CVBF 10-Q Quarterly Report March 31, 2011

CVB FINANCIAL CORP

10-Ks and 10-Qs

10-Q	Quarter ended Sept. 30, 2025
10-Q	Quarter ended June 30, 2025
10-Q	Quarter ended March 31, 2025
10-K	Fiscal year ended Dec. 31, 2024
10-Q	Quarter ended Sept. 30, 2024
10-Q	Quarter ended June 30, 2024
10-Q	Quarter ended March 31, 2024
10-K	Fiscal year ended Dec. 31, 2023
10-Q	Quarter ended Sept. 30, 2023
10-Q	Quarter ended June 30, 2023
10-Q	Quarter ended March 31, 2023
10-K	Fiscal year ended Dec. 31, 2022
10-Q	Quarter ended Sept. 30, 2022
10-Q	Quarter ended June 30, 2022
10-Q	Quarter ended March 31, 2022
10-K	Fiscal year ended Dec. 31, 2021
10-Q	Quarter ended Sept. 30, 2021
10-Q	Quarter ended June 30, 2021
10-Q	Quarter ended March 31, 2021
10-K	Fiscal year ended Dec. 31, 2020
10-Q	Quarter ended Sept. 30, 2020
10-Q	Quarter ended June 30, 2020
10-Q	Quarter ended March 31, 2020
10-K	Fiscal year ended Dec. 31, 2019
10-Q	Quarter ended Sept. 30, 2019
10-Q	Quarter ended June 30, 2019
10-Q	Quarter ended March 31, 2019
10-K	Fiscal year ended Dec. 31, 2018
10-Q	Quarter ended Sept. 30, 2018
10-Q	Quarter ended June 30, 2018
10-Q	Quarter ended March 31, 2018
10-K	Fiscal year ended Dec. 31, 2017
10-Q	Quarter ended Sept. 30, 2017
10-Q	Quarter ended June 30, 2017
10-Q	Quarter ended March 31, 2017
10-K	Fiscal year ended Dec. 31, 2016
10-Q	Quarter ended Sept. 30, 2016
10-Q	Quarter ended June 30, 2016
10-Q	Quarter ended March 31, 2016
10-K	Fiscal year ended Dec. 31, 2015
10-Q	Quarter ended Sept. 30, 2015
10-Q	Quarter ended June 30, 2015
10-Q	Quarter ended March 31, 2015
10-K	Fiscal year ended Dec. 31, 2014
10-Q	Quarter ended Sept. 30, 2014
10-Q	Quarter ended June 30, 2014
10-Q	Quarter ended March 31, 2014
10-K	Fiscal year ended Dec. 31, 2013
10-Q	Quarter ended Sept. 30, 2013
10-Q	Quarter ended June 30, 2013
10-Q	Quarter ended March 31, 2013
10-K	Fiscal year ended Dec. 31, 2012
10-Q	Quarter ended Sept. 30, 2012
10-Q	Quarter ended June 30, 2012
10-Q	Quarter ended March 31, 2012
10-K	Fiscal year ended Dec. 31, 2011
10-Q	Quarter ended Sept. 30, 2011
10-Q	Quarter ended June 30, 2011
10-Q	Quarter ended March 31, 2011
10-K	Fiscal year ended Dec. 31, 2010
10-Q	Quarter ended Sept. 30, 2010
10-Q	Quarter ended June 30, 2010
10-Q	Quarter ended March 31, 2010
10-K	Fiscal year ended Dec. 31, 2009

PROXIES

DEF 14A	Filed on May 21, 2025
DEF 14A	Filed on April 8, 2025
DEF 14A	Filed on May 15, 2024
DEF 14A	Filed on April 1, 2024
DEF 14A	Filed on April 3, 2023
DEF 14A	Filed on May 18, 2022
DEF 14A	Filed on April 4, 2022
DEF 14A	Filed on April 5, 2021
DEF 14A	Filed on April 6, 2020
DEF 14A	Filed on April 4, 2019
DEF 14A	Filed on April 4, 2018
DEF 14A	Filed on April 6, 2017
DEF 14A	Filed on April 6, 2016
DEF 14A	Filed on April 3, 2015
DEF 14A	Filed on April 4, 2014
DEF 14A	Filed on March 28, 2013
DEF 14A	Filed on March 29, 2012
DEF 14A	Filed on April 22, 2011
DEF 14A	Filed on April 9, 2010
DEF 14A	Filed on None

10-Q 1 c16511e10vq.htm FORM 10-Q Form 10-Q

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

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

For the quarterly period ended March 31, 2011

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

For the transition period from to

Commission File Number: 0-10140

CVB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)


California (State or other jurisdiction of incorporation or organization)		95-3629339 (I.R.S. Employer Identification No.)

701 North Haven Ave, Suite 350, Ontario, California (Address of Principal Executive Offices)		91764 (Zip Code)

(Registrant’s telephone number, including area code) (909) 980-4030

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 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 whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer or 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 þ		Accelerated filer o		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

Number of shares of common stock of the registrant: 106,080,055 outstanding as of April 29, 2011.

CVB FINANCIAL CORP.
2011 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION (UNAUDITED)			4

ITEM 1. FINANCIAL STATEMENTS			4

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES			9

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			35

GENERAL			3

OVERVIEW			35

CRITICAL ACCOUNTING ESTIMATES			36

ANALYSIS OF THE RESULTS OF OPERATIONS			38

RESULTS BY BUSINESS SEGMENTS			44

ANALYSIS OF FINANCIAL CONDITION			47

RISK MANAGEMENT			60

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			63

ITEM 4. CONTROLS AND PROCEDURES			67

PART II — OTHER INFORMATION			68

ITEM 1. LEGAL PROCEEDINGS			68

ITEM 1A. RISK FACTORS			69

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			69

ITEM 3. DEFAULTS UPON SENIOR SECURITIES			69

ITEM 4. REMOVED AND RESERVED			69

ITEM 5. OTHER INFORMATION			69

ITEM 6. EXHIBITS			70

SIGNATURES			71

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

GENERAL

Forward Looking Statements

Certain statements in this Report on Form 10-Q, including, but not limited to, statements under the heading “Management Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995, including but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business prospects, strategic alternatives, business strategies, regulatory and competitive outlook, capital and financing needs and availability, acquisition and divestiture opportunities, investment and expenditure plans, plans and objectives of management for future operations and other similar forecasts and statements of expectations of assumptions underlying any of the foregoing. Words such as “will likely result, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will” and variations of these words and similar expressions are intended to identify these forward looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, local, regional, national and international economic conditions and events and the impact they may have on us and our customers; ability to attract deposits and other sources of liquidity; oversupply of inventory and continued deterioration in values of California real estate, both residential and commercial; a prolonged slowdown in construction activity; changes in the financial performance and/or condition of our borrowers; changes in the level of non-performing assets and charge-offs; the effect of acquisitions we may make; the effect of changes in laws and regulations (including laws and regulations concerning financial reform, taxes, banking, securities, executive compensation and insurance) with which we and our subsidiaries must comply; changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; inflation, interest rate, securities market and monetary fluctuations; political instability; acts of war or terrorism, or natural disasters, such as earthquakes, or the effects of pandemic flu; the timely development and acceptance of new banking products and services and perceived overall value of these products and services by users; changes in consumer spending, borrowing and savings habits; technological changes; the ability to increase market share and control expenses; changes in the competitive environment among financial and bank holding companies and other financial service providers; continued volatility in the credit and equity markets and its effect on the general economy; the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; changes in our organization, management, compensation and benefit plans; the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries, including, but not limited to, the current investigation by the Securities and Exchange Commission and the related class-action lawsuits filed against us, and the results of regulatory examinations or reviews. The Company cautions that the foregoing factors are not exclusive. For additional information concerning these factors and other factors which may cause actual results to differ from the results discussed in our forward-looking statements, see the periodic filings the Company makes with the Securities and Exchange Commission, and, in particular, the information set forth in Item 1A herein and in “Item 1A. Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

PART I — FINANCIAL INFORMATION (UNAUDITED)

ITEM 1. FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
Dollar amounts in thousands, except share data


	March 31,			December 31,
	2011			2010
ASSETS
Cash and due from banks	$	348,773		$	354,048
Interest-bearing balances due from depository institutions		50,287			50,227

Total cash and cash equivalents		399,060			404,275

Interest-bearing balances due from depository institutions		50,190			50,190
Investment securities available-for-sale		2,017,528			1,791,558
Investment securities held-to-maturity		3,039			3,143
Investment in stock of Federal Home Loan Bank (FHLB)		83,310			86,744

Loans held-for-sale		3,505			2,954

Loans and lease finance receivables		3,598,447			3,747,740
Allowance for credit losses		(101,067	)		(105,259	)

Net Loans and lease finance receivables		3,497,380			3,642,481


Premises and equipment, net		39,431			40,921
Bank owned life insurance		113,605			112,901
Accrued interest receivable		23,263			23,647
Intangibles		8,128			9,029
Goodwill		55,097			55,097
FDIC loss sharing asset		81,133			101,461
Deferred tax asset		60,998			52,559
Other assets		62,685			59,731

TOTAL ASSETS	$	6,498,352		$	6,436,691


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing	$	1,817,951		$	1,701,523
Interest-bearing		2,667,738			2,817,305

Total deposits		4,485,689			4,518,828
Demand Note to U.S. Treasury		2,966			1,917
Customer repurchase agreements		578,009			542,188
Borrowings		553,458			553,390
Accrued interest payable		4,626			4,985
Deferred compensation		9,212			9,221
Junior subordinated debentures		115,055			115,055
Other liabilities		94,733			47,252

TOTAL LIABILITIES		5,843,748			5,792,836


COMMITMENTS AND CONTINGENCIES

Stockholders’ Equity:
Preferred stock, authorized, 20,000,000 shares without par; none issued or outstanding		—			—
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 106,078,253 (2011) and 106,075,576 (2010)		490,837			490,226
Retained earnings		155,027			147,444
Accumulated other comprehensive income, net of tax		8,740			6,185

Total stockholders’ equity		654,604			643,855

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,498,352		$	6,436,691

See accompanying notes to the consolidated financial statements

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
Dollar amounts in thousands, except per share


	For the Three Months
	Ended March 31,
	2011		2010
Interest income:
Loans, including fees	$	51,315	$	67,768
Investment securities:
Taxable		8,839		16,084
Tax-preferred		5,919		6,532

Total investment income		14,758		22,616
Dividends from FHLB stock		65		66
Federal funds sold and Interest bearing deposits with other institutions		374		102

Total interest income		66,512		90,552
Interest expense:
Deposits		2,788		5,288
Borrowings		5,796		11,120
Junior subordinated debentures		819		805

Total interest expense		9,403		17,213

Net interest income before provision for credit losses		57,109		73,339
Provision for credit losses		7,068		12,200

Net interest income after provision for credit losses		50,041		61,139

Other operating income:
Impairment loss on investment securities		—		(98	)
Plus: Reclassification of credit-related impairment loss from other comprehensive income		—		(587	)

Net impairment loss on investment securities recognized in earnings		—		(685	)
Service charges on deposit accounts		3,723		4,264
Trust and Investment Services		2,152		2,118
Bankcard services		708		640
BOLI income		707		845
Increase (reduction) in FDIC loss sharing asset		1,415		(10,583	)
Other		1,273		1,190

