million of tax credits. The additional investment proceeds are being used by CFF IV to make eligible NMTC loans through the Bank. In May 2009, a wholly owned subsidiary of the Company was awarded an allocation of $20 million of New Markets Tax Credits authorized by the U.S. Treasury through its Community Development Financial Institutions Fund. These tax credits were acquired by the Bank, and the Bank invested $20 million in its newly created 99.99% owned subsidiary, Charter Facilities Funding 5, LLC, (“CFF 5.”) Tax credits of $7.8 million are expected to be realized over the seven year period ending in 2015.

At December 31, 2009, the Bank has $30.6 million of NMTC loans outstanding. NMTC loans are generally commercial real estate loans in designated community development areas (low-income areas or economic enterprise zones) made in accordance with the Bank’s and community development entities’ lending policies and in accordance with the rules of the NMTC program. Generally these loans are fixed rate and there is a concession in the rate as compared to the remainder of the Bank’s community bank loan portfolio. The loans also have longer terms, often 25 to 27 years, with an initial seven years of interest only payments followed by amortization to maturity. These loans are included with commercial real estate loans in our tables and financial statements and the underlying collateral is commercial property.

Consumer Lending. The Bank’s consumer lending portfolio is primarily focused on individual wealth management and private bank investment and lending products as opposed to blanket underwriting and funding objectives to compete with the mass retail marketplace. The Bank offers home equity lines of credit and to a limited extent, home equity term loans, auto, and unsecured consumer loans. Home equity lines of credit may be extended up to 90% of the appraised value of the property, less existing liens, generally at variable interest rates based on prime, the Federal Reserve Board Target Rate for overnight borrowings, or LIBOR. In addition, most consumer loans are structured with floor pricing and incorporate underwriting guidelines that include minimum credit score requirements and aggregate liquidity and debt service guidelines. The Bank uses the same underwriting standards for home equity lines of credit as it uses for residential real estate loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to residential real estate loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus, are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans.

Other Lending

Single-family Residence Lending. At December 31, 2009, United Western Bank owns approximately $278.6 million of single-family residential whole loans. While the overwhelming majority of these loans were purchased by the Bank in the secondary market, a portion were originated by Matrix Financial Services prior to February 2003, and approximately five percent of these loans represent loans purchased from Matrix Financial Services’ servicing portfolio.

Prior to our change in business strategy, the Bank regularly reviewed residential loan portfolios for prospective acquisition; however, the Bank has not purchased any such loan portfolios since September 2005. These portfolios were typically first lien priority loans secured primarily by 1-to-4 family residential properties. Most were adjustable rate loans. The Bank would purchase packages of residential loans from various sellers who had either originated the loans or acquired the loans from others in bulk purchases. The Bank would consider several factors prior to a purchase, including the product type, the current loan balance, the current interest rate environment, the seasoning of the mortgage loans, payment histories, geographic location of the underlying collateral, price, yield, the current liquidity of the Bank and the product mix in its existing residential loan portfolio. In addition, the various sellers were evaluated for their ability to perform under the representations and warranties that would be provided to the Bank at the time of purchase.

The Bank performed due diligence on each residential loan portfolio that it desired to purchase. These underwriting procedures consisted of analyzing all or, in some instances, a representative sample of the loans in the portfolio and were typically performed by Bank employees, but occasionally were outsourced to third party contractors. The underwriter took into account many factors and statistics in analyzing the loans in the subject portfolio, including: the general economic conditions in the geographic area or areas in which the underlying residential properties were located; the credit score of the borrower; the loan-to-value ratios and quality of the valuations on the underlying loan collateral; and the payment histories of the borrowers, as well as their income and debt to income levels. In addition, the underwriter attempted to verify that each sample loan conformed to the standards for loan documentation set by the secondary market for investment grade mortgages. In cases where a significant portion of the sample loans contained nonconforming documentation, the Bank assessed the additional risk involved in purchasing those loans. This process helped the Bank determine whether the mortgage loan portfolio met its investment criteria and, if it did, the range of pricing that was appropriate.

Purchased SBA Guaranteed Loans. At December 31, 2009, United Western Bank owns approximately $71 million of guaranteed portions of SBA 7(a) loans that it acquired in the secondary market. These loans are adjustable rate and generally reset quarterly with changes in the prime rate. The Bank purchased these guaranteed portions of SBA loans from various sellers, typically the originator of the loan who retained the unguaranteed portion and continues to service the loan.

Other Activities Related to Lending

Sales of Loans. In the normal course of business, the Bank sells certain of the SBA loans it originates in the secondary market. The Bank has sold residential loans outright and has sold securities backed by residential loans after securitization with a governmental sponsored agency. During 2009, the Bank sold approximately $33.0 million of originated SBA loans. The Bank may sell SBA loans from time to time to manage industry exposures, interest rate risk and for current income. The sale of loans may generate a gain or loss for the Bank. Gains or losses result primarily from two factors. First, the Bank may make a loan to a borrower at an interest rate that is higher or lower than the prevailing or the expected rate in the market resulting in a price difference when the loan is sold in the secondary market. These price differences occur primarily as a result of competitive pricing conditions in the market place. Second, gains or losses may result from changes in interest rates that consequently change the market value of loans originated for sale.

Deposits

Deposits. The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank’s core deposits consist of retail, business, processing and trust checking accounts, NOW accounts, money market accounts, savings accounts and certificates of deposit. These deposits, along with short-term and long-term borrowings, and to a lesser extent brokered deposits, are used to support our asset base. Community bank deposits are obtained predominantly from the geographic trade areas surrounding our community banking office locations. Processing and trust deposits are obtained nationally. Processing and trust deposits comprise approximately 77% and 89% of total deposits at December 31, 2009 and 2008, respectively. Given the fact that, historically, the Bank’s processing and trust deposit base has been less expensive than community bank deposits, the Bank will continue to utilize its expertise to expand upon and to continue to diversify our processing and trust deposit base, while also increasing its traditional community bank deposit base over time, With the maturation of the Bank’s branch distribution system and operations now being conducted out of eight open locations, the Bank will continue to use its critical mass and growing reputation as a Colorado banking leader to launch future deposit campaigns. See additional discussion in Note 8 of the financial statements included in this report, Item 1A. “Risk Factors,” and Item 7. “Management’s Discussion and Analysis — Liquidity — Bank Liquidity” and Item 7. “Management’s Discussion and Analysis of Financial Condition — Deposits” for further discussion.

Total deposits, including custodial escrow balances, increased $271.0 million between December 31, 2009 and December 31, 2008. This increase was caused by growth of $272.9 million of community bank deposits from our eight open banking offices. This growth includes $214.9 million obtained through the certificate accounts offered through the CDARS program. The CDARS program provides full Federal Deposit Insurance Corporation (“FDIC”) coverage on deposit balances greater than posted FDIC limits by exchanging larger depository relationships with other CDARS members. Depositors’ funds are broken into amounts below FDIC insurance limits and placed with other banks that are members of the CDARS network. Each member bank issues certificate accounts in denominations below the FDIC insured limit, resulting in full FDIC insurance for the entire deposit. CDARS accounts are considered by regulation to be brokered deposits. The OTS has directed the Bank not to rollover or renew existing brokered deposits, or accept new brokered deposits without prior written non-objection of the OTS. Accordingly, prospectively the existing CDARS deposits, which totaled $246.5 million at December 31, 2009, will at maturity be transferred to other accounts at the Bank or withdrawn. CDARS deposits mature through December 22, 2011. See additional discussion at Item 1. “Business — Regulation and Supervision — Regulatory Informal Agreement — Memorandum of Understanding.”

Community bank deposits represent deposits attracted by our regional banking teams. In addition to the methods described above, the Bank has a wide variety of deposit products designed to attract business clients. Our Treasury Advisory Services team offers business clients remote deposit capture, lockbox, sweep products, and ACH and wire services. The Bank is also participating in the FDIC’s Temporary Liquidity Guarantee Program (“TLGP”). The FDIC has created TLGP to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount through June 30, 2010.

Custodial Escrow, Paying Agent and Trust Administration Services

Self-Directed Trust and Custody Services. The Company’s custodial escrow, paying agent and trust administration lines of business are provided through UW Trust. These services are marketed on a nationwide basis to intermediaries such as law firms, tax professionals, broker-dealers and others as well as on a direct basis to consumers of these services. UW Trust will compete with numerous other independent third parties in the provision of these services.

Brokerage Services

UW Investment Services, Inc. UWIS is registered with FINRA as a fully disclosed broker-dealer, headquartered in Denver, Colorado. UWIS previously provided brokerage services through SBA pooling and structured finance transactions. UWIS, as agent for United Western Bank, purchased the guaranteed portion of SBA 7(a) loans from bank and non-bank lenders around the country. These loans were assembled and later pooled into SBA securities that were sold into the secondary market to processing and trust companies and sophisticated investors. In addition, UWIS brokered the sale of fixed income securities to processing and trust clients. Prospectively, UWIS will provide services that complement our overall community banking business plan, which services may include securities brokerage services and retirement account management and other services. At this time, UWIS is not active in providing any services to any third party clients.

Mortgage Servicing Activities

Residential Mortgage Loan Servicing. Historically, we conducted our residential mortgage loan servicing activities through Matrix Financial Services, including the residential mortgage loan servicing that Matrix Financial Services provided as subservicer for United Western Bank’s servicing portfolio. In 2004, Matrix Financial Services transferred all of its servicing functions to a third party subservicer. The servicing transfer was done in an effort to lower the overall cost of servicing by eliminating many of the fixed costs of servicing the loans in-house. Matrix Financial Services now pays the subservicer a fixed fee per loan that varies based on whether the loan is a fixed rate or adjustable rate, or if the loan is delinquent. As part of the agreement, the custodial deposits are maintained at United Western Bank. We have retained a small staff of six people at Matrix Financial Services primarily to monitor the servicing activities of the subservicer. At December 31, 2009, including loans owned by Matrix Financial Services and United Western Bank, Matrix Financial Services serviced approximately $766 million of mortgage loans through the subservicer.

Servicing mortgage loans involves a contractual right to receive a fee for collecting, processing and administering mortgage loan payments. This processing involves collecting monthly mortgage payments on behalf of investors and remitting collected payments to investors on a periodic basis, reporting information to those investors on a monthly basis and maintaining custodial escrow accounts for the payment of principal and interest to investors and property taxes and insurance premiums on behalf of borrowers. These payments are held in custodial escrow accounts at United Western Bank.

As compensation for its mortgage servicing activities, Matrix Financial Services receives servicing fees, plus any late charges collected from delinquent borrowers and other fees incidental to the services provided. In the event of default by the borrower, Matrix Financial Services receives no servicing fees until the default is cured. At December 31, 2009, Matrix Financial Services annual weighted-average servicing fee was 0.413% of the unpaid principal balance outstanding on each mortgage.

Servicing is provided on mortgage loans on a recourse or nonrecourse basis. Matrix Financial Services’ policy was to accept only a limited number of servicing assets on a recourse basis. As of December 31, 2009, on the basis of outstanding principal balances, approximately 0.69% of its owned mortgage servicing contracts involved recourse servicing with credit risk exposure in the event of underlying mortgagor default to Matrix Financial Services. Additionally, many of its nonrecourse mortgage servicing contracts require Matrix Financial Services to advance all or part of the scheduled payments to the owner of the mortgage loan in the event of a default by the borrower. Many owners of mortgage loans also require the servicer to advance insurance premiums and tax payments on schedule even though sufficient escrow funds may not be available. Therefore, Matrix Financial Services must bear the funding costs associated with making such advances. If the delinquent loan does not become current, these advances are typically recovered at the time of the foreclosure sale. Foreclosure expenses, which may include legal fees or property maintenance expenses, are generally not fully reimbursable by Fannie Mae, Freddie Mac or Ginnie Mae, for which agencies Matrix Financial Services provides significant amounts of mortgage loan servicing. As of December 31, 2009, Matrix Financial Services had advanced approximately $5.6 million in funds on behalf of third party investors. Matrix Financial Services may incur normal curtailments of certain advances on loans serviced for Ginnie Mae and Fannie Mae. Generally advances on behalf of private investors are fully collectible. For the Veteran Affairs (“VA”) loans sold and serviced for Ginnie Mae, which are sold on a nonrecourse basis, the VA loan guarantees may not cover the entire principal balance and, in that case, Matrix Financial Services is responsible for the losses that exceed the VA’s guarantee. Estimated losses related to foreclosure and other servicer advances are estimated and reserved for, and are included in the consolidated financial statements as a reduction of the amount of other receivables.

Competition

United Western Bank faces substantial competition from a variety of competitors in all phases of its operations, including loan and deposit account originations. There is significant competition among commercial banks in the Bank’s market area. As a result of the deregulation of the financial services industry (see “Regulation and Supervision — Gramm-Leach-Bliley” below), the Bank also competes with other providers of financial services, such as credit unions, consumer finance companies, securities firms, insurance companies, insurance agencies, commercial finance and leasing companies, full service brokerage firms and discount brokerage firms. Some of the Bank’s competitors have greater resources and, as such, may have higher lending limits and may offer other services that are not provided by the Bank. The Bank generally competes on the basis of customer service and responsiveness to customer needs, available loan and deposit products, the rates of interest charged on loans, and the rates of interest paid for deposits and other funds. The Bank does not compete by lessening its credit quality standards.

UW Trust Company faces considerable competition in all of the services and products that it offers. UW Trust’s services are marketed on a nationwide basis to intermediaries such as law firms, tax professionals, broker-dealers and others as well as on a direct basis to consumers of these services. UW Trust will compete with numerous other independent third parties in the provision of these services.

To the extent that UWIS re-enters the brokerage services and other business lines normally associated with securities brokerage (e.g., retirement account management, wealth management, and other services), it will face substantial competition from larger and better capitalized market participants. The Company believes that UWIS will be able to compete effectively because of the trusted relationships developed with clients of UW Trust and United Western Bank, but there can be no assurance that UWIS will be able to effectively compete in the provision of traditional brokerage services.

Employees

At December 31, 2009, the Company had 224 employees. We believe that relations with our employees are good. The Company is not party to any collective bargaining agreement. The number of employees will vary as the Company continues to implement its community banking strategy but also as the company looks for additional operating efficiencies.

Regulation and Supervision

Set forth below is a brief description of various laws, regulatory authorities and associated regulations affecting our operations. The description of laws and regulations contained in this document does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to United Western Bancorp and its subsidiaries could have a material effect on the business of the Company.

Emergency Economic Stabilization Act of 2008. The Emergency Economic Stabilization Act of 2008 (the “EESA”) was enacted on October 3, 2008. The EESA provided the United States Department of the Treasury (“Treasury”) authority to take certain actions to restore liquidity and stability to the U.S. banking markets. Based upon its authority in the EESA, a number of programs to implement EESA have been announced by the Treasury. Those programs include the following:

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Capital Purchase Program (“CPP”). Pursuant to this program, Treasury on behalf of the US Government, purchased preferred stock along with warrants to purchase common stock, from certain financial institutions, including bank holding companies, savings and loan holding companies and banks or savings associations not controlled by a holding company. The investment has a dividend rate of 5% per year, until the fifth anniversary of the Treasury’s investment and a dividend of 9% thereafter.

On November 7, 2008, the Company submitted an application to Treasury to participate in the Treasury’s CPP Program. During the fourth quarter of 2009, after reviewing the terms and conditions of the governing documents pertaining to the CPP and observing the manner in which the CPP is administered by the Treasury, the Company determined that it was in its best interests to withdraw its CPP application. On December 10, 2009, the Company requested to withdraw from consideration for participation in the CPP. This will provide the Company with the opportunity to participate in the extended tax-loss carry back provisions made available to corporations in 2009 under recent revisions to the Internal Revenue Code of 1986, as amended.

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Temporary Liquidity Guarantee Program (“TLGP”). This program contained both (i) a debt guarantee component (“Debt Guarantee Program”), whereby the FDIC will guarantee until June 30, 2012, the senior unsecured debt issued by eligible financial institutions between October 14, 2008 and October 31, 2009; and (ii) a transaction account guarantee (“TAG”) component (“TAG Program”), whereby the FDIC will insure 100% of noninterest bearing deposit transaction accounts held at eligible financial institutions, such as payment processing accounts, payroll accounts and working capital accounts through December 31, 2009.

United Western Bank elected to participate in both parts of the TLGP. The FDIC will only guarantee a participant’s newly issued unsecured debt in a total amount not to exceed 125% of the par or face value of such participant’s senior unsecured debt outstanding as of September 30, 2008 and scheduled to mature on June 30, 2009. If there was no unsecured senior debt outstanding at September 30, 2008, the amount available under the program is limited to two percent of total liabilities as of September 30, 2008. As the Company did not have any unsecured senior debt outstanding as of September 30, 2008, the conclusion of the Debt Guarantee Program on October 31, 2009 had no impact on the Bank or Company.

On August 26, 2009, the FDIC approved the final rule extending the TAG Program for six months until June 30, 2010, and increased the applicable TAG assessment fees during that six month period. The Company did not opt out of the TAG program extension, which is expected to increase future FDIC insurance costs.

•

Temporary increase in deposit insurance coverage. Pursuant to the EESA, the FDIC temporarily increased the amount of deposit coverage for deposits at banks, thrifts and credit unions for deposits that are subject to deposit insurance provided by the FDIC from $100,000 to $250,000 per applicable depositor. The EESA provided that the basic deposit insurance limit will return to $100,000 after December 31, 2009. The temporary increase in the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor has been extended through December 31, 2013, but is permanent for certain retirement accounts (including IRAs).

Federal Securities Laws. As a publicly held company, various aspects of our public disclosure, corporate governance principles and internal control environment are subject to the Securities Exchange Act of 1934, the Sarbanes- Oxley Act of 2002 and related regulations and rules of the SEC and the Nasdaq Stock Market. Any change in applicable laws, regulations or regulatory policies may have a material effect on our business, operations and prospects.

Office of Thrift Supervision. We are a unitary savings and loan holding company within the meaning of the Home Owners’ Loan Act of 1933, as amended. As such, we are subject to the OTS regulation, examination, supervision and reporting requirements. In addition, the OTS has enforcement authority over us and our savings bank and non-savings bank subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of our subsidiary savings institution, United Western Bank. In addition, United Western Bank must notify the OTS at least 30 days before declaring any capital distribution (e.g., dividends or other) to us.

As a unitary savings and loan holding company that has been in existence prior to May 4, 1999, we generally are not restricted under existing laws as to the types of business activities in which we may engage, provided that the Bank continues to be a “qualified thrift lender” under the Home Owners’ Loan Act. To maintain its status as a qualified thrift lender, the Bank must maintain a minimum percentage of its assets in qualified thrift investments unless the OTS grants an exception to this requirement. In general, qualified thrift investments include certain types of residential mortgage loans, mortgage backed securities and certain loans to small businesses. If we acquire control of another savings association as a separate subsidiary, we would become a multiple, rather than a unitary, savings and loan holding company. Multiple savings and loan holding companies may only engage in those activities permissible for a financial holding company under the Bank Holding Company Act (“BHC Act”). Generally, financial holding companies may only engage in activities such as banking, insurance and securities activities, as well as merchant banking activities under certain circumstances. In addition, if the Bank fails to maintain its status as a qualified thrift lender, within one year of its failure, we would be required to convert the Bank to a commercial bank and to register as a bank holding company under the BHC Act, as amended.

Under certain circumstances, which include among other factors our current Informal Agreements, the FDIC may participate actively with the OTS in providing regulatory supervision of the Bank. This includes direct participation by the FDIC in on-site and off-site supervision, direct influence in various ratings and in the overall supervision of the Bank. See additional information in Item 1. “Business — Regulation and Supervision — Insurance of Accounts and Regulation by the Federal Deposit Insurance Corporation.”

See also our discussion below under Item 1. “Business — Regulation and Supervision — Regulatory Informal Agreement — Memorandum of Understanding.”

Change in Bank Control Act. The Change in Bank Control Act of 1978, as amended, provides that no person, acting directly or indirectly or through or in concert with one or more other persons, may acquire control of a savings association unless the OTS has been given 60 days prior written notice. The Home Owners’ Loan Act provides that no company may acquire control of a savings association without the prior approval of the OTS. Any company that acquires such control becomes a savings and loan holding company subject to registration, examination and regulation by the OTS. Pursuant to federal regulations, control of a savings association (which includes its holding company) is conclusively deemed to have been acquired by, among other things, the acquisition of more than 25% of any class of voting stock of the association or the ability to control the election of a majority of the directors of the association. Moreover, control is presumed to have been acquired, subject to rebuttal, upon the acquisition of more than 10% of any class of voting stock, but less than 25% of any class of stock of a savings association, where certain enumerated control factors are also present in the acquisition. The OTS may prohibit an acquisition of control if it would result in a monopoly or substantially lessen competition, the financial condition of the acquiring person might jeopardize the financial stability of the association, or the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person.

Gramm-Leach-Bliley. The Gramm-Leach-Bliley Act of 1999, as amended (also known as the Financial Services Modernization Act) (“Gramm-Leach-Bliley”) eliminated many federal and state law barriers to affiliations among banks, securities firms, insurance companies and other financial service providers. The law revised and expanded the BHC Act to permit a bank holding company to engage in a full range of financial activities by electing to be treated by the Federal Reserve Board as a “Financial Holding Company.” “Financial activities” is broadly defined to include not only banking, insurance and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determined to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.

Gramm-Leach-Bliley prohibits unitary savings and loan holding companies formed after May 4, 1999 from engaging in non-financial activities. Since we are a grandfathered unitary savings and loan holding company, Gramm-Leach-Bliley has not had a material adverse effect on our operations. However, because banking law permits banks, securities firms and insurance companies to affiliate with one another there is a continuing trend in the financial services industry toward consolidation. As a result, Gramm-Leach-Bliley could lead to an increasing amount of competition from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources.

Anti-Money Laundering and USA Patriot Act. A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001, as amended (the “Patriot Act”), substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Treasury has issued and, in some cases, proposed a number of regulations that apply various requirements of the Patriot Act to financial institutions such as United Western Bank and its subsidiaries. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious adverse consequences for the institution.

Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are sometimes referred to as the “OFAC” rules based on their administration by the Treasury’s Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.

Transactions with Affiliates. Sections 23A and 23B of the Federal Reserve Act of 1913, as amended, and its implementing regulations govern transactions between depository institutions and their affiliates. These provisions are made applicable to savings associations, such as United Western Bank, by the Home Owners’ Loan Act. Section 23A limits the extent to which the savings association or its subsidiaries may engage in certain transactions with its affiliates. These transactions include, among other things, the making of loans or other extensions of credit to an affiliate and the purchase of assets from an affiliate. Generally, such transactions between a savings association and any one affiliate cannot exceed 10% of the savings association’s capital stock and surplus, and such transactions between the savings institution and all of its affiliates cannot, in the aggregate, exceed 20% of the savings institution’s capital stock and surplus. Section 23A also establishes specific collateral requirements for loans or extensions of credit to an affiliate, and for guarantees or acceptances on letters of credit issued on behalf of an affiliate. Applicable regulations prohibit a savings association from lending to any affiliate engaged in activities not permissible for a bank holding company or for the purpose of acquiring the securities of most affiliates. Section 23B requires that transactions covered by Section 23A and a broad list of other specified transactions be on terms and under circumstances substantially the same, or no less favorable to the savings association or its subsidiary, as similar transactions with non-affiliates. In addition to the restrictions on transactions with affiliates that Sections 23A and 23B of the Federal Reserve Act impose on depository institutions, the regulations of the OTS also generally prohibit a savings association from purchasing or investing in securities issued by an affiliate. Whenever United Western Bank engages in transactions with its affiliates, the transactions are structured with the intent of complying with these regulations.

Federal Savings Bank Operations. United Western Bank is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and potentially by the FDIC, which insures its deposits up to applicable limits. Such regulation and supervision:

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establishes a comprehensive framework of activities in which United Western Bank can engage;

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limits the types and amounts of investments permissible for United Western Bank;

	•		limits the ability of United Western Bank to extend credit to any given borrower;
	•		significantly limits the transactions in which United Western Bank may engage with its affiliates;

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requires United Western Bank to meet a qualified thrift lender test that requires United Western Bank to invest in qualified thrift investments, which include primarily residential mortgage loans and related investments;

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places limitations on capital distributions by savings associations, such as United Western Bank, including cash dividends;

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imposes assessments to the OTS to fund their operations;

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establishes a continuing and affirmative obligation, consistent with United Western Bank’s safe and sound operation, to help meet the credit needs of its community, including low and moderate income neighborhoods;

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requires United Western Bank to maintain certain reserves against its transaction accounts;

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establishes various capital categories resulting in various levels of regulatory scrutiny applied to the institutions in a particular category; and

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establishes standards for safety and soundness.

The Bank must submit annual financial reports audited by independent auditors to federal regulators. The auditors must receive examination reports, supervisory agreements and reports of enforcement actions. In addition, an attestation by the auditor regarding the statements of management relating to the internal controls must be submitted to the OTS. The Bank’s audit committee must include members with experience in banking or financial management, must have access to outside counsel and must not include representatives of large customers. Any change in these regulations, whether by the OTS, the FDIC or Congress, could have a material impact on United Western Bank and its operations.

United Western Bank’s Capital Requirements. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to savings institutions that do not meet minimum capital requirements. For these purposes, the law establishes five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The OTS has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be:

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“well capitalized” if it has a total risk-based capital ratio of 10% or greater and a core capital ratio of 5% or greater;

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“adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and generally a core capital ratio of 4% or greater;

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“undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a core capital ratio of less than 4%;

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“significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a core capital ratio of less than 3%; and

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“critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%.

As of December 31, 2009, United Western Bank was a “well capitalized” institution.

The following table indicates United Western Bank’s regulatory capital ratios:

		As of December 31, 2009
		Core				Risk-Based
		Capital				Capital
		(Dollars in thousands)
Shareholder’s equity/GAAP capital		$	188,356			$	188,356
Disallowed assets			(64	)			(64	)
Unrealized loss on available for sale securities			4,547				4,547
Additional capital items:
General valuation allowances			—				20,236
Low-level recourse and residual interests			—				(51,406	)
Regulatory capital as reported to the OTS			192,839				161,669
Minimum capital requirement as reported to the OTS			100,400				128,382
Regulatory capital—excess		$	92,439			$	33,287
Capital ratios			7.68	%			10.07	%
Well capitalized requirement			5.00	%			10.00	%
Minimum capital requirements reported to the OTS			4.00	%			8.00	%

Regulatory Informal Agreement — Memorandum of Understanding. Effective as of December 10, 2009, the Company and the Bank, each entered into separate informal Memorandums of Understanding (“Informal Agreements”) with the Office of Thrift Supervision (the “OTS”). The Informal Agreements are not “written agreements” for purposes of Section 8 of the Federal Deposit Insurance Act, as amended.

The Informal Agreement between the Company and the OTS provides, among other things, that the Company, acting through its Board of Directors, will (i) support the Bank’s compliance with the Informal Agreement it entered into with the OTS; (ii) not declare or pay dividends or any other capital distribution or redeem any capital stock of the Company, or take dividends representing a reduction in the capital from the Bank, without the prior written non-objection of the Regional Director of the OTS; and (iii) not incur, issue, renew, repurchase, make payments on or rollover any debt, increase any current lines of credit, or guarantee the debt of any entity without receiving the prior written approval of the OTS Regional Director. Pursuant to the terms of the Company’s Credit Agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), entering into the Informal Agreements was considered an event of default; however, JPMorgan and the Company entered into an Amendment and Forbearance Agreement dated December 14, 2009 wherein JPMorgan agreed to forbear from declaring the amounts owing under the Credit Agreement immediately due and payable as a result of the Company and the Bank executing the Informal Agreements and any events of default resulting therefrom. Since the effective date of the Informal Agreements, the Company has requested and received the non-objection of the OTS to make certain payments due on its outstanding debt. We will be required to make additional requests for non-objection from the OTS with respect to future payments on our outstanding debt. However, the Company is continually evaluating its cash flow resources available to satisfy such debt repayments, and all such repayments are subject to continued non-objection from the OTS; accordingly, the Company may be required to suspend certain debt payments.

The Informal Agreement between the Bank and the OTS provides, among other things, that the Bank’s Board of Directors will (i) adopt a written Capital Plan for the Bank for the OTS Regional Director’s review and comment, and such plan shall address how the Bank will achieve and maintain by June 30, 2010 a Tier 1 core capital ratio of 8% and a total risk-based capital ratio of 12% (as of December 31, 2009, the Bank’s Tier 1 core capital and total risk-based capital ratios were 7.7% and 10.1%, respectively, as shown above); and; (ii) approve a written Liquidity Contingency Plan to ensure the Bank maintains adequate short-term and long-term liquidity, with such plan to specifically address deposit concentrations and plans to reduce or manage such concentrations. The Informal Agreement also requires the Bank to reduce certain concentrations in construction and land lending and non-agency mortgage backed securities. In addition, the Informal Agreement places restrictions on the level of brokered deposits maintained by the Bank including deposits obtained by our regional banking teams from our community banking customer base offered through CDARS. The Company believes that it has satisfied a number of the conditions of the Informal Agreement and has commenced the steps necessary to resolve any and all remaining matters presented therein.

The Informal Agreements remain effective until modified, suspended or terminated by the OTS Regional Director.

The OTS and the FDIC conducted a joint field visit at the Company and the Bank, which commenced January 10, 2010. Subsequently, the OTS has provided additional supervisory limitations on the Bank. These limitations include: (i) the Bank may not increase its total assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities without prior written notice of non-objection from the OTS; and (ii) the OTS has directed the Bank not to rollover or renew exiting brokered deposits, or accept new brokered deposits without the prior written non-objection from the OTS.

As a result of the Informal Agreements and the additional supervisory limitations, the Company is looking to further increase its capital position by focusing on expense reductions, optimizing the balance sheet for both loans and deposits and risk weighting of assts, as well as evaluating opportunities for margin improvement and improving the overall earnings power of the Company. This may not be sufficient to meet the requirements of the Informal Agreements, so the Company is also looking at various strategic alternatives for the Company to accelerate its compliance with terms of the Informal Agreement.

While management believes that they are instituting the appropriate plans to meet the requirements of the Informal Agreements, as well as the additional supervisory limitations, there is no certainty that the Company can successfully execute on all of the above and meet the capital requirements of the OTS by June 30, 2010. If the Company is unable to comply with the Informal Agreements or additional supervisory limitations the OTS could take additional actions, including issuing an enforcement action.

Insurance of Accounts and Regulation by the Federal Deposit Insurance Corporation. The deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the FDIC, and backed by the full faith and credit of the U.S. Government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action.

The FDIC amended its risk-based assessment system for 2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005, as amended (the “Reform Act”). Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned. Risk Category I is the lowest risk category while Risk Category IV is the highest risk category. For 2007 and 2008, the Bank qualified for Risk Category I. Risk Category I generally includes banks that are “well capitalized” and that receive a composite CAMELS rating of 2 or higher. For banks under $10 billion in total assets in Risk Category I, the 2007 and 2008 deposit assessment ranged from five to seven basis points of total qualified deposits. The actual assessment is dependent upon certain risk measures as defined in the final rule. In 2009, the Bank had its risk category change as a result of its regularly scheduled regulatory examination.

The Reform Act also provided for a one-time credit for eligible institutions based on their assessment base as of December 31, 1996. The Bank’s one-time credit was $177,000, which was recognized in 2007.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds that were issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. The current annualized assessment rate is 1.06 basis points, or approximately 0.265 basis points per quarter. These assessments will continue until the Financing Corporation bonds mature in 2019.

In an effort to restore capitalization levels and to ensure the Deposit Insurance Fund will adequately cover projected losses from future bank failures, the FDIC adopted a revised risk-based deposit insurance assessment schedule on February 27, 2009, which raised deposit insurance premiums. Changes in the risk-based assessment system included increasing premiums for institutions that rely on excessive amounts of brokered deposits, including CDARS, increasing premiums for excessive use of secured liabilities, including Federal Home Loan Bank advances, and lowering premiums for smaller institutions with very high capital levels. For the first quarter of 2009 only, the FDIC increased all FDIC assessments by seven basis points. These rates ranged from 12 to 14 basis points for Risk Category I institutions to 50 basis points for Risk Category IV institutions. Beginning April 1, 2009 the new initial base assessment rates were 12 to 16 basis points for Risk Category I institutions, to 45 basis points for Risk Category IV institutions. After applying all possible adjustments, the bases assessment rates range from 7 to 77.5 basis points. On May 22, 2009, the FDIC adopted a final rule imposing a five basis point special assessment of each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, but no more than 10 basis points times the institution’s assessment base for the second quarter of 2009. This special assessment was collected on September 30, 2009. Additional special assessments may be imposed by the FDIC for future periods.

On November 12, 2009, the FDIC adopted a final rule requiring insured institutions to prepay approximately three years of estimated insurance assessments. The pre-payment allowed the FDIC to strengthen the capital level of the Deposit Insurance Fund immediately without impacting earnings of the industry. Payment of the prepaid assessment, along with the payment of institutions’ regular third quarter assessment was due on December 30, 2009. The Bank received an exemption from prepaying its FDIC insurance premiums.

FDIC insurance expense, inclusive of assessments for the Financing Corporation bonds, totaled $4.9 million in 2009, $1.0 million in 2008, and $818,000 in 2007.

Insurance of an institution’s deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS.

Under certain circumstances, which include among other factors the existence of an Informal Agreement, the FDIC may participate actively with the OTS in providing regulatory supervision of the Bank. This includes direct participation by the FDIC in on-site and off-site supervision, direct influence in various ratings and in the overall supervision of the Bank. The FDIC may impose additional or independent actions upon management, the Board of Directors and the Bank. The FDIC is currently participating in our regulatory supervision with the OTS.