Total other operating income (expense)		9,978		(2,211	)

Other operating expenses:
Salaries and employee benefits		17,660		18,073
Occupancy and Equipment		4,321		5,052
Professional services		3,610		2,807
Amortization of intangibles		901		950
Other		9,813		9,040

Total other operating expenses		36,305		35,922

Earnings before income taxes		23,714		23,006
Income taxes		7,114		6,887

Net earnings	$	16,600	$	16,119
Earnings allocated to restricted stock		66		54

Net earnings allocated to common shareholders	$	16,534	$	16,065


Comprehensive income	$	19,155	$	22,853


Basic earnings per common share	$	0.16	$	0.15

Diluted earnings per common share	$	0.16	$	0.15


Cash dividends per common share	$	0.085	$	0.085

See accompanying notes to the consolidated financial statements

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
Amounts and shares in thousands


								Accumulated
	Common							Other
	Shares		Common		Retained			Comprehensive		Comprehensive
	Outstanding		Stock		Earnings			Income		Income		Total

Balance January 1, 2011		106,076	$	490,226	$	147,444		$	6,185			$	643,855
Proceeds from exercise of stock options		2		19									19
Tax benefit from exercise of stock options				2									2
Stock-based Compensation Expense				590									590
Cash dividends declared
Common ($0.085 per share)						(9,017	)						(9,017	)
Comprehensive income:
Net earnings						16,600				$	16,600		16,600
Other comprehensive gain:
Unrealized gain on securities available-for-sale, net									2,555		2,555		2,555

Comprehensive income										$	19,155

Balance March 31, 2011		106,078	$	490,837	$	155,027		$	8,740			$	654,604


Balance January 1, 2010		106,263	$	491,226	$	120,612		$	26,390			$	638,228
Proceeds from exercise of stock options		30		152									152
Tax benefit from exercise of stock options				35									35
Stock-based Compensation Expense				532									532
Cash dividends declared
Common ($0.085 per share)						(9,035	)						(9,035	)
Comprehensive income:
Net earnings						16,119				$	16,119		16,119
Other comprehensive gain:
Unrealized gain on securities available-for-sale, net									6,394		6,394		6,394
Portion of impairment loss on investment securities reclassified in the current year, net									340		340		340

Comprehensive income										$	22,853

Balance March 31, 2010		106,293	$	491,945	$	127,696		$	33,124			$	652,765


	At March 31,
	2011			2010

Disclosure of reclassification amount
Unrealized gain on securities arising during the period	$	4,291		$	11,610
Tax benefit		(1,736	)		(4,876	)

Net unrealized gain on securities	$	2,555		$	6,734

See accompanying notes to the consolidated financial statements

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Dollar amounts in thousands


	For the Three Months
	Ended March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and dividends received	$	67,948		$	78,809
Service charges and other fees received		8,446			8,177
Interest paid		(9,695	)		(17,736	)
Cash paid to vendors and employees		(33,942	)		(27,384	)
Income taxes paid		(27,000	)		—

Net cash provided by operating activities		5,757			41,866

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayment of investment securities		86,684			72,514
Proceeds from redemption of FHLB stock		3,434			—
Proceeds from maturity of investment securities		25,055			30,845
Purchases of investment securities		(280,623	)		(57,854	)
Net decrease in loans and lease finance receivables		136,380			116,375
Proceeds from sales of premises and equipment		147			12
Proceeds from sales of other real estate owned		1,789			1,874
Proceeds from FDIC shared-loss agreements		21,734			—
Purchase of premises and equipment		(309	)		(1,734	)
Other, net		(1	)		(10	)

Net cash (used in) provided by investing activities		(5,710	)		162,022

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in transaction deposits		95,328			50,129
Net (decrease)/increase in time deposits		(128,464	)		29,930
Repayment of advances from Federal Home Loan Bank		—			(100,000	)
Net increase in other borrowings		1,049			1,807
Net increase in customer repurchase agreements		35,821			50,082
Cash dividends on common stock		(9,017	)		(9,035	)
Proceeds from exercise of stock options		19			152
Tax benefit related to exercise of stock options		2			35

Net cash (used in) provided by financing activities		(5,262	)		23,100


NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(5,215	)		226,988
CASH AND CASH EQUIVALENTS, beginning of period		404,275			104,480

CASH AND CASH EQUIVALENTS, end of period	$	399,060		$	331,468

See accompanying notes to the consolidated financial statements

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
Dollar amounts in thousands


	For the Three Months
	Ended March 31,
	2011			2010
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net earnings	$	16,600		$	16,119
Adjustments to reconcile net earnings to net cash provided by operating activities:
(Gain) loss on sales of premises and equipment		(7	)		9
(Gain) on sale of other real estate owned		(74	)		(185	)
Increase from bank owned life insurance		(707	)		(845	)
Net amortization of premiums on investment securities		3,212			998
Accretion of SJB Discount		(1,951	)		(13,378	)
Provisions for credit losses		7,068			12,200
Provisions for revaluation of other real estate owned		820			—
(Increase)/decrease in FDIC Loss Sharing Asset		(1,415	)		10,583
Stock-based compensation		590			532
Depreciation and amortization		2,560			2,588
Change in accrued interest receivable		384			1,250
Change in accrued interest payable		(359	)		(475	)
Change in other assets and liabilities		(20,964	)		12,470

Total adjustments		(10,843	)		25,747

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	5,757		$	41,866


SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Securities purchased and not settled	$	55,791		$	—
Transfer from loans to other real estate owned	$	3,669		$	17,397

See accompanying notes to the consolidated financial statements

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the three months ended March 31, 2011 and 2010

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated unaudited financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America for interim financial reporting. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the Securities and Exchange Commission. In the opinion of management, the accompanying condensed consolidated unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.

Principles of Consolidation — The consolidated financial statements include the accounts of CVB Financial Corp. (the “Company”) and its wholly owned subsidiary: Citizens Business Bank (the “Bank”) after elimination of all intercompany transactions and balances. The Company also has three inactive subsidiaries: CVB Ventures, Inc.; Chino Valley Bancorp; and ONB Bancorp. The Company is also the common stockholder of CVB Statutory Trust I, CVB Statutory Trust II, CVB Statutory Trust III and FCB Trust II. CVB Statutory Trusts I and II were created in December 2003 and CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. The Company acquired FCB Trust II through the acquisition of First Coastal Bancshares (“FCB”). These trusts do not meet the criteria for consolidation.

Nature of Operations — The Company’s primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides automobile and equipment leasing to customers through its Citizens Financial Services Group and trust and investment-related services to customers through its CitizensTrust Division. The Bank’s customers consist primarily of small to mid-sized businesses and individuals located in San Bernardino County, Riverside County, Orange County, Los Angeles County, Madera County, Fresno County, Tulare County, Kern County and San Joaquin County. The Bank operates 43 Business Financial Centers, five Commercial Banking Centers, and three wealth management offices with its headquarters located in the city of Ontario.

The Company’s operating business units have been divided into two main segments: (i) Business Financial and Commercial Banking Centers and (ii) Treasury. Business Financial and Commercial Banking Centers (branches) are comprised of loans, deposits, and products and services the Bank offers to the majority of its customers. The other segment is Treasury, which manages the investment portfolio of the Company. The Company’s remaining centralized functions and eliminations of inter-segment amounts have been aggregated and included in “Other.”

The internal reporting of the Company considers all business units. Funds are allocated to each business unit based on its need to fund assets (use of funds) or its need to invest funds (source of funds). Net income is determined based on the actual net income of the business unit plus the allocated income or expense based on the sources and uses of funds for each business unit. Non-interest income and non-interest expense are those items directly attributable to a business unit.

Cash and due from banks — Cash on hand, cash items in the process of collection, and amounts due from correspondent banks, the Federal Reserve Bank and interest-bearing balances due from depository institutions, with initial terms of ninety days or less, are included in Cash and due from banks.

Investment Securities — The Company classifies as held-to-maturity those debt securities that the Company has the positive intent and ability to hold to maturity. Securities classified as trading are those securities that are bought and held principally for the purpose of selling them in the near term. All other debt and equity securities are classified as available-for-sale. Securities held-to-maturity are accounted for at cost and adjusted for amortization of premiums and accretion of discounts. Trading securities are accounted for at fair value with the unrealized gains and losses being included in current earnings. Available-for-sale securities are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the effective-yield method over the terms of the securities. For mortgage-backed securities (“MBS”), the amortization or accretion is based on estimated average lives of the securities. The lives of these securities can fluctuate based on the amount of prepayments received on the underlying collateral of the securities. The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost.

At each reporting date, securities are assessed to determine whether there is an other-than-temporary impairment. Other-than-temporary impairment on investment securities is recognized in earnings when there are credit losses on a debt security for which management does not intend to sell and for which it is more-likely-than-not that the Company will not have to sell prior to recovery of the noncredit impairment. In those situations, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security’s amortized cost and its fair value would be included in other comprehensive income.

Loans and Lease Finance Receivables - Loans and lease finance receivables are reported at the principal amount outstanding, less deferred net loan origination fees. Interest on loans and lease finance receivables is credited to income based on the principal amount outstanding. Interest income is not recognized on loans and lease finance receivables when collection of interest is deemed by management to be doubtful. In the ordinary course of business, the Company enters into commitments to extend credit to its customers. These commitments are not reflected in the accompanying consolidated financial statements. As of March 31, 2011, the Company had entered into commitments with certain customers amounting to $595.8 million compared to $570.1 million at December 31, 2010. Letters of Credit at March 31, 2011 and December 31, 2010, were $68.3 million and $70.4 million, respectively.

The Bank receives collateral to support loans, lease finance receivables, and commitments to extend credit for which collateral is deemed necessary. The most significant categories of collateral are real estate, principally commercial and industrial income-producing properties, real estate mortgages, and assets utilized in dairy, livestock and agribusiness.

Nonrefundable fees and direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The deferred net loan fees and costs are recognized in interest income over the loan term using the effective-yield method.

Acquired loans for which there is deterioration in credit quality between origination and acquisition of the loans and the bank does not expect to collect all amounts due according to the loan’s contractual terms are accounted for individually or in pools of loans based on common risk characteristics. These loans are within the scope of accounting guidance for loans acquired with deteriorated credit quality. The excess of the loan’s or pool’s scheduled contractual principal and interest payments over all cash flows expected at acquisition is the nonaccretable difference. The remaining amount, representing the excess of the loan’s cash flows expected to be collected over the fair value is the accretable yield (accreted into interest income over the remaining life of the loan or pool). The Bank has also elected to account for acquired loans not within the scope of accounting guidance using this same methodology.

Throughout this document, we have separated the discussion of asset quality into two sections: non-covered loans and covered loans. The non-covered loans represent the legacy Citizens Business Bank loans and exclude all loans acquired in the San Joaquin Bank (“SJB”) acquisition. The SJB loans are “covered” loans as defined in the loss sharing agreement with the FDIC.