FHLBank System. United Western Bank is a member of the Federal Home Loan Bank (“FHLBank”) system, which consists of twelve regional FHLBanks. The FHLBank provides a central credit facility primarily for member associations and administers the home financing credit function of savings associations. FHLBank borrowings must be secured by specified types of collateral. The FHLBank funds its operations primarily from proceeds derived from the sale of consolidated obligations of the FHLBank system. United Western Bank, as a member of the FHLBank system, must acquire and hold shares of capital stock in its regional FHLBank in an amount equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, 0.2% of total assets, or 5% of its borrowings from the FHLBank. Prior to relocating its domicile, United Western Bank was a member of the FHLBank of Dallas. Effective March 25, 2002, United Western Bank became a member of the FHLBank of Topeka. At December 31, 2009, United Western Bank was in compliance with the FHLBank system capital stock requirement based on its combined investment in FHLBank of Dallas and FHLBank of Topeka stock totaling $9.4 million.

Brokered Deposits. Under the FDIC regulations governing brokered deposits, well capitalized associations, such as United Western Bank, are not subject to brokered deposit limitations, while adequately capitalized associations are subject to certain brokered deposit limitations and undercapitalized associations may not accept brokered deposits. At December 31, 2009, United Western Bank had $575.7 million of brokered deposits. Included in this total were $246.5 million of CDARS deposits acquired through our community banking customer base by our regional banking teams; $104.6 million of traditional brokered deposits obtained through a national brokerage firm; and $224.6 million of other deposits that are deemed to be brokered deposits by regulatory definition. Subsequent to year end, the OTS directed the Bank not to rollover or renew existing brokered deposits, or accept new brokered deposits without prior written non-objection of the OTS. Accordingly, the CDARS brokered deposits on deposit at the Bank may be transferred to certificate accounts or other deposit accounts or withdrawn at maturity. The CDARS maturity dates run through December 22, 2011, traditional brokered deposits mature $50 million on June 30, 2010 and $50 million on July 1, 2010, and other deposits deemed to be brokered deposits by regulatory definition of $224.6 million will be withdrawn prior to March 31, 2010. Since December 31, 2009, the Bank has accumulated cash on its balance sheet of over $1 billion, and thus has the liquidity necessary to fund these brokered deposit withdrawals. In the event United Western Bank is not permitted to accept brokered deposits in the future, it would have to find replacement sources of funding. It is possible that such alternatives may not be available, or if available, would result in a higher cost of funds.

Federal Reserve System. The Federal Reserve Board regulations require all depository institutions to maintain reserves at specified levels against their transaction accounts (primarily NOW and regular checking accounts). At December 31, 2009, United Western Bank was in compliance with the Federal Reserve Board’s reserve requirements. Savings associations, such as United Western Bank, are authorized to borrow from the Federal Reserve Bank’s “discount window.” The Bank is deemed by the Federal Reserve to be generally sound and thus is eligible to obtain primary credit from its Federal Reserve Bank. Generally, primary credit is extended on a very short-term basis to meet the liquidity needs of the institution. Loans must be secured by acceptable collateral and carry a rate of interest of 50 basis points above the Federal Open Market Committee’s federal funds target rate. As a tertiary source of liquidity, (see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity — Bank Liquidity”) at December 31, 2009, the Bank had pledged approximately $22.9 million of the guaranteed portions of purchased SBA loans to the Federal Reserve Bank of Kansas City, as collateral for potential borrowings from the “discount window.”

Mortgage Banking Operations. Our mortgage banking operations are conducted through Matrix Financial Services. The rules and regulations applicable to our mortgage banking operations establish underwriting guidelines that, among other things, include anti-discrimination provisions, require provisions for inspections, appraisals and credit reports on prospective borrowers and fix maximum loan amounts. Moreover, we are required annually to submit audited financial statements to the U.S. Department of Housing and Urban Development (“HUD”), Fannie Mae, Freddie Mac and Ginnie Mae, and each regulatory entity maintains its own financial guidelines for determining net worth and eligibility requirements. Matrix Financial Services operations are also subject to examination by HUD, Fannie Mae, Freddie Mac and Ginnie Mae at any time to assure compliance with the applicable regulations, policies and procedures. Mortgage loan origination activities are subject to, among other laws, the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act of 1974, and the regulations promulgated under these laws that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Moreover, the OTS, as primary regulatory authority over the Bank (the parent of Matrix Financial Services), also examines the Matrix Financial Services mortgage banking operations as well.

Regulation of UW Trust Company. UW Trust Company provides custodial escrow, paying agent and trust administration services. UW Trust Company is chartered under the laws of the State of Texas, and as a Texas trust company is subject to supervision, regulation and examination by the Texas Department of Banking. Under applicable law, a Texas trust company, such as UW Trust, is subject to virtually all provisions of the Texas Banking Act as if the trust company were a state chartered bank. The activities of a Texas trust company are limited by law to acting as a trustee, executor, administrator, guardian or agent for the performance of any lawful act, and to lend and accumulate money when authorized under applicable law. In addition, a Texas trust company with capital of $1.0 million or more, such as UW Trust, has the power to:

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purchase, sell, discount and negotiate notes, drafts, checks and other evidences of indebtedness;

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purchase and sell securities;

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issue subordinated debentures and promissory notes; and

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exercise powers incidental to the enumerated powers of Texas trust companies as set forth in the Texas Banking Act.

A Texas trust company, such as UW Trust, is generally prohibited from accepting demand or time deposits if not insured by the FDIC.

Limitation on Capital Distributions. The Texas Finance Code prohibits a Texas trust company from reducing its outstanding capital and certified surplus through redemption or other capital distribution without the prior written approval of the Texas Banking Commissioner. During the year ended December 31, 2009, UW Trust paid the Company a dividend of $38.3 million.

Investments. A Texas trust company is generally obligated to maintain an amount equal to 40% of its capital and surplus in investments that are readily marketable and that can be converted into cash within four business days. So long as it complies with those requirements, a Texas trust company generally is permitted to invest its corporate assets in any investment otherwise permitted by law. Generally, a Texas trust company cannot invest an amount in excess of 15% of its capital and certified surplus in the securities of a single issuer.

Branching. The Texas Finance Code permits a Texas trust company to establish and maintain branch offices at any location within the state if it first obtains written approval of the Texas Banking Commissioner.

Transactions with Related Parties. The Texas Finance Code prohibits the sale or lease of an asset of a Texas trust company, or the purchase or lease of an asset by a Texas trust company, where the transaction involves an officer, director, principal shareholder or affiliate, unless the transaction is approved by a disinterested majority of the board of directors or the written approval of the Texas Banking Commissioner is first obtained. In no event, however, may a Texas trust company lease real property in a transaction involving an officer, director, principal shareholder or affiliate without the prior approval of the Texas Banking Commissioner.

Enforcement. Under applicable provisions of the Texas Finance Code, the Texas Banking Commissioner has the power to issue enforcement actions against a Texas trust company or any officer, employee or director of a Texas trust company. In addition, in certain circumstances, the Texas Banking Commissioner may remove a present or former officer, director or employee of a Texas trust company from office or employment, and may prohibit a shareholder or other persons participating in the affairs of a Texas trust company from such participation. The Texas Banking Commissioner has the authority to assess civil penalties of up to $500 per day against a Texas trust company (penalties against individuals may be higher) for violations of a cease and desist, removal or prohibition order. The Texas Banking Commissioner may also refer violations of a cease and desist order to the attorney general for enforcement by injunction.

The Texas Banking Commissioner may pursue an order of supervision or conservatorship if:

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the Texas Banking Commissioner determines that the Texas trust company is in a hazardous condition and that the continuation of business would be hazardous to the public or to the shareholders or creditors of the Texas trust company;

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the Texas Banking Commissioner determines that the Texas trust company has exceeded its powers;

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the Texas trust company has violated the law; or

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the Texas trust company gives written consent to supervision or conservatorship.

The Texas Banking Commissioner also has the authority to pursue the appointment of an independent receiver for a Texas trust company.

Capital Requirements. UW Trust is required by the Texas Banking Commissioner to maintain minimum restricted capital of at least $2 million. In addition, a Texas trust company may not have at anytime outstanding liabilities in an amount that exceeds five times its capital stock and surplus, except that with the approval of the Texas Banking Commissioner, a Texas trust company may have outstanding liabilities in an amount that does not exceed ten times its capital stock and surplus. The Texas Banking Commissioner may require additional capital of a Texas trust company if the Texas Banking Commissioner determines it necessary to protect the safety and soundness of such company. If the Texas Banking Commissioner were to do so, or in the event UW Trust fails to maintain capital of at least $2 million, there is no assurance that UW Trust would be able to restore its capital or meet such additional requirements. In either case, the Texas Banking Commissioner could pursue various enforcement actions for inadequacy of capital, such as appointing either a conservator or a receiver. As of December 31, 2009, UW Trust is in compliance with all capital requirements under Texas law.

Regulation of UW Investment Services Inc. UWIS is a securities broker-dealer that is subject to the Securities and Exchange Commission’s net capital rule, Rule 15c3-1, promulgated under the Securities Exchange Act of 1934. The net capital rule is designed to measure the general financial condition and liquidity of a broker-dealer. Net capital generally is the net worth of a broker or dealer (assets minus liabilities), less deductions for certain types of assets. If a firm fails to maintain the required net capital, it may be subject to suspension or revocation of registration by the Securities and Exchange Commission and suspension or expulsion by FINRA, and could ultimately lead to the firm’s liquidation. The net capital rule also limits the ability of broker-dealers to transfer large amounts of capital to parent companies and other affiliates. At December 31, 2009, UWIS was in compliance with these requirements with net capital of $244,000, which was approximately $239,000 in excess of its required net capital of $5,000.

Available Information

Under the Securities Exchange Act of 1934, the Company is required to file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). You may read and copy any document the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may call the SEC at 1-800-732-0330 for further information about the Public Reference Room. The SEC maintains a website at www.sec.gov which contains reports, proxy and information statements, and other information regarding the Company that we file electronically with the SEC.

The Company maintains a website at www.uwbancorp.com. On our website, investors and other interested persons may access free of charge, among other things, any of the reports that we file with or furnish to the SEC, including this annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K as soon as reasonably practicable after such reports are filed with or furnished to the SEC. The Company’s website also includes the charters of our Audit, Compensation, Nomination and Governance Committees and other corporate governance documents.

Item 1A.		Risk Factors

Ownership of the common stock or other securities including debt and debt securities of the Company involves certain risks. Holders of the Company’s securities and prospective investors in those securities should carefully consider the following risk factors and uncertainties described below together with all of the other information included and incorporated by reference in this report, in evaluating an investment in the Company’s securities. If any of the risks and uncertainties discussed below actually occur, our business, financial condition and results of operations could be materially adversely affected. In addition, other risks and uncertainties of which we are not currently aware, including those relating to the banking and financial services industries in general, regulatory supervision and actions, or which we do not now believe are material, may cause earnings to be lower, or impair our future financial condition or results of operations. The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment.

Risks Related to Our Business

Our business has been and may continue to be adversely affected by conditions in the financial markets and economic conditions generally. During 2008 and 2009, the financial services industry and the securities markets generally have been materially and adversely affected by significant declines in the economy and values of nearly all asset classes and by a serious lack of liquidity and a lack of financing for many investors. Unemployment has also increased significantly.

Market conditions have also led to the failure or merger of a number of prominent insured depository institutions. In addition, many financial institutions, including us, have experienced declines in the performance of their loans and non-agency mortgage-backed securities. Increases in defaults on mortgages including residential loans, construction and land loans, and commercial real estate loans coupled with declining asset values and the lack of market and investor confidence, as well as other factors, have all combined to negatively impact financial services participants such as us.

As a result, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies have been and are expected to continue to be aggressive in their supervision of banks and in responding to matters identified in examinations, including the issuance of informal or formal enforcement actions or orders. The impact of the legislation in response to these developments may negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance or our stock price.

Further, additional negative market developments may affect consumer confidence levels which could cause changes in payment performance, leading to increases in delinquencies and default rates that could impact our charge-offs and provision for credit losses. A worsening of these conditions would likely extend the impact of these difficult market conditions on us and others in the financial services industry.

Our financial performance generally, and in particular the ability of our borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets where we operate in the State of Colorado and in the United States as a whole. Continued deterioration in the business environments could adversely affect the credit quality of the Bank’s loans, the value of our company’s investment securities, and our overall results of operations and financial condition.

Regulatory Risks

We are subject to informal agreements and other determinations by the OTS that restricts certain of our actions. Effective as of December 10, 2009, the Company and the Bank each entered into separate informal Memorandums of Understanding (“Informal Agreements”) with the Office of Thrift Supervision (the “OTS”). The Informal Agreements are not “written agreements” for purposes of Section 8 of the Federal Deposit Insurance Act, as amended.

The Informal Agreement between the Company and the OTS provides, among other things, that the Company, acting through its Board of Directors, will (i) support the Bank’s compliance with the Informal Agreement it entered into with the OTS; (ii) not declare or pay dividends or any other capital distribution or redeem any capital stock of the Company, or take dividends representing a reduction in the capital from the Bank, without the prior written non-objection of the Regional Director of the OTS; and (iii) not incur, issue, renew, repurchase, make payments on or rollover any debt, increase any current lines of credit, or guarantee the debt of any entity without receiving the prior written approval of the OTS Regional Director. Pursuant to the terms of the Company’s Credit Agreement with JPMorgan, entering into the Informal Agreements was considered an event of default; however, JPMorgan and the Company entered into an Amendment and Forbearance Agreement dated December 14, 2009 wherein JPMorgan agreed to forbear from declaring the amounts owing under the Credit Agreement immediately due and payable as a result of the Company and the Bank executing the Informal Agreements and any events of default resulting therefrom.

The Informal Agreement between the Bank and the OTS provides, among other things, that the Bank’s Board of Directors will (i) adopt a written Capital Plan for the Bank for the OTS Regional Director’s review and comment, and such plan shall address how the Bank will achieve and maintain by June 30, 2010 a Tier 1 core capital ratio of 8% and a total risk-based capital ratio of 12% (as of December 31, 2009, the Bank’s Tier 1 core capital and total risk-based capital ratios were 7.7% and 10.1%, respectively); and (ii) approve a written Liquidity Contingency Plan to ensure the Bank maintains adequate short-term and long-term liquidity, with such plan to specifically address deposit concentrations and plans to reduce or manage such concentrations. The Informal Agreements remain effective until modified, suspended or terminated by the OTS Regional Director. There can be no assurance that the terms and conditions of the Informal Agreement will be met or that the impact or effect of such terms and conditions will not have a material adverse effect with respect to our financial condition, results of operations and future prospects.

If as a result of its review or examination of the Bank, the OTS or the FDIC should determine that the financial condition, capital resources, asset quality, liquidity, earnings ability, or other aspects of its operations have worsened or that it or its management is violating or has violated the Informal Agreement or any law or regulation, various additional remedies are available to the OTS and the FDIC. Such remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict our growth, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate our deposit insurance, which would result in the seizure of the Bank by its regulators.

We may elect or be compelled to seek additional capital, but that capital may not be available or it may be dilutive. We are required by the Informal Agreement with the OTS, to achieve and maintain a Tier 1 core capital ratio of 8% and a total risk-based capital ratio of 12% by June 30, 2010. These capital level requirements are above our current capital levels and our current earnings are not expected to be sufficient to allow us to achieve these required rates by the dates specified. Prospectively we will look to further strengthen our capital position via multiple avenues, including focused expense reductions, optimizing our balance sheet for loans and deposits and increasing net interest income and ultimately improving the overall earnings of the Company. We are also considering certain strategic alternatives for the Company to accelerate our compliance with terms of the Informal Agreement. We raised $81.7 million of capital, net of offering expenses, in the second half of 2009 and a number of financial institutions have recently raised considerable amounts of capital as a result of deterioration in their results of operations and financial condition arising from the negative impact of the mortgage loan market, non-agency mortgage-backed security market, and deteriorating economic conditions, which may diminish our ability to raise additional capital.

Our ability to raise capital will depend on conditions in the capital markets, which are outside our control, and on our financial performance. Accordingly, we cannot be assured of our ability to raise capital when needed, on favorable terms or at all. If we cannot raise additional capital when needed, we will be subject to increased regulatory supervision and the imposition of restrictions on our growth and business. These outcomes could negatively impact our ability to operate or further expand our operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on our financial condition and results of operations. In addition, in order to raise additional capital, we may need to issue shares of our common stock that would dilute the book value of our common stock and reduce our shareholders’ percentage ownership interest to the extent they do not participate in future offerings. Also, if we are unable to raise additional capital, we may be required to take alterative actions which may include the sale of income-producing assets to meet our capital requirements, which could have an adverse impact on our operations and ability to generate income.

As a regulated entity, the Bank must maintain certain required levels of regulatory capital that may limit our operations and potential growth. 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 our 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 these regulations.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and defined ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to total assets. For the Bank, Tier 1 capital consists of shareholder’s equity excluding unrealized gains and losses on certain securities, less a portion of the Bank’s mortgage servicing asset that is disallowed for capital. For the Bank, total capital consists of Tier 1 capital plus the allowance for credit losses less a deduction for low level recourse obligations. In the capital calculation for the Bank, the allowance for credit losses is limited to 1.25% of risk-weighted assets and, accordingly, the Bank does not receive a capital benefit for $14.1 million, which is disallowed in its capital calculation.