Provision and Allowance for Credit Losses - The determination of the balance in the allowance for credit losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in management’s judgment, is adequate to provide for probable credit losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience, and such other factors that would deserve current recognition in estimating inherent credit losses. The estimate is reviewed quarterly by the Board of Directors and management and periodically by various regulatory entities and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. The provision for credit losses is charged to expense. During the first three months of 2011, we recorded a provision for credit losses of $7.1 million. The allowance for credit losses was $101.1 million as of March 31, 2011, or 3.11% of total non-covered loans and leases.

In addition to the allowance for credit losses, the Company also has a reserve for undisbursed commitments for loans and letters of credit. This reserve is carried in the liabilities section of the balance sheet in other liabilities. Provisions to this reserve are included in other expense. For the first three months of 2011, the Company recorded an increase of $732,000 in the reserve for undisbursed commitments. As of March 31, 2011, the balance in this reserve was $11.2 million.

A loan for which collection of principal and interest according to its original terms is not probable is considered to be impaired. The Company’s policy is to record a specific valuation allowance, which is included in the allowance for credit losses, or charge off that portion of an impaired loan that exceeds its fair value less selling costs. Fair value is usually based on the value of underlying collateral.

At March 31, 2011, the Company had non-covered impaired loans of $120.1 million. Of this amount, $4.0 million consisted of non-accrual residential construction and land loans, $40.0 million in non-accrual commercial construction loans, $18.4 million of non-accrual single family mortgage loans, $35.0 million of non-accrual commercial real estate loans, $7.5 million of non-accrual commercial and industrial loans, $3.0 million in dairy and livestock loans, and $260,000 of non-accrual consumer loans. Non-covered impaired loans also include $38.4 million of loans whose terms were modified in a troubled debt restructure, of which $26.5 million are classified as non-accrual. The remaining balance of $11.9 million consists of nine loans performing according to the restructured terms. These loans had specific reserves of $1.3 million at March 31, 2011. At December 31, 2010, the Bank had classified as impaired, non-covered loans with a balance of $170.3 million.

Premises and Equipment - Premises and equipment are stated at cost, less accumulated depreciation, which is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. Properties under capital lease and leasehold improvements are amortized over the shorter of estimated economic lives of 15 years or the initial terms of the leases. Estimated lives are 3 to 5 years for computer equipment, 5 to 7 years for furniture, fixtures and equipment, and 15 to 40 years for buildings and improvements. Long-lived assets are reviewed periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The existence of impairment is based on undiscounted cash flows. To the extent impairment exists, the impairment is calculated as the difference in fair value of assets and their carrying value. The impairment loss, if any, would be recorded in noninterest expense.

FDIC Loss Sharing Asset — The FDIC loss sharing asset was initially recorded at fair value which represents the present value of the estimated cash payments from the FDIC for future losses on covered loans. The ultimate collectability of this asset is dependent upon the performance of the underlying covered loans, the passage of time and claims paid by the FDIC.

Other Real Estate Owned — Other real estate owned (“OREO”) represents real estate acquired through foreclosure in satisfaction of commercial and real estate loans and is stated at fair value, minus estimated costs to sell (fair value at time of foreclosure). Loan balances in excess of fair value of the real estate acquired at the date of acquisition are charged against the allowance for credit losses. Any subsequent operating expenses or income, reduction in estimated values, and gains or losses on disposition of such properties are charged to current operations. OREO is recorded in other assets on the consolidated balance sheets.

Business Combinations and Intangible Assets — The Company has engaged in the acquisition of financial institutions and the assumption of deposits and purchase of assets from other financial institutions in its market area. The Company has paid premiums on certain transactions, and such premiums are recorded as intangible assets, in the form of goodwill or other intangible assets. Goodwill is not being amortized whereas identifiable intangible assets with finite lives are amortized over their useful lives. On an annual basis, the Company tests goodwill and intangible assets for impairment.

At March 31, 2011 goodwill was $55.1 million. As of March 31, 2011, intangible assets that continue to be subject to amortization include core deposit premiums of $8.1 million (net of $23.9 million of accumulated amortization). Amortization expense for such intangible assets was $901,000 for the three months ended March 31, 2011. Estimated amortization expense, for the remainder of 2011 is expected to be $2.6 million. Estimated amortization expense, for the succeeding years is $2.2 million for 2012, $1.1 million for 2013, $475,000 for 2014, $437,000 for 2015 and $1.3 million thereafter. The weighted average remaining life of intangible assets is approximately 2.2 years.

Bank Owned Life Insurance — The Bank invests in Bank-Owned Life Insurance (“BOLI”). BOLI involves the purchasing of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in other non-interest income and are not subject to income tax.

Income Taxes — Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. Based on historical and future expected taxable earnings and available strategies, the Company considers the future realization of these deferred tax assets more likely than not.

The tax effects from an uncertain tax position are recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of other operating expense.

Earnings per Common Share — The Company calculates earnings per common share (“EPS”) using the two-class method. The two-class method requires the Company to present EPS as if all of the earnings for the period are distributed to common shareholders and any participating securities, regardless of whether any actual dividends or distributions are made. All outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends are considered participating securities. The Company grants restricted shares under the 2008 Equity Incentive Plan that qualify as participating securities. Restricted shares issued under this plan are entitled to dividends at the same rate as common stock.

Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of tax-effected shares issuable upon the assumed exercise of outstanding common stock options. Share and per share amounts have been retroactively restated to give effect to all stock dividends and splits. The number of shares outstanding at March 31, 2011 was 106,078,253. The tables below presents the reconciliation of earnings per share for the periods indicated.

Earnings Per Share Reconciliation

(Dollars and shares in thousands, except per share amounts)


	For the three months ended
	March 31,
	2011		2010
Earnings per common share
Net earnings	$	16,600	$	16,119
Less: Dividends on preferred stock and discount amortization		—		—

Net earnings available to common shareholders	$	16,600	$	16,119

Less: Net earnings allocated to restricted stock		66		54

Net earnings allocated to common shareholders (numerator)	$	16,534	$	16,065


Weighted Average Shares Outstanding (denominator)		105,651		105,929
Earnings per common share	$	0.16	$	0.15


Diluted earnings per common share
Net income allocated to common shareholders (numerator)	$	16,534	$	16,065

Weighted Average Shares Outstanding		105,651		105,929
Incremental shares from assumed exercise of outstanding options		53		192

Diluted Weighted Average Shares Outstanding (denominator)		105,704		106,121
Diluted earnings per common share	$	0.16	$	0.15

Stock-Based Compensation — At March 31, 2011, the Company has three stock-based employee compensation plans, which are described more fully in Note 17 in the Company’s Annual Report on Form 10-K. The Company accounts for stock compensation using the “modified prospective” method. Under this method, awards that are granted, modified, or settled after December 31, 2005, are fair valued as of grant date and compensation costs recognized over the vesting period on a straight-lined basis. Also under this method, unvested stock awards as of January 1, 2006 are recognized over the remaining service period with no change in historical reported earnings.

Derivative Financial Instruments — All derivative instruments, including certain derivative instruments embedded in other contracts, are recognized on the consolidated balance sheet at fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. Changes in fair value of derivatives designated and accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in “Other Comprehensive Income,” net of deferred taxes and are subsequently reclassified to earnings when the hedged transaction affects earnings. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item.

Statement of Cash Flows — Cash and cash equivalents as reported in the statements of cash flows include cash and due from banks. Cash flows from loans and deposits are reported net.

CitizensTrust — This division provides trust, investment and brokerage related services, as well as financial, estate and business succession planning services. CitizensTrust services its clients through three offices in Southern California: Pasadena, Ontario, and Irvine. CitizensTrust has approximately $2.2 billion in assets under administration, including $1.2 billion in assets under management. The amount of these funds and the related liability have not been recorded in the accompanying consolidated balance sheets because they are not assets or liabilities of the Bank or Company, with the exception of any funds held on deposit with the Bank.

Use of Estimates in the Preparation of Financial Statements — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for credit losses. Other significant estimates which may be subject to change include fair value determininations and disclosures, impairment of investments, goodwill, loans, determining the amount and the realization of the FDIC loss sharing asset, and valuation of deferred tax assets, other intangibles and OREO.

Other Contingencies — In the ordinary course of business, the Company becomes involved in litigation. Based upon the Company’s internal records and discussions with legal counsel, the Company records reserves for estimates of the probable outcome of all cases brought against them. Except as discussed in Part II — Other Information Item 1, “Legal Proceedings,” at March 31, 2011 the Company does not have any litigation reserves and is not aware of any material pending legal action or complaints asserted against the Company.

Recent Accounting Pronouncements — In April, 2011 the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The update provides additional guidance for creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The provisions of this standard are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to restructurings occurring on or after January 1, 2011. The Company is currently assessing the impact of this guidance on its financial statements.

2. INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities are shown below. The majority of securities held are publicly traded, and the estimated fair values were obtained from an independent pricing service based upon market quotes.


	March 31, 2011
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding					Total
	Cost		Gain		Loss			Fair Value		Percent
	(Amounts in thousands)
Investment Securities Available-for-Sale:
Government agency & government-sponsored enterprises	$	86,297	$	77	$	(404	)	$	85,970		4.26	%
Mortgage-backed securities		887,201		12,140		(6,846	)		892,495		44.24	%
CMO’s / REMIC’s		415,831		4,458		(1,402	)		418,887		20.76	%
Municipal bonds		612,843		13,309		(5,976	)		620,176		30.74	%

Total Investment Securities	$	2,002,172	$	29,984	$	(14,628	)	$	2,017,528		100.00	%


	December 31, 2010
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding					Total
	Cost		Gain		Loss			Fair Value		Percent
	(Amounts in thousands)
Investment Securities Available-for-Sale:
Government agency & government-sponsored enterprises	$	106,368	$	119	$	(214	)	$	106,273		5.93	%
Mortgage-backed securities		801,370		13,405		(6,366	)		808,409		45.12	%
CMO’s / REMIC’s		267,556		4,300		(1,379	)		270,477		15.10	%
Municipal bonds		605,199		10,943		(9,743	)		606,399		33.85	%

Total Investment Securities	$	1,780,493	$	28,767	$	(17,702	)	$	1,791,558		100.00	%

Approximately 69% of the available-for-sale portfolio, at March 31, 2011, represents securities issued by the U.S government or U.S. government-sponsored enterprises, which guarantee payment of principal and interest.

The remaining CMO/REMICs are backed by agency-pooled collateral or whole loan collateral. All non-agency available-for-sale CMO/REMIC issues held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of March 31, 2011 and December 31, 2010.

Composition of the Fair Value and Gross Unrealized of Securities:


	March 31, 2011
	Less than 12 months				12 months or longer				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
			Holding				Holding				Holding
Description of Securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(amounts in thousands)

Held-To-Maturity
CMO	$	—	$	—	$	3,039	$	288	$	3,039	$	288

Available-for-Sale
Government agency	$	79,440	$	404	$	—	$	—	$	79,440	$	404
Mortgage-backed securities		453,643		6,846		—		—		453,643		6,846
CMO/REMICs		162,094		1,402		—		—		162,094		1,402
Municipal bonds		168,299		5,088		5,599		888		173,898		5,976

	$	863,476	$	13,740	$	5,599	$	888	$	869,075	$	14,628


	December 31, 2010
	Less than 12 months				12 months or longer				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
			Holding				Holding				Holding
Description of Securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(amounts in thousands)

Held-To-Maturity
CMO (1)	$	—	$	—	$	3,143	$	401	$	3,143	$	401

Available-for-Sale
Government agency	$	79,635	$	214	$	—	$	—	$	79,635	$	214
Mortgage-backed securities		449,806		6,366		—		—		449,806		6,366
CMO/REMICs		144,234		1,379		—		—		144,234		1,379
Municipal bonds		225,928		8,844		5,585		899		231,513		9,743

	$	899,603	$	16,803	$	5,585	$	899	$	905,188	$	17,702


(1)		For 2010, the Company recorded a $587,000 charge, on a pre-tax basis, of the non-credit portion of OTTI for this security in other comprehensive income, which is included as gross unrealized losses.

The following summarizes our analysis of these securities and the unrealized losses. This assessment was based on the following factors: i) the length of the time and the extent to which the fair value has been less than amortized cost; ii) adverse condition specifically related to the security, an industry, or a geographic area and whether or not the Company expects to recover the entire amortized cost, iii) historical and implied volatility of the fair value of the security; iv) the payment structure of the security and the likelihood of the issuer being able to make payments in the future; v) failure of the issuer of the security to make scheduled interest or principal payments, vi) any changes to the rating of the security by a rating agency, and vii) recoveries or additional declines in fair value subsequent to the balance sheet date.

CMO Held-to-Maturity — We have one investment security classified as held-to-maturity. This security was issued by Countrywide Financial and is collateralized by Alt-A mortgages. The mortgages are primarily fixed-rate, 30-year loans, originated in early 2006 with average FICO scores of 715 and an average LTV of 71% at origination. The security was a senior security in the securitization, was rated AAA at origination and was supported by subordinate securities. This security is classified as held-to-maturity as we have both the intent and ability to hold this debt security to maturity as the amount of the security, $3.0 million, is not significant to our liquidity needs. We acquired this security in February 2008 at a price of 98.25%. The significant decline in the fair value of the security first appeared in August 2008 as the current financial crisis in the markets occurred and the market for securities collateralized by Alt-A mortgages diminished.

As of March 31, 2011, the unrealized loss on this security was $288,000 and the fair value on the security was 66% of the current par value. The security is rated non-investment grade. We evaluated the security for an other-than-temporary decline in fair value as of March 31, 2011. We assess for credit impairment using a cash flow model. The key assumptions include default rates, severities and prepayment rates. This security was determined to have additional credit impairment during the first quarter 2010 due to continued degradation in expected cash flows primarily due to higher loss forecasts. We determined the amount of the credit impairment by discounting the expected future cash flows of the underlying collateral. We recognized no other-than-temporary impairment loss in the first quarter of 2011 and $685,000 in the first quarter of 2010.

The following table provides a roll-forward of credit-related other-than-temporary impairment recognized in earnings for the three months ended March 31, 2011.


	For the three months
	ended
	March 31, 2011
	(in thousands)
Balance, beginning of the period	$	1,227
Addition of OTTI that was not previously recognized		—
Reduction for securities sold during the period		—

Reduction for securities with OTTI recognized in earnings because the security might be sold before recovery of its amortized cost basis		—

Addition of OTTI that was previously recognized because the security might not be sold before recovery of its amortized cost basis		—
Reduction for increases in cash flows expected to be collected that are recognized over the remaining life of the security		—

Balance, end of the period	$	1,227

Government Agency — The government agency bonds are backed by the full faith and credit of Agencies of the U.S. Government. These securities are bullet securities, that is, they have a defined maturity date on which the principal is paid. The contractual term of these investments provides that the Bank will receive the face value of the bond at maturity which will equal the amortized cost of the bond. Interest is received throughout the life of the security. There was no loss greater than 12 months on these securities at March 31, 2011.

Mortgaged-Backed Securities and CMO/REMICs — Almost all of the available-for-sale mortgage-backed and CMO/REMICs securities are issued by the government-sponsored enterprises such as Ginnie Mae, Fannie Mae and Freddie Mac. These securities are collateralized or backed by the underlying residential mortgages. All available-for-sale mortgage-backed securities are rated investment grade with a weighted average life of approximately 3.5 years. The contractual cash flows of 99.33% of these investments are guaranteed by U.S. government-sponsored agencies. The remaining 0.67% are issued by banks. Accordingly, it is expected the securities would not be settled at a price less than the amortized cost of the bonds. There was no loss greater than 12 months on these securities at March 31, 2011.

Municipal Bonds — Ninety-eight percent of our $620.2 million municipal bond portfolio contains securities which have an underlying rating of investment grade. The majority of our municipal bonds are insured by the largest bond insurance companies with an average remaining maturity of approximately 10.12 years. The unrealized loss greater than 12 months on these securities at March 31, 2011 was $888,000. The Bank diversifies its holdings by owning selections of securities from different issuers and by holding securities from geographically diversified municipal issuers, thus reducing the Bank’s exposure to any single adverse event. Because we believe the decline in fair value is attributable to the changes in interest rates and not credit quality and because the Bank does not intend to sell the investments and it is more likely than not that the Bank will not be required to sell the investments before recovery of their amortized costs, which may be at maturity, management does not consider these investments to be other-than-temporarily impaired at March 31, 2011.

We are continually monitoring the quality of our municipal bond portfolio in light of the current financial problems exhibited by certain monoline insurance companies. Many of the securities that would not be rated without insurance are pre-refunded and/or are general obligation bonds. Based on our monitoring of the municipal marketplace, to our knowledge, none of the municipalities are exhibiting financial problems that would lead us to believe there is a loss in any given security.

At March 31, 2011 and December 31, 2010, investment securities having an amortized cost of approximately $1.88 billion and $1.74 billion respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities at March 31, 2011, by contractual maturity, are shown below. Although mortgage-backed securities and CMO/REMICs have contractual maturities through 2029, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed securities and CMO/REMICs are included in maturity categories based upon estimated prepayment speeds.


	Available-for-sale
					Weighted-
	Amortized		Fair		Average
	Cost		Value		Yield
	(amounts in thousands)
Due in one year or less	$	107,396	$	109,487		3.60	%
Due after one year through five years		1,450,540		1,461,952		3.01	%
Due after five years through ten years		270,816		277,399		4.05	%
Due after ten years		173,420		168,690		3.88	%

	$	2,002,172	$	2,017,528		3.25	%

The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through March 31, 2011.

3. LOAN AND LEASE FINANCE RECEIVABLES

The following is a summary of the components of loan and lease finance receivables (dollars in thousands):


	March 31, 2011
	Non-Covered
	Loans			Covered Loans			Total
Commercial and Industrial	$	456,040		$	34,276		$	490,316
Real Estate:
Construction		109,540			60,022			169,562
Commercial Real Estate		1,966,589			288,658			2,255,247
SFR Mortgage		205,583			4,862			210,445
Consumer		51,818			9,804			61,622
Municipal lease finance receivables		122,422			475			122,897
Auto and equipment leases, net of unearned discount		17,399			—			17,399
Dairy and Livestock		325,052			—			325,052
Agribusiness		885			48,779			49,664

Gross Loans	$	3,255,328		$	446,876		$	3,702,204

Less: Purchase Accounting Discount		—			(98,117	)		(98,117	)
Less: Deferred net loan fees		(5,640	)		—			(5,640	)

Gross loans, net of deferred loan fees	$	3,249,688		$	348,759		$	3,598,447
Less: Allowance for credit losses		(101,067	)		—			(101,067	)

Net Loans	$	3,148,621		$	348,759		$	3,497,380


	December 31, 2010
	Non-Covered
	Loans			Covered Loans			Total
Commercial and Industrial	$	460,399		$	39,587		$	499,986
Real Estate:
Construction		138,980			84,498			223,478
Commercial Real Estate		1,980,256			292,014			2,272,270
SFR Mortgage		218,467			5,858			224,325
Consumer		56,747			10,624			67,371
Municipal lease finance receivables		128,552			576			129,128
Auto and equipment leases, net of unearned discount		17,982			—			17,982
Dairy and Livestock		376,143			—			376,143
Agribusiness		1,686			55,618			57,304

Gross Loans	$	3,379,212		$	488,775		$	3,867,987

Less: Purchase Accounting Discount		—			(114,763	)		(114,763	)
Less: Deferred net loan fees		(5,484	)		—			(5,484	)

Gross loans, net of deferred loan fees	$	3,373,728		$	374,012		$	3,747,740
Less: Allowance for credit losses		(105,259	)		—			(105,259	)

Net Loans	$	3,268,469		$	374,012		$	3,642,481

At March 31, 2011, the Company held approximately $1.35 billion of fixed rate loans. As of March 31, 2011, 60.9% of the loan portfolio consisted of commercial real estate loans, 4.6% of the loan portfolio consisted of construction loans and 5.7% of the loan portfolio consisted of SFR mortgages. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California.

4. ALLOWANCE FOR CREDIT LOSSES AND OTHER REAL ESTATE OWNED (NON-COVERED LOANS)

The Bank’s Credit Management Division is responsible for regularly reviewing the allowance for credit losses (“ALLL”) methodology, including loss factors and economic risk factors. The Bank’s Director Loan Committee provides Board oversight of the ALLL process and approves the ALLL methodology on a quarterly basis.

Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers all loans. The systematic methodology consists of two major elements.

The first major element includes a detailed analysis of the loan portfolio in two phases. In the first phase, individual loans are reviewed to identify loans for impairment. A loan is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan. Impairment is measured as either the expected future cash flows discounted at each loan’s effective interest rate, the fair value of the loan’s collateral if the loan is collateral dependent, or an observable market price of the loan (if one exists). If we determine that the value of the impaired loan is less than the recorded investment of the loan, we either recognize an impairment reserve as a Specific Allowance to be provided for in the allowance for credit losses or charge-off the impaired balance if it determined that such amount represents a confirmed loss. Loans determined to be impaired are excluded from the formulae allowance so as not to double-count the loss exposure.

Central to the first phase and our credit risk management is our loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is reviewed and possibly changed by Credit Management, which is based primarily on a thorough analysis of each borrower’s financial capacity in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.

Loans are risk rated into the following categories: Loss, Doubtful, Substandard, Special Mention and Pass. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. The Impaired and Doubtful loans are analyzed on an individual basis for allowance amounts. The other categories have formulae used to determine the needed allowance amount.

The second phase is conducted by evaluating or segmenting the remainder of the loan portfolio into groups or pools of loans with similar characteristics. In this second phase, groups or pools of homogeneous loans are reviewed to determine a portfolio formula allowance. In the case of the portfolio formula allowance, homogeneous portfolios, such as small business loans, consumer loans, agricultural loans, and real estate loans, are aggregated or pooled in determining the appropriate allowance. The risk assessment process in this case emphasizes trends in the different portfolios for delinquency, loss, and other-behavioral characteristics of the subject portfolios.

The second major element in our methodology for assessing the appropriateness of the allowance consists of our considerations of qualitative factors, including, all known relevant internal and external factors that may affect the collectability of a loan. This includes our estimates of the amounts necessary for concentrations, economic uncertainties, the volatility of the market value of collateral, and other relevant factors. The relationship of the two major elements of the allowance to the total allowance may fluctuate from period to period. These qualitative factors are used to adjust the historical loan loss rates for each pool of loans to determine the probable credit losses inherent in the portfolio.