At December 31, 2009, the Bank was required to establish a deferred tax valuation allowance of $14.5 million. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Assessing the need for, or the sufficiency of, a valuation allowance requires management to evaluate all available evidence, both negative and positive. Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character within the carryback and carryforward periods is available under the tax law. When negative evidence (e.g., cumulative losses in recent years) exists, more positive evidence than negative evidence will be necessary. If the positive evidence is not sufficient to exceed the negative evidence, a valuation allowance for deferred tax assets is established. The deferred tax valuation allowance reduced the Bank’s preliminary deferred tax asset of $27.9 million by 52% to $13.5 million. The establishment of this deferred tax valuation allowance had a negative impact to the Bank’s financial condition, results of operations and capital ratios. The incurrence of additional losses or reduction of positive evidence related to the portion of the deferred tax asset that remains could result in additional valuation allowance of the balance of the deferred tax balances.

Many factors may affect the Bank’s capital and its ability to maintain required capital ratios. For example, loan grading decisions, loan impairments, recognized loan losses, declines in the ratings of certain non-agency mortgage backed securities or other factors leading to impairments of these securities, increased operating expenses and other factors, may combine to decrease the Bank’s capital and require us to contribute additional capital to the Bank. Conversely, positive operational results, such as the sale of assets at value in excess of our amortized cost, expense savings programs and other factors may increase the Bank’s capital, thereby improving its regulatory capital ratios under OTS guidelines.

As of December 31, 2009, the Bank was “well capitalized” under applicable capital requirements, including a total risk-based capital ratio of 10.1%. See Item 1 — “Business — Regulation and Supervision — United Western Bank’s Capital Requirements.” If our total risk-based capital ratio drops below 10.00% at any quarter, we would be classified as “adequately capitalized,” and could be subject to increased regulatory supervision and requirements, which could have a material adverse effect on our financial condition and results of operation, including resulting in an event of default under the Company’s senior credit agreement.

Liquidity Risks

Liquidity risk could impact our operations and our results of operations. If the Bank or Company were unable to borrow funds through access to the marketplace, we may not be able to meet the cash flow requirements of our depositors, creditors, and borrowers, or the operating cash needed to fund corporate expansion and other corporate activities. Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. Liquidity is essential to our business.

United Western Bank relies on processing and trust deposits, which, if one or more processing and trust relationship was terminated, such termination could negatively impact our liquidity, profitability and results of operations. A significant portion of the total deposits of our principal subsidiary, United Western Bank, are funds deposited as a result of unaffiliated processing and trust relationships maintained by the Bank. At December 31, 2009, four unaffiliated processing and trust relationships accounted for $1.04 billion, or 51.6%, of our total deposits, which includes custodial escrow deposits. Included in these four unaffiliated processing and trust relationships is one processing and trust relationship with a balance of $934 million at December 31, 2009, which accounts for 46.1% of the Bank’s total deposits at December 31, 2009. The Bank’s future success in retaining and attracting processing and trust depositors depends, in part, on its ability to offer competitive rates and services. With the unprecedented events in the financial markets in the United States over the past two years, deposit concentrations are an increasing risk to all depository institutions and to our company. Although our processing and trust deposit relationships are evidenced by an agreement between the Bank and the institution, some of the agreements may be terminated by the institution at any time, upon prior notice, for any reason. Further, an institution may elect not to renew the agreement or to terminate the deposit relationship for various reasons, including, but not limited to, if there is a serious impairment to the Bank’s financial condition or if the Bank fails to be well capitalized, adequately capitalized, or other covenants, including regulatory directives or agreements. If the Bank loses one or more of these processing and trust relationships, our liquidity, profitability and results of operations may be significantly and adversely affected.

Pursuant to an asset purchase agreement dated April 7, 2009, Equity Trust Company and Sterling Administrative Services, LLC (“the Buyers”) purchased from us the assets of UW Trust associated with its self-directed individual retirement account and qualified employee benefit plan administration business. The Buyers, and their affiliate, Equity Administrative Services, Inc., have agreed to maintain all of their custodial deposits with the Bank for a three-year period. These deposits are included in the amounts set forth in the paragraph above. Notwithstanding the terms of the asset purchase agreement, if the Buyers transfer these deposits to another depository institution, our liquidity, profitability, and results of operations may be significantly and adversely affected.

Effective January 15, 2010, the Company amended its credit agreement with its senior credit facility provider. The terms of the amendment provide, among other things: (i) for the extension of the maturity date from December 31, 2009 to June 30, 2010 (the note had a balance of $20 million at December 31, 2009); (ii) that the Company make a principal reduction payment on the note of $2.5 million upon execution of the amendment, which payment the Company has made, and another principal reduction payment on the note of $1.25 million on or before March 31, 2010. Additionally, the lender agrees to continue to forbear from declaring all outstanding amounts on the note to be immediately due and payable as a result of the Company and, United Western Bank each executing Informal Agreements with the OTS. The Company and one of its nonbank subsidiaries pledged certain non-agency mortgage-backed securities as additional collateral to the lender. Unless we further amend, or obtain a waiver under the senior credit facility, we will need to receive the written non-objection from the OTS to make the principal payment due at maturity. The Company intends to renew and extend the maturity of this debt, which will require the non-objection from the OTS and approval from its senior credit facility provider; however, there can be no assurance that we will be successful in securing the required non-objection and approval.

In the event we fail to make such payments, or to comply with other restrictive debt covenants under our senior credit facility, we may not be able to obtain the necessary amendments or waivers, and our lender could accelerate the payment of all outstanding amounts due under that arrangement. In addition to the risk of non-payment described above, our ability to meet the nonperforming assets plus real estate owned ratio, or NPA Plus REO Ratio, contained in our senior credit facility and otherwise comply with our covenants may be affected by various events, including those that may be beyond our control. In addition to the financial covenants pertaining to the Bank maintaining its categorization as “well capitalized” as described in the OTS regulations, our financial covenants require that the Bank, at all times, maintain an NPA Plus REO Ratio of not greater than 6.50%, which the Bank complied with at December 31, 2009 (as the ratio was 5.73%). The NPA Plus REO Ratio means the ratio of the sum of nonperforming assets (less nonperforming assets guaranteed as to principal repayment by the U.S. government or one of its agencies) plus real estate owned, to the sum of total loans and repossessed assets plus real estate owned. Prospectively, we may not be able to continue to meet these and other ratios, tests and covenants. If we were to breach any of these covenants, ratios, tests or restrictions, as applicable, in the future, it could result in an event of default, which would allow our lender to declare all amounts outstanding to be immediately due and payable. If the lender accelerates the payment of our indebtedness, we may not be able to repay in full the amounts then outstanding. Further, as a result of any breach and during any cure period or negotiations to resolve a breach or expected breach, our lenders may refuse to make further loans to us, which could affect our liquidity and results of operations. Even if we are successful in obtaining waivers or entering into any such amendments, we could incur substantial costs in doing so, our borrowing costs could increase, and we may be subject to more restrictive covenants than the covenants under our existing facility. Any of the foregoing events could have a material adverse impact on our business and results of operations, and there can be no assurance that we would be able to obtain the necessary waivers or amendments on commercially reasonable terms, or at all.

United Western Bank relies on wholesale funding sources for secondary and contingent liquidity sources. The Bank utilizes borrowings from the Federal Home Loan Bank, or FHLBank, system, brokered certificates of deposits and repurchase agreements for secondary and contingent sources of liquidity. The Bank also has capacity to borrow from the Federal Reserve Discount Window. Also, from time to time, the Bank utilizes these sources to capitalize on market opportunities to fund investment and loan initiatives. To the extent such wholesale sources depend upon collateralized borrowings, declines in asset quality or the fair value of the underlying instruments could reduce our wholesale borrowing capacity. If the Bank were unable to obtain or maintain our access to funding or if adequate funding is not available to accommodate future growth at acceptable interest rates, it would have to find alternative sources of liquidity, which, if available, would probably be at a higher cost and on terms that do not match the structure of our liabilities as well as the existing wholesale funding sources. In addition, our Company relies on wholesale bank funding for parent company funds. If such funds were not available from the banking sector, securing alternative funding could cause disruption to our business. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.

At December 31, 2009, we had outstanding indebtedness to FHLBank Topeka in the amount of $180 million. FHLBank Topeka currently limits our ability to pledge non-agency mortgage-backed securities as collateral against our borrowings from them to securities rated AA by at least one NRSRO. If the rating agencies were to downgrade any of the eligible securities that we have pledged to FHLBank Topeka to an unacceptable rating, our borrowing capacity would be reduced by $53.2 million as of December 31, 2009. If FHLBank Topeka reduced our borrowing capacity, and we were not able to replace the financing on similar terms, our liquidity could be materially and adversely affected. It may be difficult to secure replacement financing in the current credit markets.

We are significantly dependent upon brokered deposits as a source of liquidity, and are currently under significant restrictions in our ability to use them in the future. At December 31, 2009, we had outstanding brokered deposit balances in the amount of $575.6 million. Our Informal Agreement with the OTS prohibits us from increasing brokered deposits. Subsequent to year end, the OTS provided additional supervisory limitations on the Bank. These limitations restrict us from rolling over, renewing or entering into any new brokered deposits without the prior non-objection of the OTS. Based on factors such as our financial performance, the capital markets generally, and the increased regulatory supervision to which we are subject, we can offer no assurance that we will be successful in obtaining these alternative sources of liquidity in a timely manner, if required. At December 31, 2009, the Bank had cash on hand of $586 million and since year end this has grown to over $1 billion, and thus the withdrawal of these balances will not have a material adverse impact on the Bank. If the OTS or FDIC were to impose further limitations on brokered deposits or classify other deposits as brokered, this could materially impact our liquidity.

Our ability to service our debt and pay dividends is subject to our ability to receive dividends from our subsidiaries. We are a separate legal entity from our subsidiaries and do not have significant operations of our own. We currently depend on our cash, mortgage-backed securities, credit facilities and liquidity as well as dividends from our subsidiaries to pay our operating expenses and service our debt. There is no assurance that our subsidiaries will continue to have the capacity to pay us the necessary dividends to satisfy our obligations. In particular, the availability of dividends from the Bank is limited by various statutes and regulations. Currently, our Informal Agreement with the OTS prohibits the payment of dividends from the Bank to the Company. Depending upon the financial condition of the Bank and other factors, it is possible that the OTS could assert that the payment of dividends or other payments by the Bank are an unsafe or unsound practice. There can be no assurance of whether or when we will be able to cause the Bank to pay a dividend to the Company in the future.

If the Bank or our other subsidiaries continue to be unable to pay dividends sufficient to satisfy our obligations, or if we are unable to access the marketplace to refinance our outstanding senior debt facility we may not be able to service our debt, pay our obligations as they become due or pay dividends on our common stock.

Risks Associated with Non-Agency Mortgage Backed Securities

Continued deterioration in the underlying performance of our investment securities backed by mortgage loans could create losses in our investment portfolio. Although we sold mortgage-backed securities on June 30, 2009 that represented 100% of our exposure to mortgage-backed securities collateralized by option-adjustable-rate mortgage loans, a majority of the Bank’s investment portfolio is comprised of securities where mortgages are the underlying collateral. These securities include agency-guaranteed mortgage-backed securities and non-agency mortgage-backed securities and collateralized mortgage obligations. With the national downturn in residential real estate markets and the rising mortgage delinquency and foreclosure rates, investors are increasingly concerned about these types of securities, which have negatively impacted the prices of such securities in the marketplace.

Continued negative trends in the loans underlying the mortgage-backed securities, as well as negative trends in home prices in the markets in which the collateral for these loans are located, negative trends in unemployment, and other macroeconomic factors, could all lead to additional material other-than-temporary impairment charges in the future.

The determination of other-than-temporary impairment is a significant estimate and is susceptible to change prospectively. If credit losses on those loans were to exceed the subordinated tranches designed to credit-enhance our securities, we would not receive the full stated interest due on the securities or our full principal balance, or both. Our Company and the Bank own both senior and subordinated tranches of these securities. If we were to conclude there were unrealized losses which were other-than-temporary — which we evaluate, by among other factors, considering estimates of recoverability, as well as the duration and severity of the unrealized loss — we would be required under GAAP to reduce the carrying amount of the securities to fair value and record a corresponding charge to earnings for the portion determined to be due solely to credit, and reduce the remainder of the securities to fair value via a corresponding charge to other comprehensive income. The portion of the charge due to credit losses would also reduce our regulatory capital and negatively impact the Bank’s capital ratios. These negative impacts could significantly impair the Bank’s ability to borrow funds under credit arrangements, as well as negatively impact our material processing and trust depository arrangements and relationships. In addition, if the Bank determined it was more likely than not that it would sell a security or that it was more likely than not that it would be required to sell a security, such impairments would be realized through earnings as other-than-temporary impairments.

Temporary impairments on available for sale securities and the portion of impairments on held to maturity securities in which we have identified as other-than-temporary impairment that is not directly related to credit factors also reduce our book value per share as the changes in the value reduce shareholders’ equity. Although OTS regulations do not prescribe capital ratio levels for the Company per se, additional impairments could reduce capital levels further and below levels our management deems prudent.

Many of the loans underlying the non-agency mortgage-backed securities we own have one or more characteristics increasing the risk of default by the borrowers. These characteristics include, among others, declining real estate values that have reduced the prices of many one-to-four family residences below the amount of the outstanding mortgage debt, limited underwriting documentation at mortgage origination which may have permitted borrowers to become mortgagors of obligations beyond their economic means, declining employment in the United States, and other factors.

Declines in the credit and residential housing markets could result in further losses on our mortgage-backed securities. Credit markets in many sectors have experienced dramatic reductions in liquidity and increases in required returns by investors in credit-sensitive assets. These conditions began in 2007 in the sub-prime mortgage market, but expanded in 2008 to include virtually all non-agency mortgage-backed securities and many other asset-backed markets. At December 31, 2009, approximately 13.7% of our assets were mortgage-backed securities and approximately 89.9% of those securities were non-agency securities. Recent transactions by distressed sellers, and expectations of further distressed sales, have exacerbated market discounts for mortgage-backed securities and generally removed the majority of typical participants from transactions in non-agency securities. As a result, it is difficult to determine fair values for those securities and would likely be difficult to sell securities in the current market at all. We estimate the fair value of the non-agency securities we own was below amortized cost, after giving effect to other-than-temporary impairment charges for the year ended December 31, 2009, by approximately $65.4 million, or 21%, at December 31, 2009. Though the Company does not intend to sell and it is not more likely than not that the Company would be required to sell the securities if it became necessary for us to sell non-agency securities, any sales would almost certainly be at a significant discount to par value which would have a negative effect on our operating results and capital position. Due to current market conditions, we may be unable to sell our non-agency mortgage-backed securities when or if required to meet capital demands.

If any additional of the Bank’s subordinate-tranche, non-agency, mortgage-backed securities were to be downgraded below investment grade by one or more of the nationally recognized securities rating organizations, or NRSROs, which rate the securities, we could be required to maintain additional capital. We hold a number of subordinate-tranche, non-agency, mortgage-backed securities which were rated AAA by one or more NRSROs when the Bank acquired them. If any of these securities were to be downgraded two or more grades below investment grade by any one NRSRO, as described below, we will be required to maintain additional risk-based capital in support of such securities if the Bank elects to continue to hold such securities. The additional amount of risk-based capital required may be as great as the outstanding principal amount of the security. If this were to occur, and the Bank did not have enough risk-based capital to meet its required risk-based capital ratios, the Bank may have to raise additional capital or sell assets in order to maintain its required risk-based capital ratios. If additional capital was not available to the Bank when needed, the Bank would have to consider other alternatives for downgraded subordinate-tranche securities or implement other capital planning strategies to maintain its required capital ratios. These alternatives or other strategies could negatively affect our results of operations, cash flows and financial position. With the distress in the United States mortgage market ensuing since Spring 2008, many of our subordinate-tranche, non-agency, mortgage-backed securities, formerly rated investment grade, have been downgraded to two or more grades below investment grade by one or more NRSROs.

As of December 31, 2009, we held subordinate-tranche, non-agency, mortgage-backed securities with an amortized cost of $116.9 million, of which $42.8 million in amortized cost to us were rated investment grade or one grade below investment grade. With regard to the $42.8 million in amortized cost of subordinate-tranche, non-agency, mortgage-backed securities, we were required to maintain regulatory risk-based capital of $3.1 million to hold such securities at December 31, 2009. The remainder of our subordinate-tranche, non-agency, mortgage-backed securities, $74.1 million in amortized cost, were rated two or more grades below investment grade at December 31, 2009, and the Bank was required to maintain $65.8 million of regulatory risk-based capital in order to hold such securities and maintain a total risk-based capital ratio of at least 10%.

Subsequent to December 31, 2009, approximately $1.4 million of the $42.8 million of subordinate-tranche, non-agency mortgage-backed securities were downgraded to two or more grades below investment grade by at least one NRSRO. Assuming no other changes prior to December 31, 2009, this downgrade would have required the Bank to allocate an estimated $720,000 of additional capital to these securities in order to maintain a total risk-based capital ratio of 10% at December 31, 2009.

We are unable to predict with any degree of accuracy when or if any of our remaining subordinate-tranche, non-agency, mortgage-backed securities with an amortized cost of $42.8 million may be downgraded to two or more grades below investment grade by any NRSRO. Any additional downgrades by the NRSROs to two or more grades below investment grade could cause us to fall below “well capitalized” status under applicable regulations, and have other material adverse effect on our financial condition.