The Bank’s methodology is consistently applied across all the portfolio segments taken into account the applicable historical loss rates and the qualitative factors applicable to each pool of loans. There have been no significant changes to the methodology or policies in the periods presented.

The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Bank evaluates credit risk associated with the loan and lease portfolio at the same time it evaluates credit risk associated with the off-balance sheet commitments. The Bank recorded an increase of $732,000 and $1.3 million in the reserve for undisbursed commitments for the first quarters of 2011 and 2010, respectively. As of March 31, 2011, the balance in this reserve was $11.2 million compared to a balance of $10.5 million as of December 31, 2010.

Management believes that the ALLL was adequate at March 31, 2011. No assurance can be given that economic conditions which adversely affect the Bank’s service areas or other circumstances will not be reflected in increased provisions for credit losses in the future.

The following table presents the balance and activity in the allowance for loan losses, and the recorded investment in held-for-investment loans by portfolio segment and its evaluation based on impairment method as of March 31, 2011, December 31, 2010 and March 31, 2010:

Allowance for Credit Losses and Recorded Investment in Financing Receivables
(Dollars in thousands)


										Municipal
										Lease			Dairy
	Commercial									Finance			&			Consumer,			Covered
	and Industrial			Construction			Real Estate			Receivables			Livestock			Auto & Other			Loans (1)			Unallocated			Total
Three Months Ended March 31, 2011
Allowance for Credit Losses:

Beginning balance	$	11,472		$	10,188		$	43,529		$	2,172		$	36,061		$	1,034		$	0		$	803		$	105,259
Charge-offs		(689	)		(6,160	)		(2,471	)		—			(2,204	)		(120	)		(394	)		—			(12,038	)
Recoveries		142			—			581			—			—			52			3			—			778
Provision		(482	)		2,350			1,151			639			(430	)		707			391			2,742			7,068

Ending balance	$	10,443		$	6,378		$	42,790		$	2,811		$	33,427		$	1,673		$	—		$	3,545		$	101,067

Ending balance: Individually evaluated for impairment	$	364		$	—		$	885		$	—		$	—		$	37		$	—		$	—		$	1,286

Ending balance: Collectively evaluated for impairment	$	10,079		$	6,378		$	41,905		$	2,811		$	33,427		$	1,636		$	—		$	3,545		$	99,781


Financing receivables:
Ending balance	$	456,925		$	109,540		$	2,172,172		$	122,422		$	325,052		$	69,217		$	348,759		$	—		$	3,604,087

Ending balance: Individually evaluated for impairment	$	10,136		$	42,320		$	62,707		$	—		$	2,996		$	260		$	14,965		$	—		$	133,384

Ending balance: Collectively evaluated for impairment	$	446,789		$	67,220		$	2,109,465		$	122,422		$	322,056		$	68,957		$	333,794		$	—		$	3,470,703


Twelve Months Ended December 31, 2010
Allowance for Credit Losses:

Beginning balance	$	7,530		$	21,222		$	42,215		$	1,724		$	31,051		$	1,004		$	—		$	4,178		$	108,924
Charge-offs		(6,290	)		(15,648	)		(41,356	)		(13	)		(1,205	)		(627	)		(385	)		—			(65,524	)
Recoveries		242			291			35			—			—			76			15			—			659
Provision		9,990			4,323			42,635			461			6,215			581			370			(3,375	)		61,200

Ending balance	$	11,472		$	10,188		$	43,529		$	2,172		$	36,061		$	1,034		$	—		$	803		$	105,259

Ending balance: Individually evaluated for impairment	$	50		$	3,300		$	681		$	—		$	—		$	28		$	—		$	—		$	4,059

Ending balance: Collectively evaluated for impairment	$	11,422		$	6,888		$	42,848		$	2,172		$	36,061		$	1,006		$	—		$	803		$	101,200


Financing receivables:
Ending balance	$	462,085		$	138,980		$	2,198,723		$	128,552		$	376,143		$	74,729		$	374,012		$	—		$	3,753,224

Ending balance: Individually evaluated for impairment	$	9,404		$	63,025		$	90,416		$	—		$	5,207		$	586		$	15,879		$	—		$	184,517

Ending balance: Collectively evaluated for impairment	$	452,681		$	75,955		$	2,108,307		$	128,552		$	370,936		$	74,143		$	358,133		$	—		$	3,568,707


Three Months Ended March 31, 2010
Allowance for Credit Losses:

Beginning balance	$	7,530		$	21,222		$	42,215		$	1,724		$	31,051		$	1,004		$	—		$	4,178		$	108,924
Charge-offs		(2,569	)		(4,685	)		(1,580	)		—			—			(97	)		—			—			(8,931	)
Recoveries		119			—			1			—			—			8			—			—			128
Provision		2,865			2,532			3,140			347			1,533			862			—			921			12,200

Ending balance	$	7,945		$	19,069		$	43,776		$	2,071		$	32,584		$	1,777		$	—		$	5,099		$	112,321

Ending balance: Individually evaluated for impairment	$	225		$	7		$	1,359		$	—		$	—		$	73		$	—		$	—		$	1,664

Ending balance: Collectively evaluated for impairment	$	7,720		$	19,062		$	42,417		$	2,071		$	32,584		$	1,704		$	—		$	5,099		$	110,657


Financing receivables:
Ending balance	$	408,554		$	221,130		$	2,247,732		$	155,511		$	391,668		$	90,025		$	438,539		$	—		$	3,953,159

Ending balance: Individually evaluated for impairment	$	6,393		$	41,028		$	35,767		$	—		$	—		$	609		$	24,071		$	—		$	107,868

Ending balance: Collectively evaluated for impairment	$	402,161		$	180,102		$	2,211,965		$	155,511		$	391,668		$	89,416		$	414,468		$	—		$	3,845,291


(1)		Net of purchase accounting discount

Asset Quality and Non-Performing Loans

We manage asset quality and control credit risk through diversification of the non-covered loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of non-performing, past due non-covered loans and larger credits, designed to identify potential charges to the allowance for loan and lease losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors.

A loan is considered impaired when based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Generally, when loans are identified as impaired they are moved to our Special Assets Department. When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of collateral, less selling costs. The starting point for determining the fair value of collateral is through obtaining external appraisals.

Loans are reported as restructured when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan and lease losses.

The accrual of interest on loans is discontinued when the loan becomes 90 days past due, or when the full collection of principal and interest is no longer probable. When an asset is placed on non-accrual status, previously accrued but unpaid interest is reversed against income. Subsequent collections of cash are applied as reductions to the principal balance unless the loan is returned to accrual status. Non-accrual loans may be restored to accrual status when principal and interest become current and full payment of principal and interest is expected. Had non-accrual loans for which interest was no longer accruing complied with the original terms and conditions of their notes, interest income would have been $831,000 and $1.0 million greater for the first quarters of 2011 and 2010, respectively.

The following table presents the recorded investment in held-for-investment and held-for-sale, non-covered, non-accrual loans and loans past due by class of loans as of March 31, 2011, December 31, 2010 and March 31, 2010:

(Dollars in Thousands)


					Greater Than
					90 Days Past								Total
	30-59 Days		60-89 Days		Due and		Total Past						Financing
March 31, 2011	Past Due		Past Due		Accruing		Due		Nonaccrual		Current		Receivables
Commercial & Industrial	$	72	$	—	$	—	$	72	$	7,542	$	449,311	$	456,925
Construction — Speculative		—		—		—		—		34,656		58,393		93,049
Construction — Non-Speculative		1,492		—		—		1,492		9,320		7,335		18,147
Commercial Real Estate — Owner-Occupied		366		—		—		366		1,511		698,980		700,857
Commercial Real Estate — Non-Owner-Occupied		—		532		—		532		33,440		1,231,760		1,265,732
Residential Real Estate (SFR 1-4)		993		—		—		993		18,425		188,014		207,432
Dairy & Livestock		—		—		—		—		2,996		322,056		325,052
Municipal Lease Finance Receivables		—		—		—		—		—		122,422		122,422
Consumer		9		—		—		9		259		51,550		51,818
Auto & Equipment Leases		139		28		—		167		1		17,231		17,399

Total	$	3,071	$	560	$	—	$	3,631	$	108,150	$	3,147,052	$	3,258,833


					Greater Than
					90 Days Past								Total
	30-59 Days		60-89 Days		Due and		Total Past						Financing
December 31, 2010	Past Due		Past Due		Accruing		Due		Nonaccrual		Current		Receivables

Commercial & Industrial	$	2,177	$	1,036	$	—		3,213	$	3,887	$	454,985	$	462,085
Construction — Speculative		—		—		—		—		55,208		66,343		121,551
Construction — Non-Speculative		—		—		—		—		9,473		9,612		19,085
Commercial Real Estate — Owner-Occupied		62		—		—		62		5,457		545,073		550,592
Commercial Real Estate — Non-Owner-Occupied		3,132		—		—		3,132		59,402		1,367,130		1,429,664
Residential Real Estate (SFR 1-4)		1,473		1,124		—		2,597		17,800		199,368		219,765
Dairy & Livestock		—		—		—		—		5,207		370,936		376,143
Municipal Lease Finance Receivables		—		—		—		—		—		128,552		128,552
Consumer		—		29		—		29		537		56,181		56,747
Auto & Equipment Leases		93		14		—		107		49		17,826		17,982

Total	$	6,937	$	2,203	$	—	$	9,140	$	157,020	$	3,216,006	$	3,382,166


					Greater Than
					90 Days Past								Total
	30-59 Days		60-89 Days		Due and		Total Past						Financing
March 31, 2010	Past Due		Past Due		Accruing		Due		Nonaccrual		Current		Receivables
Commercial & Industrial	$	679	$	1,670	$	—	$	2,349	$	6,393	$	399,812	$	408,554
Construction — Speculative		8,143		—		—		8,143		24,142		165,671		197,956
Construction — Non-Speculative		—		—		—		—		9,929		15,765		25,694
Commercial Real Estate — Owner-Occupied		130		—		—		130		1,906		738,847		740,883
Commercial Real Estate — Non-Owner-Occupied		3,156		—		—		3,156		20,135		1,230,248		1,253,539
Residential Real Estate (SFR 1-4)		3,199		547		—		3,746		13,726		238,459		255,931
Dairy & Livestock		—		—		—		—		—		391,668		391,668
Municipal Lease Finance Receivables		—		—		—		—		—		155,511		155,511
Consumer		—		28		—		28		123		62,328		62,479
Auto & Equipment Leases		276		89		—		365		486		26,695		27,546

Total	$	15,583	$	2,334	$	—	$	17,917	$	76,840	$	3,425,004	$	3,519,761

Credit Quality Indicators

The Company’s risk rating methodology assigns risk ratings generally described by the following groupings:

Pass — These loans range from minimal credit risk to lower than average, but still acceptable, credit risk.

Watch List —Watch list loans usually require more than normal management attention. Loans which qualify for the Watch List may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.

Special Mention — Loans assigned to this category are currently protected but are weak. Although concerns exist, the bank is currently protected and loss is unlikely. They have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Bank’s credit position at some future date.

Substandard — Loans classified as substandard include poor liquidity, high leverage, and erratic earnings or losses. The primary source of repayment is no longer realistic, and asset or collateral liquidation may be the only source of repayment. Loans are marginal and require continuing and close supervision by credit management. Substandard loans have the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

Doubtful — Loans classified doubtful have all the weaknesses inherent in those classified substandard with the added provision that the weaknesses make collection or the liquidation, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the assets, their classifications as losses are deferred until their more exact status may be determined.

Loss — Loans classified as Loss are considered uncollectible and of such little value that their continuance as active assets of the Bank is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Impaired — Loans are classified as Impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement, without unreasonable delay. This generally includes all loans classified as non-accrual and troubled debt restructurings.

The following table summarizes our internal risk grouping by loan class as of March 31, 2011, December 31, 2010 and March 31, 2010 for non-covered, held-for-investment loans:

Credit Quality Indicators
As of March 31, 2011, December 31, 2010 and March 31, 2010
(Amounts in Thousands)

Credit Risk Profile by Internally Assigned Grade


	March 31, 2011
					Special				Doubtful &
	Pass		Watch List		Mention		Sub-Standard		Loss		Total
Commercial & Industrial	$	310,233	$	76,268	$	37,395	$	32,996	$	33	$	456,925
Construction — Speculative		796		8,251		24,522		57,824		—		91,393
Construction — Non-Speculative		606		3,784		2,005		11,752		—		18,147
Commercial Real Estate — Owner-Occupied		367,139		105,493		93,386		134,839		—		700,857

Commercial Real Estate — Non-Owner-Occupied		862,262		208,533		74,732		120,205		—		1,265,732
Residential Real Estate (SFR 1-4)		175,636		11,926		701		17,320		—		205,583
Dairy & Livestock		911		2,164		123,034		198,943		—		325,052
Municipal Lease Finance Receivables		85,275		13,515		13,559		10,073		—		122,422
Consumer		42,841		3,854		2,707		2,332		84		51,818
Auto & Equipment Leases		10,818		3,426		893		2,262		—		17,399

Total Non-covered Loans		1,856,517		437,214		372,934		588,546		117		3,255,328
Covered Loans		130,726		47,967		29,108		238,367		708		446,876

Total Gross Loans	$	1,987,243	$	485,181	$	402,042	$	826,913	$	825	$	3,702,204


	December 31, 2010
					Special				Doubtful &
	Pass		Watch List		Mention		Sub-Standard		Loss		Total
Commercial & Industrial	$	311,303	$	80,306	$	35,670	$	34,741	$	65	$	462,085
Construction — Speculative		428		16,022		24,773		78,672		—		119,895
Construction — Non-Speculative		3,168		3,422		2,346		10,149		—		19,085
Commercial Real Estate — Owner-Occupied		369,974		98,295		32,647		49,676		—		550,592

Commercial Real Estate — Non-Owner-Occupied		853,581		209,185		123,912		242,986		—		1,429,664
Residential Real Estate (SFR 1-4)		190,022		11,002		801		16,642		—		218,467
Dairy & Livestock		4,373		4,917		152,891		213,962		—		376,143
Municipal Lease Finance Receivables		92,064		11,540		21,746		3,202		—		128,552
Consumer		47,927		4,885		2,367		1,484		84		56,747
Auto & Equipment Leases		10,925		3,450		1,122		2,483		2		17,982

Total Non-covered Loans		1,883,765		443,024		398,275		653,997		151		3,379,212
Covered Loans		139,038		59,996		42,147		247,407		187		488,775

Total Gross Loans	$	2,022,803	$	503,020	$	440,422	$	901,404	$	338	$	3,867,987


	March 31, 2010
					Special
	Pass		Watch List		Mention		Sub-Standard		Doubtful		Total
Commercial & Industrial	$	271,512	$	81,143	$	26,942	$	28,957	$	—	$	408,554
Construction — Non-Speculative		8,115		7,175		—		10,405		—		25,695
Construction — Speculative		1,473		36,038		33,372		124,342		210		195,435
Commercial Real Estate — Owner-Occupied		423,664		122,620		59,070		135,529		—		740,883

Commercial Real Estate — Non-Owner-Occupied		872,029		174,892		53,297		153,321		—		1,253,539
Residential Real Estate (SFR 1-4)		227,821		9,343		734		15,412		—		253,310
Dairy & Livestock		13,414		79,745		121,602		176,907		—		391,668
Municipal Lease Finance Receivables		127,955		11,662		12,949		2,945		—		155,511
Consumer		52,491		5,162		3,223		1,603		—		62,479
Auto & Equipment Leases		16,736		3,933		3,198		3,679		—		27,546

Total Non-covered Loans		2,015,210		531,713		314,387		653,100		210		3,514,620
Covered Loans		215,101		47,780		41,291		298,209		—		602,381

Total Gross Loans	$	2,230,311	$	579,493	$	355,678	$	951,309	$	210	$	4,117,001

Non-covered Impaired Loans

The following table presents held-for-investment and held-for-sale loans, individually evaluated for impairment by class of loans, as of March 31, 2011, December 31, 2010 and March 31, 2010:

Non-Covered Impaired Loans
As of March 31, 2011, December 31, 2010 and March 31, 2010


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
March 31, 2011
With no related allowance recorded:
Commercial & Industrial	$	7,574	$	8,691	$	—	$	8,657	$	52
Construction — Speculative		34,656		56,431		—		39,521		—
Construction — Non-Speculative		9,320		10,149		—		9,396		—
Commercial Real Estate — Owner-Occupied		1,511		1,721		—		1,648		—
Commercial Real Estate — Non-Owner-Occupied		39,880		48,014		—		40,138		131
Residential Real Estate (SFR 1-4)		17,327		20,370		—		17,816		8
Dairy & Livestock		2,996		5,777		—		4,654		—
Municipal Lease Finance Receivables		—		—		—		—		—
Consumer		—		—		—		—		—
Auto & Equipment Leases		—		—		—		—		—

		113,264		151,153		—		121,830		191

With a related allowance recorded:
Commercial & Industrial	$	2,562	$	2,601	$	364	$	2,853	$	—
Construction — Speculative		—		—		—		—		—
Construction — Non-Speculative		—		—		—		—		—
Commercial Real Estate — Owner-Occupied		—		—		—		—		—
Commercial Real Estate — Non-Owner-Occupied		1,647		1,655		717		1,661		—
Residential Real Estate (SFR 1-4)		2,342		2,446		168		2,351		—
Dairy & Livestock		—		—		—		—		—
Municipal Lease Finance Receivables		—		—		—		—		—
Consumer		259		265		37		260		—
Auto & Equipment Leases		1		1		—		2		—

		6,811		6,968		1,286		7,127		—

Total	$	120,075	$	158,121	$	1,286	$	128,957	$	191


December 31, 2010
With no related allowance recorded:
Commercial & Industrial	$	9,060	$	9,600	$	—	$	9,972	$	339
Construction — Speculative		47,328		65,121		—		56,610		—
Construction — Non-Speculative		9,473		10,149		—		9,777		—
Commercial Real Estate — Owner-Occupied		4,528		4,528		—		4,541		—
Commercial Real Estate — Non-Owner-Occupied		66,856		103,010		—		93,807		498
Residential Real Estate (SFR 1-4)		13,766		16,285		—		14,556		—
Dairy & Livestock		5,207		5,780		—		6,334		—
Municipal Lease Finance Receivables		—		—		—		—		—
Consumer		334		334		—		336		—
Auto & Equipment Leases		—		—		—		—		—

		156,552		214,807		—		195,933		837


With a related allowance recorded:
Commercial & Industrial	$	344	$	352	$	50	$	371	$	—
Construction — Speculative		7,880		12,588		3,300		8,966		—
Construction — Non-Speculative		—		—		—		—		—
Commercial Real Estate — Owner-Occupied		929		929		136		934		—
Commercial Real Estate — Non-Owner-Occupied		303		311		25		308		—
Residential Real Estate (SFR 1-4)		4,034		4,086		520		4,067		—
Dairy & Livestock		—		—		—		—		—
Municipal Lease Finance Receivables		—		—		—		—		—
Consumer		203		205		21		207		—
Auto & Equipment Leases		49		49		7		77		—

		13,742		18,520		4,059		14,930		—

Total	$	170,294	$	233,327	$	4,059	$	210,863	$	837


March 31, 2010
With no related allowance recorded:
Commercial & Industrial	$	4,370	$	6,890	$	—	$	6,451	$	—
Construction — Speculative		33,494		46,074		—		37,034		125
Construction — Non-Speculative		9,929		10,149		—		10,005		—
Commercial Real Estate — Owner-Occupied		500		500		—		500		—
Commercial Real Estate — Non-Owner-Occupied		19,817		21,135		—		20,654		—
Residential Real Estate (SFR 1-4)		9,967		10,897		—		10,343		—
Dairy & Livestock		—		—		—		—		—
Municipal Lease Finance Receivables		—		—		—		—		—
Consumer		40		100		—		85		—
Auto & Equipment Leases		—		—		—		—		—

		78,117		95,745		—		85,072		125

With a related allowance recorded:
Commercial & Industrial	$	2,023	$	2,031	$	225	$	2,028	$	—
Construction — Speculative		125		127		7		125		—
Construction — Non-Speculative		—		—		—		—		—
Commercial Real Estate — Owner-Occupied		1,406		1,404		582		1,408		—
Commercial Real Estate — Non-Owner-Occupied		318		323		36		320		—
Residential Real Estate (SFR 1-4)		3,759		3,794		741		3,786		—
Dairy & Livestock		—		—		—		—		—
Municipal Lease Finance Receivables		—		—		—		—		—
Consumer		83		83		12		83		—
Auto & Equipment Leases		486		486		61		497		—

		8,200		8,248		1,664		8,247		—

Total	$	86,317	$	103,993	$	1,664	$	93,319	$	125

Loans with no related allowance reported generally represent non-accrual loans. The Bank recognizes the charge-off of impairment reserves on impaired loans in the period it arises for collateral dependent loans. Therefore, the majority of the non-accrual loans as of March 31, 2011 have already been written-down to their estimated net realizable value. The impaired loans with a related allowance recorded are on non-accrual loans where a charge-off is not yet processed, on non-accrual SFR loans where there is a potential modification in process, on smaller balance non-collateral dependent loans and impairment reserves on performing restructured loans.

At March 31, 2011 and December 31, 2010, impaired loans of $11.9 million and $13.3 million were classified as accruing restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, and generally provide for a modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest at each respective date. A performing restructured loan is reasonably assured of repayment, is performing according to the modified terms and the restructured loan is well secured.

5. FAIR VALUE INFORMATION

The following disclosure provides fair value information for financial assets and liabilities as of March 31, 2011 and December 31, 2010. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 3).

•

Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.

•

Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

•

Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flows and similar techniques.

Determination of Fair Value

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value.

Cash — The carrying amount of cash and cash equivalents is considered to be a reasonable estimate of fair value.

Investment securities available-for-sale — Investment securities available-for-sale are valued based upon quotes obtained from reputable third-party pricing services. These services use evaluated pricing applications and model processes. Market inputs, such as, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data are considered as part of the evaluation. The inputs are related directly to the security being evaluated, or indirectly to a similarly situated security. Market assumptions and market data are utilized in the valuation models. Accordingly, the Company categorized its investment portfolio as a Level 2 valuation.