Risks Related to Lending

Our allowance for credit losses may be insufficient. We maintain an allowance for credit losses, which is a reserve established through a provision for credit losses charged to expense, that represents the Company’s best estimate of probable inherent losses within the existing portfolio of loans. The allowance, in the judgment of our Company, is necessary to reserve for estimated credit losses and risks inherent in our loan portfolio. The level of the allowance reflects the Company’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio, and has been increasing as the economy worsens. The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and inherent and as-yet-unidentified losses in the portfolio, all of which may undergo material changes. In addition, the OTS periodically reviews our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of the Company. In light of the current economic environment, significant additional provisions for credit losses may be necessary to supplement the allowance for credit losses in the future. If charge-offs in future periods exceed the allowance for credit losses, we will need additional provisions to increase the allowance for credit losses. We cannot assure you that we will not increase the allowance for credit losses further or that the OTS will not require the Bank to increase its allowance, either of which could adversely affect our Company. Any increases in the allowance for credit losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations and hinder our ability to make payments on the outstanding obligations of our Company.

A significant portion of our loan portfolio is secured by real estate, and a continued downturn in the economy within the markets we serve could significantly hurt our business and prospects for growth. Real estate lending (including commercial, construction, land development, and residential) remains a large portion of the Bank’s loan portfolio. These categories constituted $1.3 billion, or approximately 89% of the Bank’s total loan portfolio as of December 31, 2009. Real estate values are generally affected by changes in economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax and other laws and acts of nature. A downturn in the real estate markets in which the Bank originates, purchases and services mortgage and other loans could hurt our business because these loans are secured by real estate. In addition, even though the Bank’s real property collateral is currently located throughout the United States, we believe that the amount of such collateral in Colorado, which at December 31, 2009 was $798 million, or 55% of our total loan portfolio, is likely to increase as a result of our community banking strategy. A continuation of the downturn in the real estate markets where the Bank has loans could have a material adverse effect on our business, financial condition and results of operations.

Current market conditions include an over-supply of land, lots, and finished homes in many markets including those where we do business. At December 31, 2009, approximately 11.0% of our assets were single-family mortgage loans. We had approximately $3.9 million of nonperforming, single-family mortgage loans in our held for investment portfolio and $9.8 million of nonperforming single-family mortgage loans in our held for sale portfolio at December 31, 2009. If housing markets in our market areas continue to deteriorate, we may experience a further increase in nonperforming loans, provisions for credit losses, charges to reduce the carrying value of loans held for sale to the lower of cost or fair value, and charge-offs. While it is difficult to predict how long these conditions will exist and which markets, products or other segments of our loan and securities portfolio might ultimately be affected, these factors could adversely affect our ability to grow our earning assets or affect our results of operations.

The residential and commercial real estate sectors of the U.S. economy experienced an economic slowdown that has continued in 2009. Specifically, the values of residential and commercial real estate located in our market areas have declined, and these declines may continue in the future. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the full value of the collateral that we anticipated at the time of originating the loan, which could require us to increase our provision for credit losses and adversely affect our financial condition and results of operations.

We are subject to risk related to our concentration of construction and land development and commercial real estate loans. As of December 31, 2009, we had $251 million of construction loans and $92 million of land development loans, of which $295 million, or 86% of the aggregate of such loans, are for projects located in Colorado. Construction loans are subject to risks during the construction phase that are not present in standard residential real estate and commercial real estate loans. These risks include:

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the viability of the contractor;

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the value of the project being subject to successful completion;

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the contractor’s ability to complete the project, to meet deadlines and time schedules and to stay within cost estimates; and

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concentrations of such loans with a single contractor and its affiliates.

Real estate construction loans may involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan and also present risks of default in the event of declines in property values or volatility in the real estate market during the construction phase. Our practice, in the majority of instances, is to secure the personal guaranty of individuals in support of our real estate construction loans which provides us with an additional source of repayment. At December 31, 2009, we had ten nonperforming construction and development loans that totaled $21.7 million and another $11.7 million of assets that have been foreclosed. If one or more of our larger borrowers were to default on their construction and development loans, and we did not have alternative sources of repayment through personal guarantees or other sources, or if any of the aforementioned risks were to occur, we could incur significant losses.

At December 31, 2009, we had $519.6 million of commercial real estate loans. Bank regulatory authorities have issued guidance regarding high concentrations of commercial real estate loans within bank loan portfolios to remind banks that their risk the Company practices and capital levels should be commensurate with the level and nature of their commercial real estate concentration risk. Banks with higher levels of commercial real estate loans are expected to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances for credit losses and capital levels as a result of commercial real estate lending growth and exposures. If there is deterioration in our commercial real estate portfolio or if the OTS concludes that we have not implemented appropriate risk management policies and practices, it could adversely affect our business and result in a requirement of increased capital levels, and such capital may not be available at that time.

The mortgage loans that the Bank holds are subject to risks of delinquency, foreclosure and loss, which could result in losses to us. The residential and commercial mortgage loans held in the Bank’s loan portfolio are secured by residential and commercial properties and are subject to risks of delinquency, foreclosure and loss of principal and interest. The ability of a borrower to repay a loan secured by residential property typically is dependent primarily upon the income or assets of the borrower. In addition, other factors that affect the risk of our mortgage loan portfolio include:

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property location and condition;

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competition and demand for comparable properties;

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changes in zoning laws for the property or its surrounding area;

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environmental contamination at the property;

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the occurrence of any uninsured casualty at the property;

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changes in national, regional or local economic conditions;

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declines in regional or local real estate values;

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increases in interest rates and/or real estate tax rates;

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changes in governmental rules, regulations and fiscal policies, including environmental legislation and tax laws; and

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other events such as acts of God, natural disasters, war, terrorism, social unrest and civil disturbances.

In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy, as determined by the bankruptcy court. The lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process that can have a substantial negative effect on our originally anticipated return on the foreclosed mortgage loan. Prospectively, it is possible there will be changes in bankruptcy laws, as well as other rules and regulations that impact delinquent mortgage loan borrowers that could negatively impact the total recovery we realize on mortgage loans.

The Bank has invested in loan portfolios, pooled securities and mortgage-backed obligations, which may lead to volatility in cash flow and market risk. The Bank’s asset portfolio contains large portfolios of single-family residential loans acquired through bulk purchases and purchased SBA loans and pools. Our investment portfolio largely consists of mortgage-backed securities primarily secured by pools of mortgages on single-family residences. When the Bank acquires such mortgage-backed securities and loans, we anticipate that the underlying notes will prepay at a projected rate, thereby generating an expected yield. Prepayment rates generally increase as interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Some of the Bank’s mortgage-backed securities and many of our bulk single-family loan purchases and purchased SBA loans and pools were acquired at a premium purchase price. In accordance with applicable accounting rules, we will write-off such premiums when necessary due to loan prepayments with respect to our held for sale loan portfolio and amortize such premiums over the expected lives of our mortgage-backed securities and loans held for investment. If the underlying assets that the Bank acquired or that secure our mortgage-backed securities prepays more rapidly than anticipated, we would have to write-off or amortize the premium on an accelerated basis, which would adversely affect our profitability.

We must effectively manage our credit risk. There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. The Bank attempts to minimize its credit risk with prudent loan application approval procedures, including an analysis of the credit risk, a valuation of the underlying collateral, monitoring of loan concentration within specific industries and geographic locations and periodic independent reviews of outstanding loans by our loan review and audit departments. Nevertheless, we are exposed to significant credit risks, including possible errors in the Bank’s credit analysis, the uncertainty of the borrower’s ability to repay the loans, the uncertainty of future economic conditions and the possibility of loan defaults.

Other Risks Related to our Business

Our FDIC deposit insurance premiums have increased and could increase further, which could have a material adverse impact on earnings in the future. The FDIC insures deposits at FDIC insured financial institutions, including the Bank. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund at a certain level. Recent insured depository institution failures, as well as deterioration in banking and economic conditions, have significantly increased the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio of the FDIC to historical lows. The FDIC expects a higher rate of insured depository institution failures in the next few years compared to recent years; thus, the reserve ratio may continue to decline. In addition, the deposit insurance limit on FDIC deposit insurance coverage generally has increased to $250,000 through December 31, 2013. These developments will cause the premiums assessed on us by the FDIC to increase and materially increase our noninterest expense.

Our FDIC insurance related costs were $4.9 million for the year ended December 31, 2009 compared to $1.0 million and $818,000 for the years ended December 31, 2008 and 2007, respectively. We are unable to predict the impact in future periods, including whether and when additional special assessments will occur, in the event the economic crisis continues.

We also participate in the FDIC’s Temporary Liquidity Guarantee Program, or TLGP, for noninterest-bearing transaction deposit accounts. Banks that participate in the TLGP’s noninterest-bearing transaction account guarantee will pay the FDIC an annual assessment of 10 basis points on the amounts in such accounts above the amounts covered by FDIC deposit insurance. To the extent that these TLGP assessments are insufficient to cover any loss or expenses arising from the TLGP program, the FDIC is authorized to impose an emergency special assessment on all FDIC-insured depository institutions. The FDIC has authority to impose charges for the TLGP program upon depository institution holding companies as well. These actions could significantly increase our noninterest expense for the foreseeable future.

Our business is subject to interest rate risk. Our Company’s earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect:

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our Company’s ability to originate loans and obtain deposits;

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the fair value of our Company’s financial assets and liabilities;

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the average duration of our Company’s mortgage-backed securities portfolio; and

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other mortgage and servicing assets

If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Our earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Although our management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our Company’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our Company’s financial condition and results of operations.

Continued declines in interest rates would likely hurt our earnings. The decline in market interest rates that occurred in 2008 and in particular in the fourth quarter of 2008 that continued into 2009 negatively impacted our net interest income. While we believe that the continued implementation of our community bank business plan, and its expected change in asset and liability mix, will partially mitigate the impact of lower market rates, any additional declines in interest rates are expected to have a negative impact on net interest income, net interest spread, net interest margin, and overall results of operations.

As a savings bank, pursuant to the Home Owners’ Loan Act, or HOLA, the Bank is required to maintain a certain percentage of its total assets in HOLA-qualifying loans and investments, which limits our asset mix and could significantly restrict our ability to sell certain assets to obtain liquidity. A savings bank or thrift differs from a commercial bank in that it is required to maintain at least 65% of its total assets in HOLA-qualifying loans and investments, such as loans for the purchase, refinance, construction, improvement, or repair of residential real estate, home equity loans, educational loans and small business loans. To maintain our thrift charter we have to pass the Qualified Thrift Lender test, or QTL test, in 9 out of 12 of the immediately preceding months. The QTL test limits the extent to which we can grow our commercial loan portfolio. However, a loan that does not exceed $2 million (including a group of loans to one borrower) and is for commercial, corporate, business, or agricultural purposes is not so limited. We may be limited in our ability to change our asset mix and increase the yield on our earning assets by growing our commercial loan portfolio. At December 31, 2009, the Bank complied with the QTL test.

In addition, if we continue to grow our commercial loan portfolio and our single-family loan portfolio declines, it is possible that in order to maintain our QTL status, we could be forced to buy mortgage-backed securities or other HOLA-qualifying assets at times when the terms might not be attractive. Alternatively, we could find it necessary to pursue different structures, including converting the Bank’s thrift charter to a commercial bank charter.

Our quarterly results may fluctuate. Our financial results are subject to significant quarterly fluctuations as a result of, among other things, our loan production, opening of new branch locations, development of new products and services, premium amortization caused by prepayments of certain assets, such as our single-family mortgage loans, guaranteed SBA loans and pooled securities and changes in interest rates. Our operating results will fluctuate significantly in the future as a result of a variety of factors, some of which are outside of our control, including general economic conditions, economic conditions in the financial industry, the effects of governmental regulations and regulatory changes, capital expenditures and other costs relating to the expansion of operations, the introduction of new services by us or our competitors and the mix of services sold. In response to a changing competitive environment, we may elect from time-to-time to make certain pricing, service, or marketing decisions or enter into strategic alliances or make investments that could have a material adverse effect on our business, results of operations, financial condition and cash flow. Accordingly, our results of operations for any particular quarter are not necessarily indicative of the results that may be achieved for any succeeding quarter or for the full fiscal year.

If we sell mortgage loans or mortgage servicing rights and the underlying loan defaults, we may be liable to the purchaser for unpaid principal and interest on the loan. In the ordinary course of selling mortgage loans or mortgage servicing rights and in accordance with industry standards, we make certain representations and warranties to purchasers. If a loan defaults and there has been a breach of representations or warranties and we have no recourse against a third party, we may become liable for the unpaid principal and interest on the defaulted loan. In such a case, we may be required to repurchase the mortgage loan and bear any subsequent loss on the loan. When we purchased mortgage servicing rights or mortgage loans, we also may have been exposed to liability to the extent that an originator or other seller of the servicing rights is unable to honor its representations and warranties to us. Our Company has established a reserve for repurchases that may be required in connection with loans we originated and sold in connection with the sale of our production platform in 2003.

Curtailment of government guaranteed loan programs could affect our SBA business. The Bank’s small business department relies on originating, purchasing, pooling and selling government guaranteed loans, in particular those guaranteed by the SBA. From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee loans for a period of time. In addition, these agencies may change their rules for loans or legislation may discontinue or change the programs. If changes occur, the volumes of loans that qualify for government guarantees could decline, which could in turn reduce the profitability of the Bank’s small business department.

We are exposed to risk of environmental liabilities. If we foreclose and take title to real estate, we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.

Failure in our automated systems and controls could subject us to increased operating or other liabilities. We depend heavily upon our automated systems and controls for our business and operations. These systems and controls support the evaluation, acquisition, monitoring, collection and administration of our loan and servicing portfolios, depository, general accounting and other management functions. The failure of the automated systems, including a failure of data integrity or accuracy, could have a material adverse effect on our business and financial condition.

In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us against damage from physical break-ins, security breaches and other disruptive problems caused by the Internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and deter potential customers. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. A failure of such security measures could have an adverse effect on our financial condition and results of operations.

Breaches of our computer and network security systems may result in customer information being compromised and/or identity theft. We maintain personal and financial information about our current, past and potential customers on our computer systems and network infrastructure, such as customer names, addresses, social security numbers, tax identification numbers, bank account numbers, information on loan applications and other sensitive personal and financial information. In addition, our customers may use the Internet to connect to the Bank’s website to retrieve information about their accounts and to conduct online transactions, such as online bill payments. If the security of our encrypted computer systems and network infrastructure responsible for storing our customers’ personal and financial data and information or the security of our online banking Internet services is breached, then customer information could be stolen and misused. Such misuse could include the loss of privacy resulting from the disclosure of the information to third parties, credit fraud or other consequences of identity theft to the customer.

While we believe that our current encrypted systems meet or exceed all commercial standards for network security, new criminal schemes or capabilities could compromise or breach our systems and network infrastructure. If our security measures fail to protect our customer’s information, our existing and future customer base may be adversely affected, we may become subject to customer claims or lawsuits, our public image may be diminished, and our results of operations and financial condition could be adversely affected.

We may be adversely affected by changes in laws and regulations and the regulatory environment. In June 2009, the U.S. Department of the Treasury, or Treasury, issued a “white paper” containing several federal legislative proposals that, if enacted into law, would make substantial changes to the present U.S. financial services regulatory framework. One legislative proposal would eliminate the OTS and the federal savings bank or “thrift” charter, subject to “reasonable transition arrangements.” One of these transition arrangements might involve conversion of the federal thrift charter into a national bank charter, which would result in the Office of the Comptroller of the Currency (or successor thereto) having principal regulatory and supervisory authority over former thrift institutions. The Bank conducts its business pursuant to a federal thrift charter.

In response to the U.S. Treasury Department’s proposal, various bills were introduced by the Financial Services Committee of the U.S. House of Representatives, which were ultimately consolidated into the Wall Street Reform and Consumer Protection Act of 2009, passed by the U.S. House of Representatives in December 2009. Among other things, this legislation establishes a new Consumer Financial Protection Agency to regulate products like home mortgages, car loans and credit cards, and consolidates the OTS into the Office of the Comptroller of the Currency. As with the U.S. Treasury Department’s proposal, under the House legislation savings institution holding companies would be subject to supervision and regulation by the Federal Reserve Board.

In November 2009, Senate Banking Chairman Christopher Dodd introduced a financial regulatory reform bill entitled the Restoring American Financial Stability Act of 2009 which further builds on the Treasury proposal. That legislation, if enacted, would remove bank and bank holding company regulatory powers from the Board of Governors of the Federal Reserve System, eliminate both the Office of Thrift Supervision and the Office of the Comptroller of the Currency, and establish a single bank and bank holding company regulator known as the Financial Institutions Regulatory Administration. Under this proposal, savings and loan holding companies that were regulated by the Office of Thrift Supervision would become subject to supervision and regulation by this new regulator. The Senate bill would also establish an independent Consumer Financial Protection Agency, under which consumer protection responsibilities currently handled by the bank and credit union regulators and the Federal Trade Commission would be consolidated.

Although it is impossible to predict which of these proposals, if any, may be adopted by the full Congress and signed into law, these pending proposals may significantly affect the Company and the Bank. If the reforms contained in the U.S. Treasury Department or House Financial Service Committee proposals are fully enacted, the Company would become a bank holding company subject to supervision by the Board of Governors of the Federal Reserve System as opposed to the Office of Thrift Supervision, and we expect we would become subject to the Federal Reserve’s regulations, including holding company capital requirements, that the Company is not subject to as a savings and loan holding company. Holding company capital requirements could reduce capital available for dividends and share repurchases. In addition, under the reforms contained in the Senate proposal, the Company would become subject to supervision and regulation by the Financial Institutions Regulatory Administration, a new federal regulatory agency. Compliance with new regulations and being supervised by one or more new regulatory agencies could increase our expenses and affect the conduct of our business. In addition, the proposals could lead to heightened restrictions being placed upon institutions and activities that increase systemic risk. Such restrictions would likely relate to liquidity, capital, and leverage requirements.

Any change in the laws or regulations applicable to us, or in supervisory policies or examination procedures of banking regulators, whether by the OTS, the FDIC, the Treasury, the FHLBank System, the United States Congress, the Texas Department of Banking, or other federal or state regulators, could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, bank regulatory authorities have extensive discretion in the exercise of their supervisory and enforcement powers. They may, among other things, impose restrictions on the operation of a banking institution, the classification of assets by such institution and such institution’s allowance for credit losses, require changes in other significant accounting estimates including the determination of the fair value of assets and other-than-temporary impairment. Additionally, bank regulatory authorities have the authority to bring enforcement actions against banks and their holding companies for unsafe or unsound practices in the conduct of their businesses or for violations of any law, rule or regulation, any condition imposed in writing by the appropriate bank regulatory agency or any written agreement with the agency. Possible enforcement actions against us could include the issuance of a cease-and-desist order that could be judicially enforced, the imposition of civil monetary penalties, the issuance of directives to increase capital or enter into a strategic transaction, whether by merger or otherwise, with a third party, the appointment of a conservator or receiver, the termination of insurance of deposits, the issuance of removal and prohibition orders against institution-affiliated parties, and the enforcement of such actions through injunctions or restraining orders.

Regulatory and law enforcement authorities also have wide discretion and extensive enforcement powers under various consumer protection and civil rights laws, including the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Truth-in-Saving Act, the Federal Trade Commission Act and Colorado’s deceptive trade practices act. These laws also permit private individual and class action lawsuits and provide for the recovery of attorneys fees in certain instances.

We are subject to examinations and challenges by tax authorities. We are subject to federal and state income tax regulations. Income tax regulations are often complex and require interpretation. Changes in income tax regulations could negatively impact our results of operations. In the normal course of business, we are subject to examinations and challenges from federal and state tax authorities regarding the amount of taxes due in connection with investments we have made and the businesses in which we have engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to tax compliance, sales and use, gross receipts, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in our favor, they could have a material adverse effect on our financial condition and results of operations.

Restriction on use of tax attributes from tax law “ownership change.” As of December 31, 2009, we had approximately $80 million of net unrealized built in losses (“NUBIL”), which for tax purposes represent the amount by which the adjusted tax basis of our assets exceeds their fair market value. Section 382 of the Internal Revenue Code imposes limitations on a corporation’s ability to use its NUBIL and other tax attributes, such as net operating loss and tax credit carryforwards, when it undergoes a 50% “ownership change” over a designated testing period (not to exceed three years). We regularly monitor ownership changes (as calculated for purposes of Section 382) based on available information and, as of December 31, 2009, our analysis indicated that we were below the 50% ownership change threshold that would limit our ability to utilize our NUBIL and other tax attributes. However, taking into account the common stock offerings in 2009, we expect we are close to the 50% ownership change level. As a result, any future transaction or transactions and the timing of such transaction or transactions could trigger an ownership change under Section 382. Such transactions may include, but are not limited to, additional repurchases or issuances of common stock, or acquisitions or sales of shares of our stock by certain holders of our shares, including persons who have held, currently hold or may accumulate in the future 5% or more of our outstanding common stock (“5% Holders”) for their own account.

If an ownership change were to occur for purposes of Section 382, we would be required to calculate an annual limitation on the amount of our taxable income that may be offset by losses arising from the recognition of NUBIL or other tax attributes which existed at the time of such ownership change. That limitation would apply to built in losses recognized during a five-year period after the date of the ownership change. The annual limitation would be calculated based upon the fair market value of our equity at the time of such ownership change, multiplied by a federal long-term tax exempt rate (currently 4.03%), and the annual restriction could eliminate our ability to use a substantial portion of our NUBIL or other tax attributes to offset future taxable income.

UW Trust Company is subject to regulation as a trust company and could be the subject of third party actions. As a Texas chartered trust company, UW Trust is subject to supervision, regulation and examination by the Texas Department of Banking. UW Trust’s activities are limited by applicable law generally to acting as a trustee, executor, administrator, guardian or agent for the performance of any lawful act, and to accumulate money when authorized under applicable law.

UW Trust has been in the past, and may be in the future, subject to claims by third parties regarding breach of contract, breach of fiduciary duty, or similar claims alleging violation of duty or law. While we believe applicable law supports our view of UW Trust’s duties, or lack thereof, in that regard, there can be no assurances that we will prevail in any litigation or other proceeding challenging the matter.

Significant legal actions could subject our Company to substantial liabilities. We are from time to time subject to various legal claims related to our operations. These claims and legal actions, including potential supervisory actions by our Company’s regulators, could involve large monetary claims and significant defense costs. As a result, we may be exposed to substantial liabilities, which could adversely affect our results of operations and financial condition.

Risks Related to our Business Strategy

We may be unable to fully implement our community banking business strategy. We are 48 months into our community bank transition, and in order to complete the execution of this strategy we must, among other things:

•

attract sufficient commercial business and community bank deposits;

•

attract and maintain business banking relationships with businesses in the markets in which we serve;

•

attract and retain experienced and successful commercial and community bankers;

•

identify and pursue suitable opportunities for opening new branches in the Colorado Front Range and selected mountain community markets;

•

maintain adequate regulatory capital and comply with applicable federal and state regulations; and

•

originate community bank loans and maintain adequate asset quality.

Failure to achieve these strategic goals could adversely affect our ability to fully implement our community banking business strategies as well as our overall financial condition and results of operations.

We may not be able to effectively manage our proposed growth. Our business strategy contemplates, in part, an increase in our franchise value by expanding into additional communities in the Colorado Front Range and selected mountain communities through a branch network for the Bank. To the extent that we undertake additional branch openings, we are likely to experience the effects of higher operating expenses relative to operating income from our expansion efforts for a period of time. We may acquire or lease other sites for future expansion. While we are committed to this strategy, our expansion could significantly burden our infrastructure or we may be unable to manage this growth. In addition, we may enter new lines of business or pursue other strategies intended to complement our community banking business plan implementation. To the extent we undertake such actions, we may experience higher operating costs and these new activities may not be successful.

We may not be able to attract and retain key personnel. Our business strategy requires us to attract and to retain management experienced in community banking and financial services that live in the communities we serve. Our ability to retain our existing executive officers, regional presidents, and community banking staff is important to the successful implementation of our strategy. The unexpected loss of key personnel or the inability to recruit and retain qualified personnel in the future could have a material adverse effect on our business.

Adverse economic conditions in the Colorado Front Range and our mountain community markets could impair the execution of our business strategy. The success of our business strategy depends primarily on the general economic conditions in our markets because local economic conditions will materially affect commercial real estate, including construction and land development, and residential loans originated, the ability of the borrowers to repay these loans and the value of the collateral securing these loans.

Risks Relating to Ownership of Our Common Stock

The trading volume of our stock is low. The low trading volume in our common shares on the NASDAQ Global Market means that our shares may have less liquidity than other publicly traded companies. We cannot ensure that the volume of trading in our common shares will increase in the future. Furthermore, to the extent shares are concentrated in a relatively small group of holders, a seller could be subject to significant adverse price volatility and price fluctuation. At December 31, 2009, based on filings made by third parties with the Securities and Exchange Commission, we believe that eleven holders owned 47.3% of our outstanding common stock. This includes shares held by our Chairman of the Board, Guy A. Gibson, who owns 1,335,305 shares, or 4.55% of our outstanding common stock.

We may issue additional shares of common or preferred stock, which may cause dilution and other risks. Our board of directors may authorize the issuance of additional common or preferred stock in connection with future equity offerings, acquisitions of securities or assets of other companies or to be used as compensation for our executive officers. Furthermore, there are significant implementation risks associated with the acquisition and integration of another entity into our Company that could adversely impact our financial condition and results of operations. Our board may also classify or reclassify any unissued preferred stock and set the preferences, rights and other terms of the classified or reclassified shares, including the issuance of preferred stock with preference rights over the common stock with respect to dividends, liquidation, voting and other matters. In any event, the issuance of additional shares of our common stock could be dilutive to shareholders who do not invest in future offerings. Moreover, to the extent that we issue options, warrants or similar instruments to purchase our common stock in the future and those options, warrants or similar instruments are exercised or we issue restricted stock which subsequently vests, our shareholders may experience future dilution.

The market price of our common stock may fluctuate significantly. The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, including some that are beyond our control and that may not be directly related to our operating performance. These factors include the following:

•

changes in earnings estimates or recommendations by analysts who cover our common stock;

•

variations in our quarterly operating results or the quarterly financial results of companies perceived to be competitors or similar to us;

•

changes in our capital structure, such as future issuances of securities, sales of large blocks of common stock by our shareholders or the incurrence of additional debt; and

•

changes in general economic and market conditions.

Item 1B.		Unresolved Staff Comments

None.

Item 2.		Properties

We believe that all of our present facilities are adequate for our current needs and that additional space is available for future expansion on acceptable terms. The following table sets forth certain information concerning the real estate that we own or lease:

						Monthly Rent or
						Mortgage
Location		Owned/Leased		Occupant		Payment
Denver, CO		Leased through October 31, 2016 (1)		United Western Bancorp and various of its subsidiaries		$	142,646
Highlands Ranch, CO		Leased month to month		United Western Bancorp		$	2,400
Dallas, TX		Leased month to month		United Western Bancorp		$	875
Aspen, CO		Leased		United Western Bank — Aspen office		$	8,112
Boulder, CO		Leased (land lease)		United Western Bank — Boulder Branch		$	1,356
Denver, CO		Leased (land lease)		United Western Bank — Cherry Creek Branch		$	8,974
Fort Collins, CO		Owned		United Western Bank — Fort Collins Branch			N/A
Loveland, CO		Owned		United Western Bank — Loveland Branch			N/A
Longmont, CO		Owned		United Western Bank — Longmont Branch			N/A
Denver, CO		Leased (land lease)		United Western Bank — Hampden Branch		$	13,240
Centennial CO		Owned		United Western Bank — DTC Branch			N/A
Thornton, CO		Leased through April 2010		United Western Bancorp		$	3,000
Waco, TX		Leased month to month		UW Trust Company		$	3,754
Phoenix, AZ		Leased through September 30, 2015		Matrix Financial Services		$	8,885
St. Louis, MO		Leased through June 30, 2012		Equi-Mor Holdings, Inc.		$	14,125
Ft. Lupton, CO		Owned		Matrix Funding Corp.			N/A

Item 3.		Legal Proceedings

General. We are from time to time party to various litigation matters, in most cases involving ordinary and routine claims incidental to our business. We accrue for contingent liabilities with respect to litigation matters in accordance with the requirements of generally accepted accounting principles (“GAAP”), which generally requires the Company to accrue a loss for a litigation matter involving a contingent liability if the loss is probable and the amount of the loss is reasonably estimable. In order to determine whether the two conditions necessary for accrual are met, management necessarily makes a number of judgments and assumptions. Because the outcome of most litigation matters is inherently uncertain, the Company will generally only accrue a loss for a pending litigation matter if, for example, the parties to the matter have entered into definitive settlement agreements or a final judgment adverse to the Company has been entered.

In many cases, these settlements or final judgments are not material to the consolidated financial position, results of operations or cash flows of the Company. Nevertheless, an adverse decision in certain matters, as described below, may have a material, adverse impact on our consolidated financial position, results of operations or cash flows.

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, Messrs. Curd and Snodgrass, 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. On September 30, 2009, the Court granted in part the Company’s, First Matrix’s and Messrs. Curd’s and Snodgrass’ Motion for Summary Judgment. In granting partial summary judgment for the defendants, the court agreed to dismiss (i) plaintiffs’ Idaho Consumer Protection Act claim; (ii) the claims by United Heritage Financial Group (“UHFG”), the parent of United Heritage Life Insurance Company (“UHLIC”) against the defendants since UHLIC sold all but a $425,000 interest in the subject bond to UHFG, thereby reducing UHLIC’s claim from $1.70 million to $425,000; in addition, UHLIC’s claim was further reduced to $212,500 since UHLIC and UHFG sold their entire interest in the bond to a third party for fifty cents on the dollar and (iii) Messrs. Curd and Snodgrass from the matter. On December 15, 2009, the parties entered into a settlement and release agreement to fully settle the litigation. Under the terms of the settlement and release agreement, First Matrix agreed to pay $100,000 to the plaintiffs (of which 85% was covered by insurance) and the plaintiffs agreed to dismiss the lawsuit with prejudice.

United Western Bancorp, Inc. and UW Trust Company. William R. and Carolyn Richoz, et al. v. United Western Trust Company f/k/a Sterling Trust and United Western Bancorp, Inc. In October of 2009, plaintiffs filed an amended class action complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against United Western Trust Company f/k/a Sterling Trust and United Western Bancorp, Inc. The plaintiffs allege that they were damaged when they invested proceeds from their self-directed individual retirement accounts with InvestForClosures and other related entities using UW Trust Company as custodian for such investments. Plaintiffs claim UW Trust Company breached its fiduciary duties owed to plaintiffs as custodian of individual retirement accounts set up through UW Trust Company by plaintiffs. Plaintiffs also allege that UW Trust Company knew that these investment were part of a Ponzi scheme to defraud investors, that UW Trust Company’s actions violated the Texas Securities Act, Illinois securities laws and the Illinois Consumer Fraud Act and that UW Trust was unjustly enriched in excess of $5 million, should pay compensatory damages of $5 million and exemplary damages in the amount of $20 million. On December 28, 2009, the parties filed a stipulation with the court voluntarily dismissing the action without prejudice.

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 a processing and trust 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 processing and trust account maintained at the Bank. On December 28, 2009, the Court agreed to dismiss the action with prejudice.

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 of money (“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 for 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. With respect to plaintiffs’ claims against the Bank, plaintiffs alleged, among other things, 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. On October 2, 2009, the Bank filed a Motion to Dismiss with the court requesting the court to dismiss all plaintiffs’ claims against the Bank since the Bank successfully initiated the QI’s wire transfers, and therefore, the Bank cannot be held liable under U.C.C. Article 4-A. On February 3, 2010, the court granted the Bank’s Motion to Dismiss agreeing with the Bank that the Bank cannot be held liable under U.C.C. Article 4-A; and furthermore, that all common law claims against the Bank are preempted by U.C.C Article 4-A. While the court dismissed the Bank from the action, it granted the plaintiffs with leave to amend the complaint. On March 3, 2010, the plaintiffs filed a second amended complaint with the court against the Bank and other defendants, making the following allegations specifically against the Bank: (i) aiding and abetting a breach of fiduciary duty by means of non-electronic transfers; (ii) aiding and abetting fraud by means of non-electronic transfers; (iii) aiding and abetting fraud; (iv) conversion and aiding and abetting conversion by means of non-electronic transfers; (v) conversion; (vi) aiding and abetting a conversion; (vii) contractual interference; (viii) negligence and (ix) violations of U.C.C. Article 4-A. While the Bank’s liability, if any, to the plaintiffs claims 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. On September 15, 2009, the plaintiffs agreed to dismiss the Bank’s loan officer from the matter. On January 4, 2010, the parties to the action agreed to stipulate to dismissing the action without prejudice.

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Market Prices and Dividends

Our common stock, $0.0001 par value, is traded on the NASDAQ Global Market under the symbol “UWBK.” The following table sets forth the quarterly market price for our common stock and cash dividends paid per share of our common stock for 2009 and 2008:

		Market Price
		High				Low				Dividends Paid
Quarter Ended:
December 31, 2009		$	4.29			$	2.17			$	—
September 30, 2009			10.17				3.71				0.01
June 30, 2009			10.85				4.44				0.06
March 31, 2009			9.98				4.40				0.06
December 31, 2008		$	12.15			$	6.98			$	0.06
September 30, 2008			13.68				9.92				0.06
June 30, 2008			18.08				12.42				0.06
March 31, 2008			20.09				15.60				0.06

At March 11, 2010, there were 29,358,580 shares of the Company’s common stock outstanding held by 149 holders of record, which excludes beneficial owners who hold their shares through nominees or in “street” name. The closing price per share of common stock on December 31, 2009, the last trading day of the Company’s fiscal year, was $2.76.