Investment security held-to-maturity — Investment security held-to-maturity is carried at amortized cost-basis on the balance sheet. The fair value is determined using the same process described above for available-for-sale securities.

Non-covered Loans — The carrying amount of loans and lease finance receivables is their contractual amounts outstanding, reduced by deferred net loan origination fees and the allocable portion of the allowance for credit losses.

The fair value of loans, other than loans on non-accrual status, was estimated by discounting the remaining contractual cash flows using the estimated current rate at which similar loans would be made to borrowers with similar credit risk characteristics and for the same remaining maturities, reduced by deferred net loan origination fees and the allocable portion of the allowance for credit losses. Accordingly, in determining the estimated current rate for discounting purposes, no adjustment has been made for any change in borrowers’ credit risks since the origination of such loans. Rather, the allocable portion of the allowance for credit losses is considered to provide for such changes in estimating fair value. As a result, this fair value is not necessarily the value which would be derived using an exit price.

Non-covered Impaired loans and OREO are generally measured using the fair value of the underlying collateral, which is determined based on the most recent appraisal information received, less costs to sell. Appraised values may be adjusted based on factors such as the changes in market conditions from the time of valuation or discounted cash flows of the property. As such, these loans fall within Level 3 of the fair value hierarchy.

The fair value of commitments to extend credit and standby letters of credit were not significant at either March 31, 2011 or December 31, 2010, as these instruments predominantly have adjustable terms and are of a short-term nature.

Covered Loans — Covered loans were measured at fair value on the date of acquisition. Thereafter, covered loans are not measured at fair value on a recurring basis. The above valuation discussion for non-covered loans is applicable to covered loans following their acquisition date.

Swaps — The fair value of the interest rate swap contracts are provided by our counterparty using a system that constructs a yield curve based on cash LIBOR rates, Eurodollar futures contracts, and 3-year through 30-year swap rates. The yield curve determines the valuations of the interest rate swaps. Accordingly, the swap is categorized as a Level 2 valuation.

Deposits & Borrowings — The amounts payable to depositors for demand, savings, and money market accounts, and the demand note to the U.S. Treasury, and short-term borrowings are considered to be stated at fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of long-term borrowings and junior subordinated debentures is estimated using the rates currently offered for borrowings of similar remaining maturities.

Accrued Interest Receivable/Payable — The amounts of accrued interest receivable on loans and lease finance receivables and investments and accrued interest payable on deposits and borrowings are considered to be stated at fair value.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010.

Assets & Liabilities Measured at Fair Value on a Recurring Basis


			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Carrying Value at		Assets		Inputs		Inputs
(in thousands)	March 31, 2011		(Level 1)		(Level 2)		(Level 3)
Description of Assets
Mortgage-backed securities	$	892,495	$	—	$	892,495	$	—
CMO’s / REMIC’s		418,887		—		418,887		—
Government agency		85,970		—		85,970		—
Municipal bonds		620,176		—		620,176		—

Investment Securities-AFS		2,017,528		—		2,017,528		—
Interest Rate Swaps		5,847		—		5,847		—

Total Assets	$	2,023,375	$	—	$	2,023,375	$	—


Description of Liability
Interest Rate Swaps	$	5,847	$	—	$	5,847	$	—

Assets & Liabilities Measured at Fair Value on a Recurring Basis


			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Carrying Value at		Assets		Inputs		Inputs
*(in thousands)*	December 31, 2010		(Level 1)		(Level 2)		(Level 3)
Description of Assets
Mortgage-backed securities	$	808,409	$	—	$	808,409	$	—
CMO’s / REMIC’s		270,477		—		270,477		—
Government agency		106,273		—		106,273		—
Municipal bonds		606,399		—		606,399		—

Investment Securities-AFS		1,791,558		—		1,791,558		—
Interest Rate Swaps		9,127		—		9,127		—

Total Assets	$	1,800,685	$	—	$	1,800,685	$	—


Description of Liability
Interest Rate Swaps	$	9,127	$	—	$	9,127	$	—

We may be required to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at March 31, 2011 and December 31, 2010, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets.

Assets & Liabilities Measured at Fair Value on a Non-Recurring Basis


			Quoted Prices in		Significant				For the three
			Active Markets		Other		Significant		months ended
			for Identical		Observable		Unobservable		March 31,
	Carrying Value at		Assets		Inputs		Inputs		2011
(in thousands)	March 31, 2011		(Level 1)		(Level 2)		(Level 3)		Total Losses
Description of Assets
Investment Security-HTM	$	3,039	$	—	$	—	$	3,039	$	—
Impaired Loans-Noncovered	$	120,075	$	—	$	—	$	120,075	$	(11,644	)
OREO-Noncovered	$	6,240	$	—	$	—	$	6,240	$	(18	)
OREO-Covered	$	11,490	$	—	$	—	$	11,490	$	(802	)

Assets & Liabilities Measured at Fair Value on a Non-Recurring Basis


			Quoted Prices in		Significant				For the year
			Active Markets		Other		Significant		ended
			for Identical		Observable		Unobservable		December 31,
	Carrying Value at		Assets		Inputs		Inputs		2010
*(in thousands)*	December 31, 2010		(Level 1)		(Level 2)		(Level 3)		Total Losses
Description of Assets
Investment Security-HTM	$	3,143	$	—	$	—	$	3,143	$	(904	)
Impaired Loans-Noncovered	$	170,294	$	—	$	—	$	170,294	$	(65,524	)
OREO-Noncovered	$	5,290	$	—	$	—	$	5,290	$	(4,578	)
OREO-Covered	$	11,305	$	—	$	—	$	11,305	$	(2,912	)

The following table presents estimated fair value of financial instruments. The estimated fair value amounts have been determined by the Bank using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Bank could have realized in a current market exchange as of March 31, 2011 and December 31, 2010. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.


	March 31, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(amounts in thousands)
Assets
Total cash and cash equivalents	$	399,060	$	399,060	$	404,275	$	404,275
Interest-bearing balances due from depository institutions		50,190		50,190		50,190		50,190
FHLB Stock		83,310		83,310		86,744		86,744
Investment securities available-for-sale		2,017,528		2,017,528		1,791,558		1,791,558
Investment securities held-to-maturity		3,039		3,039		3,143		3,143
Loans held-for-sale		3,505		3,505		2,954		2,954
Total Loans, net of allowance for credit losses		3,497,380		3,559,924		3,642,481		3,729,296
Accrued interest receivable		23,263		23,263		23,647		23,647
Swaps		5,847		5,847		9,127		9,127

Liabilities
Deposits:
Noninterest-bearing	$	1,817,951	$	1,817,951	$	1,701,523	$	1,701,523
Interest-bearing		2,667,738		2,668,688		2,817,305		2,818,390
Demand note to U.S. Treasury		2,966		2,966		1,917		1,917
Borrowings		1,131,467		1,161,575		1,095,578		1,128,562
Junior subordinated debentures		115,055		115,803		115,055		115,823
Accrued interest payable		4,626		4,626		4,985		4,985
Swaps		5,847		5,847		9,127		9,127

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2011 and December 31, 2010. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.

6. BUSINESS SEGMENTS

The Company has identified two principal reportable segments: Business Financial and Commercial Banking Centers and the Treasury Department. The Company’s subsidiary bank has 43 Business Financial Centers and 5 Commercial Banking Centers (branches), organized in 5 geographic regions, which are the focal points for customer sales and services. The Company utilizes an internal reporting system to measure the performance of various operating segments within the Bank which is the basis for determining the Bank’s reportable segments. The Chief Operating Decision Maker (currently our CEO) regularly reviews the financial information of these segments in deciding how to allocate resources and assessing performance. The Bank’s Business Financial and Commercial Banking Centers are considered one operating segment as their products and services are similar and are sold to similar types of customers, have similar production and distribution processes, have similar economic characteristics, and have similar reporting and organizational structures. The Treasury Department’s primary focus is managing the Bank’s investments, liquidity, and interest rate risk. Information related to the Company’s remaining operating segments which include construction lending, dairy and livestock lending, SBA lending, leasing, and centralized functions have been aggregated and included in “Other.” In addition, the Company allocates internal funds transfer pricing to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in administration.

The following table represents the selected financial information for these two business segments. Accounting principles generally accepted in the United States of America do not have an authoritative body of knowledge regarding the management accounting used in presenting segment financial information. The accounting policies for each of the business units is the same as those policies identified for the consolidated Company and identified in the footnote on the summary of significant accounting policies. The income numbers represent the actual income and expenses of each business unit. In addition, each segment has allocated income and expenses based on management’s internal reporting system, which allows management to determine the performance of each of its business units. Loan fees, included in the “Business Financial and Commercial Banking Centers” category are the actual loan fees paid to the Bank by its customers. These fees are eliminated and deferred in the “Other” category, resulting in deferred loan fees for the consolidated financial statements. All income and expense items not directly associated with the two business segments are grouped in the “Other” category. Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results.

The following tables present the operating results and other key financial measures for the individual reportable segments for the three months ended March 31, 2011 and 2010 (dollar amounts in thousands):


	Three Months Ended March 31, 2011
	Business
	Financial
	Centers		Treasury		Other			Eliminations			Total

Interest income, including loan fees	$	39,439	$	15,221	$	11,852		$	—		$	66,512
Credit for funds provided (1)		6,026		—		2,688			(8,714	)		—

Total interest income		45,465		15,221		14,540			(8,714	)		66,512


Interest expense		3,268		5,291		844			—			9,403
Charge for funds used (1)		1,286		8,302		(874	)		(8,714	)		—

Total interest expense		4,554		13,593		(30	)		(8,714	)		9,403


Net interest income		40,911		1,628		14,570			—			57,109

Provision for credit losses		—		—		7,068						7,068

Net interest income after provision for credit losses	$	40,911	$	1,628	$	7,502		$	—		$	50,041


Non-interest income		5,212		—		4,766			—			9,978
Non-interest expense		12,631		216		23,458			—			36,305


Segment pretax profit (loss)	$	33,492	$	1,412	$	(11,190	)	$	—		$	23,714


Segment assets as of March 31, 2011	$	4,903,546	$	2,540,188	$	724,182		$	(1,669,564	)	$	6,498,352


	Three Months Ended March 31, 2010
	Business
	Financial
	Centers		Treasury			Other			Eliminations			Total

Interest income, including loan fees	$	42,752	$	22,804		$	24,996		$	—		$	90,552
Credit for funds provided (1)		16,823		—			7,016			(23,839	)		—

Total interest income		59,575		22,804			32,012			(23,839	)		90,552


Interest expense		6,636		9,907			670			—			17,213
Charge for funds used (1)		3,521		8,856			11,462			(23,839	)		—

Total interest expense		10,157		18,763			12,132			(23,839	)		17,213


Net interest income		49,418		4,041			19,880			—			73,339

Provision for credit losses		—		—			12,200						12,200

Net interest income after provision for credit losses	$	49,418	$	4,041		$	7,680		$	—		$	61,139


Non-interest income		5,604		(685	)		(7,130	)		—			(2,211	)
Non-interest expense		13,132		380			22,410			—			35,922


Segment pretax profit (loss)	$	41,890	$	2,976		$	(21,860	)	$	—		$	23,006


Segment assets as of March 31, 2010	$	4,825,482	$	2,476,423		$	769,487		$	(1,282,740	)	$	6,788,652


(1)		Credit for funds provided and charge for funds used is eliminated in the consolidated presentation.