Dividends

Given current economic conditions the board of directors reduced the dividend to $.01 in the third quarter of 2009. Given the continuation of the difficult economic conditions as well as our results of operations, the Company and the board of directors have decided to suspend our quarterly cash dividends. Additionally, in accordance with the Informal Agreement between the Company and the OTS, the Company is required to obtain the prior written non-objection of the OTS prior to the declaration of a dividend or other capital distribution or redemption of any common stock. There can be no assurance as to future dividends because they are dependent on the Company’s future earnings, capital requirements and financial conditions. Further, if the scheduled payments on our junior subordinated debentures and trust preferred securities have not been made the Company would be prohibited from the payment of dividends. See Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Liquidity and Capital” in this report and Notes 13 and 14 to the financial statements. The ability of UW Trust, UWIS and United Western Bank to pay dividends to United Western Bancorp may be restricted due to certain regulatory requirements. See Item 1. “Business — Regulation and Supervision” in this report.

Issuer Purchases of Equity Securities

The following table provides information with respect to purchases made by the Company of the Company’s common stock during 2008 and 2007. There were no purchases made by the Company of the Company’s common stock during 2009.

										Total Number of				Maximum Number
										Shares Purchased				of Shares that may
		Total Number of				Average Price				as part of Publicly				yet be purchased
		Shares Purchased				Paid per Share				Announced Plan				under the Plan
January 1 through February 28, 2008			—			$	—				—				—
March 1 through March 31, 2008			13,900				16.25				13,900				365,018
April 1 through May 31, 2008			—				—				—				—
June 1 through June 30, 2008			100,000				13.79				100,000				265,018
July 1 through December 31, 2008			—				—				—				—
Total			113,900			$	14.09				113,900				265,018

										Total Number of				Maximum Number
										Shares Purchased				of Shares that may
		Total Number of				Average Price				as part of Publicly				yet be purchased
		Shares Purchased				Paid per Share				Announced Plan				under the Plan
January 1 through July 31, 2007			—			$	—				—				—
August 1 through August 31, 2007			25,000				21.54				25,000				414,118
September 1 through November 30, 2007			—				—				—				—
December 1 through December 31, 2007			35,200				20.23				35,200				378,918
Total			60,200			$	20.78				60,200				378,918

In November 2006, the Company’s Board of Directors authorized the repurchase of up to five percent of the Company’s outstanding common stock. On August 2, 2007, the Company’s Board of Directors authorized the repurchase of up to an additional five percent of the outstanding shares of the Company’s common stock. The repurchases of the Company’s common stock was made pursuant to those authorizations. Although there were 265,018 remaining available shares that were authorized for repurchase, the Company did not repurchase any shares during 2009. As shown in the table above, the Company discontinued the repurchase of its common shares by June 2008, and the Company has no further plans to repurchase additional shares of its common stock, which would require the non-objection of the OTS.

Performance Graph

The performance graph below compares the cumulative total shareholder return on United Western Bancorp, Inc. common stock with the cumulative total return on the equity securities of companies included in the SNL $1 billion to $5 billion Thrift Index and the Russell 2000 Index. The graph assumes an investment of $100 on December 31, 2004 and reinvestment of dividends on the date of payment without commissions. The performance graph represents past performance and should not be considered to be an indication of future performance.

Index		12/31/2004				12/31/2005				12/31/2006				12/31/2007				12/31/2008				12/31/2009
United Western Bancorp, Inc.		$	100.00			$	150.36			$	159.79			$	161.57			$	76.99			$	23.18
SNL $1B-$5B Thrift index			100.00				99.12				114.01				88.94				75.87				63.69
Russell 2000			100.00				104.55				123.76				121.82				80.66				102.58

Item 6.		Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION

The following selected consolidated financial data and operating information of United Western Bancorp, Inc. and subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which is included elsewhere in this report.

Information presented in this table is from continuing operations. This information excludes, for all periods presented, the results associated with the assets of UW Trust associated with custodial IRA and qualified employee benefit plan businesses, which we sold on June 27, 2009, the results of Matrix Bancorp Trading, Inc., a former brokerage subsidiary, which we sold certain assets and the operations of effective March 31, 2006, and ABS School Services, LLC, our former school services subsidiary, which we sold to former executive officers of the Company on May 5, 2006. We concluded that substantial benefit could be received by the Company by executing a sale of the UW Trust custodial IRA and qualified employee benefit plan businesses. The dispositions of Matrix Bancorp Trading, Inc. and ABS School Services, LLC, were part of our strategy to divest certain non-core operations of the Company. All three divestitures are reported as discontinued operations. The results from continuing operations as reflected herein are not necessarily reflective of the financial results that might have occurred had the dispositions referred to above actually been completed on the indicated date, and are not indicative of any future results.

		As of and for the Year Ended December 31,
		2009				2008				2007				2006				2005
		(Dollars in thousands, except per share data)
Statement of Operations Data
Interest and dividend income		$	101,507			$	115,017			$	121,559			$	115,300			$	87,096
Interest expense			31,193				33,032				52,717				59,783				42,466
Net interest income before provision for credit losses			70,314				81,985				68,842				55,517				44,630
Provision for credit losses			35,032				8,599				2,312				2,019				891
Net interest income after provision for credit losses			35,282				73,386				66,530				53,498				43,739
Noninterest income:
Custodial, administrative and escrow services			491				864				606				302				1,319
Loan administration			4,290				4,914				6,311				7,749				10,103
Gain on sale of loans held for sale			2,248				764				2,124				640				1,511
(Loss) gain on trading securities			—				—				—				(229	)			613
(Loss) gain on sale of available for sale investment securities			(46,980	)			—				98				274				(122	)
Total other-than-temporary impairment losses			(42,790	)			(4,110	)			—				—				—
Portion of loss recognized in other comprehensive income (before taxes)			6,197				—				—				—				—
Net impairment losses recognized in earnings			(36,593	)			(4,110	)			—				—				—
Gain on sale of investment in Matrix Financial Solutions, Inc.			3,567				—				—				—				—
Gain on sale of assets			—				—				—				3,100				300
Litigation settlements			—				—				155				2,550				764
Other			2,450				3,072				3,729				8,265				8,203
Total noninterest (loss) income			(70,527	)			5,504				13,023				22,651				22,691
Noninterest expense			76,892				66,130				66,085				61,885				65,136
(Loss) income from continuing operations before income taxes			(112,137	)			12,760				13,468				14,264				1,294
Income tax (benefit) expense			(32,567	)			2,635				3,315				3,885				(318	)
(Loss) income from continuing operations		$	(79,570	)		$	10,125			$	10,153			$	10,379			$	1,612
(Loss) income from continuing operations per share basic		$	(6.06	)		$	1.39			$	1.39			$	1.33			$	0.23
(Loss) income from continuing operations per share — assuming dilution (1)		$	(6.06	)		$	1.39			$	1.39			$	1.33			$	0.23
Weighted average common shares — basic			13,139,070				7,164,250				7,247,636				7,791,516				6,943,480
Weighted average common shares — assuming dilution			13,139,070				7,164,598				7,256,484				7,791,516				7,035,948

		As of and for the Year Ended December 31,
		2009				2008				2007				2006				2005
Balance Sheet Data
Total assets		$	2,526,172			$	2,259,429			$	2,096,559			$	2,156,548			$	2,079,388
Cash and due from banks			586,380				22,880				40,806				23,754				34,232
Investment securities			390,199				558,037				661,781				838,979				540,194
Loans held for investment, net			1,150,105				1,233,301				885,710				711,601				425,943
Loans held for sale — at lower of cost or fair value			260,757				291,620				369,071				444,120				927,442
Mortgage servicing rights, net			7,344				9,496				11,971				15,399				20,708
Deposits(2)			1,993,513				1,724,672				1,385,481				1,345,681				1,124,044
Custodial escrow balances			31,905				29,697				34,172				40,017				49,385
FHLBank borrowings			180,607				226,721				406,129				519,431				615,028
Junior subordinated debentures owed to unconsolidated subsidiary trusts			30,442				30,442				30,442				56,216				61,372
United Western Bank repurchase agreements			78,635				81,265				76,428				50,000				—
Other borrowings			30,000				38,000				21,000				10,000				29,581
Total shareholders’ equity(3)			159,651				101,949				113,421				107,753				180,728
Operating Ratios and Other Selected Data
Average equity to average total assets(4)			5.62	%			5.01	%			5.42	%			5.12	%			5.00	%
Yield on assets			4.31				5.54				6.09				5.63				4.75
Cost of liabilities			1.45				1.80				3.06				3.26				2.56
Net interest margin(4)(5)			3.00				3.96				3.46				2.74				2.44
Return from continuing operations on average total assets(4)		NMF					0.46				0.48				0.48				0.08
Return from continuing operations on average equity(4)		NMF					9.21				8.92				9.34				1.61
Operating efficiency ratio(4) and (6)		NMF					72.57				76.46				72.09				86.97
Ratios of Earnings to Fixed Charges(7)
Including interest on deposits		NMF					1.38	X			1.25	X			1.24	X			1.03	X
Excluding interest on deposits		NMF					1.60				1.51				1.38				1.05
Total Loan Performance Ratios and Data
Nonperforming loans(8)		$	54,290			$	21,899			$	10,475			$	8,398			$	16,894
Nonperforming loans/total loans(8)			3.76	%			1.42	%			0.83	%			0.72	%			1.24	%
Nonperforming assets/total assets(8)			2.80				1.17				0.65				0.64				1.03
Net loan charge-offs/average loans(4)			1.33				0.04				0.07				0.11				0.46
Loans held for Investment Performance Ratios and Data
Allowance for credit losses		$	34,669			$	16,183			$	8,000			$	6,231			$	4,808
Nonperforming loans held for investment(8)			60,833				13,064				4,251				3,675				9,601
Nonperforming loans held for investment /total loans held for investment(8)			5.13	%			1.05	%			0.48	%			0.51	%			2.23	%
Allowance for credit losses/total loans held for investment			2.93				1.30				0.90				0.87				1.12
Allowance for credit losses/nonperforming loans held for investment			56.99				123.87				188.19				169.55				50.08

Fourth Quarter Results

Loss from continuing operations for the fourth quarter of 2009 was $40.6 million or $(1.40) per diluted share compared to loss from continuing operations of $8.7 million for the third quarter of 2009 or $(0.95) per diluted share. The Company reported income from continuing operations of $2.4 million or $0.33 per diluted share in the fourth quarter of 2008. The results of the fourth quarter of 2009 were significantly impacted by the current economic environment.

Comparing the fourth quarter to the third quarter of 2009, net interest income declined $809,000, as a result of the change in asset mix caused principally by excess liquidity we have maintained on our balance sheet. Total interest income for the fourth quarter of 2009 declined by $1.1 million, to $24.2 million as compared to $25.2 million for the third quarter of 2009. Interest income on community bank loans decreased $584,000 due to the $41.6 million decrease in average community bank loans between the periods. Interest income from other loans and securities declined $726,000 between the third and fourth quarter of 2009. This decline was the result of (i) higher levels of premium amortization on purchased SBA loans and securities of $166,000, and (ii) overall lower average other loans and securities in the fourth quarter of 2009, of $44.9 million which was principally due to payoffs. Interest income from other earning assets increased $246,000 between the third and fourth quarter of 2009, on an average increase of $327.9 million of the principal balance of such assets. We maintained this additional liquidity on our balance sheet based on our decision to assess fourth quarter provision for credit loss levels and potential for other-than-temporary impairment charges prior to reducing this balance. Overall these items impacted the fourth quarter of 2009 yield on interest-earning assets which was 3.66% compared to 4.2% for the third quarter of 2009. Interest expense declined $255,000 in the fourth quarter which was principally the result of a decline in the rates paid on certificate of deposits accounts. In the fourth quarter the cost of funds was 1.31% compared to 1.48% for the third quarter of 2009.

Net interest income was $16.2 million for the fourth quarter of 2009 compared to $20.8 million for the fourth quarter of 2008. The yield on interest-earning assets was 3.66% for the fourth quarter of 2009 compared to 5.35% for the fourth quarter of 2008. The cost of interest bearing liabilities was 1.31% for the fourth quarter of 2009 compared to 1.64% for the fourth quarter of 2008. Between the periods, interest rates declined due to the economic environment that was prevalent in 2009, which resulted in declines in the yield on assets and liabilities. Runoff of other loans and securities from repayment resulted in declines in interest income from those assets. Interest expense declined principally as a result of the declining interest rate environment.

Net interest income before provision for credit losses totaled $16.2 million for the quarter ended December 31, 2009, compared to $17 million for the quarter ended September 30, 2009. Our net interest margin was 2.47% for the fourth quarter of 2009 compared to 2.84% for the third quarter of 2009. The 37 basis point decline in net interest margin between the third and fourth quarters of 2009 was due to the factors discussed above. For the quarter ended December 31, 2008 net interest margin was 3.88%; the 141 basis point decrease in the net interest margin from the fourth quarter of 2008 and 2009 was principally due to higher levels of liquidity maintained on the balance sheet and an 81 basis points decrease in the average prime rate.

Provision for credit losses expense increased $4.4 million between the third and fourth quarters of 2009. The provision for credit losses expense of $14.5 million for the fourth quarter of 2009 was principally related to an increase in nonperforming loans in the period. Provision for credit losses was $2.4 million in the fourth quarter of 2008 as a result of $64 million of growth, net of repayments in the community bank loan portfolio, an increase in specific impairments of $189,000 for one commercial loan, and approximately $1.7 million related to other existing loans that demonstrated signs of weakness for which the loan grade was reduced as well as a continued decline in general economic conditions.

Noninterest (loss) income was ($30.9) million for the quarter ended December 31, 2009, compared to $41,000 for the quarter ended September 30, 2009. The Company incurred $33.2 million of other-than-temporary impairment (“OTTI”) charges on 13 of its non-agency residential mortgage-backed securities in the fourth quarter of 2009 due to continued deterioration in the underlying performance of the mortgage collateral of these securities. The OTTI charges were predominately in older vintage securities with approximately 80% from 2005 and earlier-date issued securities. In addition, the OTTI is largely in securities that are support securities, or securities that are not the most senior securities in a structure. The non-agency residential mortgage-backed securities market continues to be substantially illiquid, and therefore the evaluation for impairment and the determination of fair value remains highly complex and is dependent upon the assumptions applied. As part of the evaluation, the Company completes an analysis of estimated cash flows for these securities, which incorporates, but is not limited to, an estimate of the level of voluntary repayments, both known and projected defaults on the underlying mortgage collateral, and an estimate of loss severity. Based on the continued deterioration of the underlying collateral performance during the fourth quarter of 2009 and into the first quarter of 2010, including substantial downgrades in the first quarter of 2010, as well as the protracted nature of the current financial crises in the U.S. in general and the U.S. housing market in particular, for the fourth quarter of 2009 management changed its estimate of future cash flows, by applying a more conservative estimate of future defaults than in previous quarters. Noninterest income was $2.0 million for the quarter ended December 31, 2008 in which period there were no OTTI charges.

Noninterest expense was $20.9 million for the quarter ended December 31, 2009 compared with $21 million for the quarter ended September 30, 2009. In comparing the fourth quarter and the third quarter 2009, noninterest expense was relatively unchanged as management reduced controllable expenses including compensation, professional fees, public relations and marketing compared to the earlier quarter. Noninterest expense was $17.3 million for the quarter ended December 31, 2008. Between the fourth quarters of 2009 and 2008, the principal factor contributing to the $3.6 million increase in noninterest expense was a $2.8 million increase in subaccounting fees. Subsequent to the sale of certain assets of UW Trust at the end of June 2009, the Company has incurred subaccounting fees on the custodial deposits transferred to the buyer. The remaining increase is a result of increases in deposit insurance expense, loan collection expenses, and real estate owned expenses.

Income tax (benefit) expense from continuing operations was ($9.4) million for the quarter ended December 31, 2009, compared to ($5.4) million for the quarter ended September 30, 2009. Our tax rate was (18.8%) and (38.2%) for those same periods, respectively. The effective income tax rate for the fourth quarter of 2009 was impacted by the establishment of a $10.2 million deferred tax valuation allowance. Due to the loss incurred in the fourth quarter of 2009 and for the year then ended, the Company was unable to conclude that it is more likely than not that we will generate sufficient taxable income in the foreseeable future to realize all of our deferred tax assets. In evaluating the level of valuation allowance needed the Company considered the amount of net operating loss carryback potential, which approximated $12.2 million, after consideration of the impact on the utilization of various tax credits in those periods. In addition, management evaluated various tax planning strategies which could be utilized to support a portion of the deferred tax asset. Some of the tax planning strategies considered, which would not substantially impact the business, were sale-leaseback of facilities, redemption of life insurance, and the sale of certain lines of business or assets. Based on the carryback potential and tax planning strategies, management determined that a valuation allowance of $10.2 million was appropriate. At December 31, 2009, the net deferred tax asset was $14.2 million. Income tax expense from continuing operations in the quarter ended December 31, 2008 was $766,000 and our tax rate was 24.4%.

Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is management’s analysis to assist in the understanding and evaluation of our financial position and results of operations of the Company. It should be read in conjunction with the information set forth under Item 1A. “Risk Factors,” and our consolidated financial statements and notes thereto included in Item 8 in this report.

Overview

The Company’s primary sources of revenue, through the Bank, are net interest income (predominately from loans and deposits, and also from investment securities and other funding sources), and noninterest income, including loan administration income, gains on sale of originated SBA loans, and other noninterest income. Volumes of loan originations and pricing decisions are key determinants in revenue potential, and these tend to be impacted by overall economic factors, including market interest rates, overall business levels, economic growth, consumer confidence, and competitive conditions.

The Company experienced significant challenges during 2009 as the deteriorating economic and credit environments negatively affected the Company’s results. In June 2009, the Bank sold 100% of its available-for-sale mortgage-backed securities collateralized by option adjustable rate residential loans with an unpaid principal balance of $47.3 million. We realized a loss of $47 million, or $29.2 million, net of tax from the sale. 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. This loss from operations was substantially offset by a gain on sale, which was reported as discontinued operations in the statement of operations, from the sale of UW Trust assets. We realized a gain of $36.1 million, net of tax from that transaction. In addition to the two items referenced above, we also were impacted by increased levels of OTTI and provisions for credit losses. During 2009, the Company recognized OTTI charges of $36.6 million on its non-agency mortgage backed securities portfolio due to continued declines in the performance of the underlying residential loans that collateralize such securities. In addition, the Company made provisions for credit losses of $35 million in 2009 to maintain the allowance at a level we felt was appropriate based on the economic challenges facing our borrowers.

Since mid-2007 the banking industry and the securities markets have been materially and adversely affected by significant declines in the fair value of nearly all asset classes and by a lack of liquidity. In addition, the U.S. economy has been in a recession. The Company’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the fair value of collateral securing those loans, is highly dependent on the economy in our markets. The current market conditions continue to present difficult asset quality issues for the banking industry (including the ongoing effect of current economic conditions and lower residential and commercial real estate values) and for the Company (including higher net charge offs and higher levels of nonperforming assets as compared to our historical experience). In the current real estate market, the value of the collateral securing the loans has become one of the most important factors in determining the appropriate amount of allowance for credit losses to record at the balance sheet date. Additionally, the performance and value of the loans that collateralize our non-agency mortgage-backed securities and our outlook on market conditions has significantly impacted the determination of OTTI. Based on these factors, and others, during the third and fourth quarter of 2009 the Company raised net proceeds of approximately $81.7 million by issuing 22 million shares of common stock through a public stock offering.

During 2009, we focused on asset quality issues and the corresponding decline in the Company’s credit quality metrics of both loans and non-agency mortgage backed securities. During 2009, the Company hired a new loan review executive, enhanced many of its lending policies and procedures. These enhancements included reducing the advance rates on many real estate related loan types and including increasing loss factors for various loan types based on actual credit losses realized and impairments on other loans as such impairments were incurred. Overall the increase in the allowance for credit losses was based on and consistent with the deterioration in performance of 10 construction and land development loan relationships, and 10 commercial real estate loan relationships. A record level of provision for credit losses and charge offs resulted for 2009. Management expects 2010 provision for credit losses and charge off amounts will also be elevated compared to historical levels.

During the fourth quarter of 2009, the Company recognized an OTTI charge in earnings of $33.2 million across 13 securities. For the securities subject to OTTI in the fourth quarter of 2009, the collateral coverage ratio (the amount of support tranches underlying the Company’s position in the security relative to loans 60 days or more past due) declined between 14% and 100%, and on a weighted average basis the decline was 28%. The average credit support (the amount of support tranches underlying the Company’s position in the security relative to less senior tranches) for these 13 securities declined from 5.3% at September 30, 2009 to 3.5% at December 31, 2009, due to losses incurred by support tranches. The cumulative level of delinquencies in these securities continued to increase in the fourth quarter of 2009 despite the losses incurred by support tranches thus the pipeline of problem loans has not declined with the losses incurred. At December 31, 2009 the collateral coverage ratio for the 13 securities subject to OTTI during the fourth quarter ranged from zero to 0.77%, with an average below one-half percent. In addition, on February 22, 2010, Standard & Poor’s (“S&P”) ratings services cut the ratings on 2,861 classes underlying 354 residential mortgage-backed securities transactions. S&P said that because of higher delinquencies, credit enhancements for the classes in question will likely not be enough to cover projected losses. Included in the S&P February ratings declines were 22 securities owned by the Company. In total approximately 47.5% of the Company’s portfolio was downgraded, watch listed, or in a few cases the rating was affirmed subsequent to January 31, 2010.

The continued economic downturn and the poor economic indicators including continued declines in home prices, continued high unemployment, and continued erosion of mortgage equity that occurred in the fourth quarter of 2009 and the early first quarter of 2010 concerned us, especially in connection with the downgrades in securities. Over the past year it had appeared that the rating agencies were being more conservative and reacting more timely, but these downgrades showed the rating agencies were still lagging. During the off-cycle field visit by our regulators beginning in January 2010, we discussed with the OTS and FDIC our assumptions regarding the determination of OTTI and the fair value of securities, our observations of the performance of the loans underlying our non-agency mortgage backed securities, and the macroeconomic factors discussed above, as well as our regulators’ views of how these securities have been performing for other industry participants. Though ongoing discussions were being held throughout January and February 2010, the Company was required by law to file the Thrift Financial Report on January 30, 2010, which we did. Based on an extensive review of all of the information available, we determined that we should re-evaluate the default assumptions used to determine the expected cash flows to be received from the securities for the period ended December 31, 2009.

One of the inputs that management uses for estimating cash flows on our mortgage backed securities is an estimated default rate on the underlying loan portfolio. Through September 30, 2009, and for the prior four quarters we had utilized an estimate for defaults from our third party provider that projected the estimated lifetime cumulative defaults based on loan level actual historical default performance for the specific pool. This analysis was supported by observed behavior that weaker loans go bad earlier and older paying loans have superior credit performance to more recently originated loans with similar underwriting criteria and show fewer weaknesses. Our own historical mortgage origination business resulted in weaker loans becoming delinquent early in the life of the instrument and the overall performance of the loans generally improved over time with additional seasoning. We expected this would also be the case with the mortgage-backed securities portfolio. This assumption was true with respect to the mortgage origination business, and still appeared to be true through the third quarter of 2009, as the residential home market was improving. The results of the fourth quarter of 2009 and the early first quarter of 2010 show that the length and severity of the recession, as well as home price depreciation is continuing, and as such, even these older loans have more risk. As a result, we determined that a cash flow estimate based on loan level default performance alone was no longer producing results that match the expectations that management believes are applicable to the underlying performance of the securities owned by the Company as of December 31, 2009. The change in the default assumption used in our cash flow estimate impacted both the amount of OTTI and the timing of OTTI recognition.

Accordingly, the Company has concluded its former default assumption was no longer indicative of the Company’s best estimate of cash flows. The Company worked with our third party provider to select an alternative default assumption based on an enhanced trend analysis in order to estimate cash flows that we believe better reflect the continued deterioration of the underlying collateral performance discussed previously and the protracted nature of the current financial crisis in the U.S. in general and the U.S. housing market in particular.

The new default assumptions contain two factors, first, an earlier forecast of when a loan will default, and secondly, an absolute increase in default levels. The earlier time-period forecast of default results in earlier recognition by the Company of OTTI through earnings. The accounting recognition can and does occur well before a loss (sometimes referred to as a principal break) is realized by actual security owned by the Company. Since such events are forecast up to 30 years in the future significant forecast error can occur. U.S. economic and financial factors that impact housing, as well as public policy and government actions, can and will impact such long-range forecasts.

For the year ended December 31, 2009, loss from continuing operations was $79.6 million or $(6.06) per diluted share compared to income from continuing operations of $10.1 million or $1.39 per diluted share for the year ended December 31, 2008. The loss for 2009 was attributed to four principal factors, (i) $47.0 million loss on the sale of available-for-sale mortgage-backed securities collateralized by payment option adjustable rate mortgage loans, or $29.2 million net of tax; (ii) $35.0 million of provision for credit losses, or $24.9 million net of tax, (iii) a net other-than-temporary impairment charge on non-agency mortgage backed securities of $36.6 million, or $26.0 million net of tax and (iv) during 2009 the Company held approximately $320 million of short term liquidity on its balance sheet, which negatively impacted net interest income and net interest margin for the period.

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 year ended December 31, 2009, which is included in discontinued operations for the period. The operating results associated with the sale of UW Trust assets have been retrospectively presented as discontinued operations beginning January 1, 2007.

Total assets at December 31, 2009 were $2.53 billion, which represented an increase of $267 million from December 31, 2008. Loan and security repayments together with deposit growth were principally invested in cash and due from banks.

Between 2008 and 2009, net interest income before provision for credit losses decreased by $11.7 million and our net interest margin decreased 96 basis points from 3.96% for 2008 to 3.00% for 2009. Increasing net interest income from an appropriate mix of growth in loans and management of our processing and trust deposit base represents the Company’s best opportunity for 2010 earnings growth. However, this is subject to various risks, such as competitive pricing pressures for the types of loan products we will seek, overall decreased loan demand, higher levels of nonperforming loans, disciplined pricing, and challenges to our processing and trust deposit base as discussed further below. Specifically, we expect net interest margin to improve prospectively from the following actions: (i) future reductions in our processing and trust deposit base in order to reduce excess liquidity; (ii) continued disciplined loan pricing; and (iii) a 200 basis point reduction in the effective interest rate paid on $180 million of borrowings from FHLBank of Topeka.

Total loans declined $95.6 million, or 6.2%, between December 31, 2009 and 2008, including a $26.6 million decline in construction loans and a $31.1 million decline in land loans. We continued to execute our planned reduction of exposure to this loan class, which is consistent with the Informal Agreement we entered into in December 2009. Additionally, we modestly reduced commercial real estate loans during 2009.

Total deposits grew $271 million, or 15.5% between the end of 2009 and 2008. All of this growth can be attributed to the success of our community banking teams as community bank deposits increased by 142% to $465 million. The growth in community bank deposits was principally in certificate accounts offered through the CDARS network; however, we also grew community bank noninterest bearing deposits and money market and now accounts. In total, community bank deposit accounts increased by over 1,000 and reached 2,353 at December 31, 2009. Managing our processing and trust deposit base is a key factor to improving our net interest income and net interest margin prospectively. We elected to maintain additional liquidity on our balance sheet based on our decision to assess year end 2009 provision for credit loss levels and potential for other-than-temporary impairment charges prior to reducing this balance. We anticipate it will be the second quarter of 2010 before we can fully reduce selected processing and trust deposit balances to correspond to our anticipated liquidity requirements and goals for the year.

Results of Operations

Loss from continuing operations for 2009 was $79.6 million, or $(6.06) per diluted share compared to income from continuing operations of $10.1 million, or $1.39, per diluted share, for 2008 and $10.2 million or $1.39 per diluted share for 2007. Details of the changes of the various components of income from continuing operations are further discussed below.

Net Interest Income

The following table sets forth for the periods and as of the dates indicated, information regarding our average balances of assets and liabilities, as well as the dollar amounts of interest income from interest-earning assets and of interest expense on interest-bearing liabilities and the resultant yields or costs. Ratio, yield and rate information are based on average daily balances where available; otherwise, average monthly balances have been used. Nonaccrual loans are included in the calculation of average balances for loans for the periods indicated.

		Year Ended December 31,
		2009												2008												2007
		Average								Average				Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate				Balance				Interest				Rate
Assets
Interest-earning assets:
Community bank loans:
Commercial real estate		$	401,454				23,445				5.84	%		$	312,299				20,082				6.43	%		$	172,716				12,750				7.38	%
Construction and development			363,943				17,376				4.77				321,410				19,080				5.94				157,796				14,394				9.12
Originated SBA loans			151,543				8,482				5.60				113,430				8,340				7.35				96,848				9,136				9.43
Multifamily			44,931				2,288				5.09				48,906				2,927				5.98				55,464				3,615				6.52
Commercial			124,207				6,931				5.58				112,239				7,122				6.35				54,765				4,707				8.59
Consumer and other loans			52,028				2,594				4.99				13,154				482				3.66				4,419				287				6.49
Total community bank loans			1,138,106				61,116				5.37				921,438				58,033				6.30				542,008				44,889				8.28
Other loans and securities:
Residential mortgage loans			305,507				14,036				4.59				385,908				20,503				5.31				517,720				27,882				5.39
Purchased SBA loans and securities			127,079				2,056				1.62				157,928				5,109				3.24				213,311				10,393				4.87
Mortgage-backed securities			445,439				23,281				5.23				560,039				29,894				5.34				663,379				35,233				5.31
Total other loans and securities			878,025				39,373				4.48				1,103,875				55,506				5.03				1,394,410				73,508				5.27
Interest-earning deposits			319,592				678				0.21				18,454				345				1.84				20,382				1,012				4.90
FHLBank Stock			20,224				340				1.68				34,298				1,133				3.30				39,297				2,150				5.47
Total interest-earning assets			2,355,947				101,507				4.31	%			2,078,065				115,017				5.54	%			1,996,097				121,559				6.09	%
Noninterest-earning assets:
Cash		$	62,601											$	19,239											$	18,720
Allowance for credit losses			(26,234	)											(13,500	)											(9,238	)
Premises and equipment			25,646												21,662												11,321
Other assets			90,455												87,333												82,585
Total non-interest bearing assets			152,468												114,734												103,388
Total assets		$	2,508,415											$	2,192,799											$	2,099,485
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Savings accounts		$	344				1				0.29	%		$	256				2				0.76	%		$	165				2				1.26	%
Money market and NOW accounts			1,484,182				7,525				0.51				1,238,869				10,376				0.84				1,198,094				25,759				2.15
Certificates of deposit			285,863				7,040				2.46				59,718				2,284				3.82				32,369				1,381				4.27
FHLBank borrowings			214,881				9,339				4.29				383,543				13,769				3.53				351,231				17,086				4.80
Repurchase agreements			79,195				3,666				4.57				78,934				2,975				3.71				72,354				3,494				4.83
Borrowed money and junior subordinated debentures			68,149				3,622				5.24				53,702				3,626				6.64				59,742				4,995				8.25
Total interest-bearing liabilities			2,132,614				31,193				1.45	%			1,815,022				33,032				1.80	%			1,713,955				52,717				3.06	%
Noninterest-bearing liabilities:
Demand deposits (including custodial escrow balances)			215,824												246,064												249,356
Other liabilities			19,096												21,831												22,327
Total non-interest bearing liabilities			234,920												267,895												271,683
Shareholders’ equity			140,881												109,882												113,847
Total liabilities and shareholders’ equity		$	2,508,415											$	2,192,799											$	2,099,485
Net interest income before provision for credit losses						$	70,314											$	81,985											$	68,842
Interest rate spread											2.86	%											3.74	%											3.03	%
Net interest margin											3.00	%											3.96	%											3.46	%
Ratio of average interest-earning assets to average interest bearing liabilities											110.47	%											114.49	%											116.46	%

Volume and Rate Analysis of Net Interest Income

The following table presents the extent to which changes in volume and interest rates of interest earning assets and interest bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior period rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior period volume) and (iii) changes attributable to a combination of changes in rate and volume (change in rates multiplied by the changes in volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

		Year ended 2009 versus 2008												Year ended 2008 versus 2007
		Increase (Decrease) Due to Change in												Increase (Decrease) Due to Change in
		Volume				Rate				Total				Volume				Rate				Total
		(Dollars in thousands)
Interest-earning assets:
Community bank loans:
Commercial real estate loans		$	5,334			$	(1,971	)		$	3,363			$	9,155			$	(1,823	)		$	7,332
Construction and development loans			2,337				(4,041	)			(1,704	)			11,017				(6,331	)			4,686
Originated SBA loans			2,407				(2,265	)			142				1,413				(2,209	)			(796	)
Multifamily loans			(225	)			(414	)			(639	)			(405	)			(283	)			(688	)
Commercial Loans			719				(910	)			(191	)			3,900				(1,485	)			2,415
Consumer and other loans			1,881				231				2,112				365				(170	)			195
Other loans and securities:
Residential loans			(3,917	)			(2,550	)			(6,467	)			(6,973	)			(406	)			(7,379	)
Purchased SBA loans and securities			(858	)			(2,195	)			(3,053	)			(2,308	)			(2,976	)			(5,284	)
Mortgage-backed securities			(6,008	)			(605	)			(6,613	)			(5,536	)			197				(5,339	)
Interest-earning deposits			887				(554	)			333				(87	)			(580	)			(667	)
FHLBank stock			(361	)			(432	)			(793	)			(247	)			(770	)			(1,017	)
Total interest-earning assets			2,196				(15,706	)			(13,510	)			10,294				(16,836	)			(6,542	)
Interest-bearing liabilities:
Savings accounts			1				(2	)			(1	)			1				(1	)			—
Money market and NOW accounts			1,785				(4,636	)			(2,851	)			847				(16,230	)			(15,383	)
Certificates of deposit			5,832				(1,076	)			4,756				1,062				(159	)			903
FHLBank borrowings			(6,888	)			2,458				(4,430	)			1,446				(4,763	)			(3,317	)
Repurchase agreements			10				681				691				310				(829	)			(519	)
Borrowed money			841				(845	)			(4	)			(467	)			(902	)			(1,369	)
Total interest-bearing liabilities			1,581				(3,420	)			(1,839	)			3,199				(22,884	)			(19,685	)
Change in net interest income		$	615			$	(12,286	)		$	(11,671	)		$	7,095			$	6,048			$	13,143