7. DERIVATIVE FINANCIAL INSTRUMENTS

The Bank is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are market risk and interest rate risk. As of March 31, 2011, the Bank entered into 57 interest-rate swap agreements with customers and 57 with a counterparty bank. The swaps are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and provide the customer the financial effects of a fixed-rate loan without creating volatility in the bank’s earnings.

The structure of the swaps is as follows. The Bank enters into a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Bank enters into a swap with the counterparty bank to allow the Bank to pass on the interest-rate risk associated with fixed rate loans. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the market value of the swaps primarily offset each other and therefore do not have a significant impact on the Company’s results of operations.

As of March 31, 2011, the total notional amount of the Bank’s swaps was $173.6 million. The following tables present the location of the asset and liability and the amount of gain recognized as of and for the three months ended March 31, 2011.

Fair Value of Derivative Instruments

Asset Derivatives

Liability Derivatives

March 31, 2011

(amounts in thousands)

Balance Sheet

Location

Fair Value

Location

Fair Value

Derivatives Not Designated as Hedging Instruments

Interest Rate Swaps

Other Assets

5,847

Other Liabilities

5,847

Total Derivatives

5,847

The Effect of Derivative Instruments on the Consolidated Statement of Earnings for
three months ended March 31, 2011
(amounts in thousands)


		Amount of Gain
	Location of Gain	Recognized in Income
Derivatives Not Designated as	Recognized in	on Derivative
Hedging Instruments	Income on Derivative	March 31, 2011
Interest Rate Swaps	Other Income	$	101

Total		$	101


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are a bank holding company with one bank subsidiary, Citizens Business Bank. We have three other inactive subsidiaries: CVB Ventures, Inc.; Chino Valley Bancorp and ONB Bancorp. We are also the common stockholder of CVB Statutory Trust I, CVB Statutory Trust II and CVB Statutory Trust III, statutory trusts which were formed to issue trust preferred securities in order to increase the capital of the Company. Through our acquisition of FCB in June 2007, we acquired FCB Capital Trust II, another statutory trust. We are headquartered in Ontario, California in what is known as the “Inland Empire” of California. Our geographical market area encompasses the City of Stockton in the center of California to the City of Laguna Beach (in Orange County) in the southern portion of California. Our mission is to offer the finest financial products and services to professionals and businesses in our market area while maintaining a strong capital base and prudent loan loss reserves. We intend to grow our business through targeted efforts at our existing customers and by attracting new associates who bring customer relationships with them and acquisitions.

Our primary source of income is from the interest earned on our loans and investments and our primary area of expense is the interest paid on deposits, borrowings, and salaries and benefits. As such our net income is subject to fluctuations in interest rates and their impact on our income statement. We are also subject to competition from other financial institutions, which may affect our pricing of products and services, and the fees and interest rates we can charge on them.

Economic conditions in our California service area impact our business. We have seen a significant decline in the housing market resulting in slower growth in construction loans. Unemployment is high in our market areas and areas of our marketplace have been significantly impacted by adverse economic conditions, both nationally and in California. Approximately 17.6% of our total loan portfolio of $3.60 billion is located in the Inland Empire region of California. The balance of the portfolio is from outside of this region. We continue to see the impact of deteriorating economic conditions on our loan portfolio. Continued weaknesses in the local and state economy could adversely affect us through diminished loan demand, credit quality deterioration, and increases in provisions for credit losses, loan delinquencies and defaults.

Over the past few years, we have been active in acquisitions and we will continue to consider acquisition targets, including FDIC-assisted acquisitions, which will enable us to meet our business objectives and enhance shareholder value, along with organic growth. Since 2000, we have acquired five banks and a leasing company, and we have opened four de novo branches: Bakersfield, Fresno, Madera and Stockton, California. We also opened five Commercial Banking Centers since 2008.

Our net income increased to $16.6 million for the first three months of 2011 compared with $16.1 million for the first three months of 2010, an increase of $481,000 million, or 2.98%. Diluted earnings per share increased to $0.16 per share for 2011, from $0.15 per share for 2010. Operating results for the first three months of 2011 include a $7.1 million provision for credit losses, $2.0 million in interest income from accelerated accretion on loans from our FDIC assisted acquisition of San Joaquin Bank (SJB), and $1.4 million in income from the increase in the FDIC loss sharing asset.

During the first quarter of 2011, the Bank sold six of seven notes previously held in connection with its former largest borrowing relationship. The six notes, with a bank carrying value of $42.9 million (and a legal principal balance of $78.1 million), were sold for $41.0 million, resulting in a $1.9 million charge-off.

The operating results for the first quarter 2011 were impacted by the accounting treatment of credit-related transactions from the SJB loan portfolio. For further discussion, see “Analysis of the Results of Operations” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CRITICAL ACCOUNTING ESTIMATES

Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting estimates upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments are as follows:

Allowance for Credit Losses: Arriving at an appropriate level of allowance for credit losses involves a high degree of judgment. Our allowance for credit losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. The determination of the balance in the allowance for credit losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in our judgment, is adequate to provide for probable credit losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience, and such other factors as deserve current recognition in estimating inherent credit losses. The provision for credit losses is charged to expense. For a full discussion of our methodology of assessing the adequacy of the allowance for credit losses, see the “Risk Management” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Investment Portfolio: The investment portfolio is an integral part of our financial performance. We invest primarily in fixed income securities. Accounting estimates are used in the presentation of the investment portfolio and these estimates do impact the presentation of our financial condition and results of operations. We classify securities as held-to-maturity those debt securities that we have the positive intent and ability to hold to maturity. Securities classified as trading are those securities that are bought and held principally for the purpose of selling them in the near term. All other debt and equity securities are classified as available-for-sale. Securities held-to-maturity are accounted for at cost and adjusted for amortization of premiums and accretion of discounts. Trading securities are accounted for at fair value with the unrealized holding gains and losses being included in current earnings. Securities available-for-sale are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate component of stockholders’ equity. At each reporting date, securities are assessed to determine whether there is an other-than-temporary impairment. Such impairment, if any, is required to be recognized in current earnings rather than as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the effective-yield method over the terms of the securities. Our investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost.

Income Taxes: We account for income taxes using the asset and liability method by deferring income taxes based on estimated future tax effects of differences between the tax and book basis of assets and liabilities considering the provisions of enacted tax laws. These differences result in deferred tax assets and liabilities, which are included in our balance sheets. We must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and establish a valuation allowance for those assets determined to not likely be recoverable. Our judgment is required in determining the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income. Although we have determined a valuation allowance is not required for any of our deferred tax assets, there is no guarantee that these assets are recoverable.

Covered Other Real Estate Owned: All other real estate owned acquired in the FDIC-assisted acquisition of SJB are included in a FDIC shared-loss agreement and are referred to as covered other real estate owned. Covered other real estate owned is reported exclusive of expected reimbursement cash flows from the FDIC. Upon transferring covered loan collateral to covered other real estate owned status, acquisition date fair value discounts on the related loan are also transferred to covered other real estate owned. Fair value adjustments on covered other real estate owned result in a reduction of the covered other real estate carrying amount and a corresponding increase in the estimated FDIC reimbursement, with the estimated net loss to the Bank charged against earnings.

FDIC Loss Sharing Asset: In conjunction with the FDIC-assisted acquisition of San Joaquin Bank, the Company entered into a shared-loss agreement with the FDIC for amounts receivable under the shared-loss agreement. At the date of the acquisition the Company elected to account for amounts receivable under the shared-loss agreement as a loss sharing asset in accordance with ASC 805. Subsequent to the acquisition the loss sharing asset is adjusted for payments received and changes in estimates of expected losses and is not being accounted for under fair value. The loss estimates used in calculating the FDIC loss sharing asset are determined on the same basis as the related covered loans and is the present value of the cash flows the Company expects to collect from the FDIC under the shared-loss agreement. The difference between the present value and the undiscounted cash flow the Company expects to collect from the FDIC is accreted into noninterest income over the life of the FDIC indemnification asset. The FDIC indemnification asset is adjusted for any changes in expected cash flows based on the loan performance. Any increases in cash flow of the loans over those expected will reduce the FDIC indemnification asset and any decreases in cash flow of the loans over those expected will increase the FDIC indemnification asset. Increase and decreases to the FDIC indemnification asset are recorded as adjustments to other operating income.

Other Real Estate Owned: Other real estate owned (“OREO”) represents properties acquired through foreclosure or through full or partial satisfaction of loans, is considered held for sale, and is recorded at the lower of cost or estimated fair value at the time of foreclosure. Loan balances in excess of fair value of the real estate acquired at the date of foreclosure are charged against the allowance for credit losses. After foreclosure, valuations are periodically performed as deemed necessary by management and the real estate is carried at the lower of carrying value or fair value less costs to sell. Subsequent declines in the fair value of the OREO below the carrying value are recorded through the use of a valuation allowance by charges to other operating expense. Any subsequent operating expenses or income of such properties are charged to other operating expense or income, respectively. Any declines in value after foreclosure are recorded as OREO expense. Revenue recognition upon disposition of a property is dependent on the sale having met certain criteria relating to the buyer’s initial investment in the property sold.

The Bank is able and willing to provide financing for entities purchasing loans or OREO assets from the Bank. Our general guideline is to seek an adequate down payment (as a percentage of the purchase price) from the buyer. We will consider lower down payments when this is not possible; however, accounting rules require certain minimum down payments in order to record the profit on sale, if any. The minimum down payment varies by the type of underlying real estate collateral.

Goodwill and Intangible Assets: We have acquired entire banks and branches of banks. Those acquisitions accounted for under the purchase method of accounting have given rise to goodwill and intangible assets. We record the assets acquired and liabilities assumed at their fair value. These fair values are arrived at by use of internal and external valuation techniques. The excess purchase price is allocated to assets and liabilities respectively, resulting in identified intangibles. Any excess purchase price after this allocation results in goodwill. Goodwill is not being amortized whereas identifiable intangible assets with finite lives are amortized over their useful lives. On an annual basis, the Company tests goodwill and intangible assets for impairment.

Acquired Loans : Loans acquired from SJB were recorded at fair value as of the acquisition date. In estimating the fair value, the portfolio was segregated into two groups: credit-impaired covered loans and other covered loans. Credit-impaired loans are those loans showing evidence of credit deterioration since origination and it is probable, at the date of acquisition, that the Company will not collect all contractually required principal and interest payments. For the credit-impaired loans, the fair value was estimated by using observable market data for similar types of loans. For the other covered loans, the fair value was estimated by calculating the undiscounted expected cash flows based on estimated levels of prepayments, default factors, and loss severities and discounting the expected cash flows at a market rate. Significant estimates are used in calculating the fair value of acquired loans; as a result, actual results may be different than estimates.

Fair Value of Financial Instruments: We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Investment securities available-for-sale and interest-rate swaps are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other financial assets on a non-recurring basis, such as impaired loans and OREO. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. Further, we include in the Notes to Financial Statements information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. Additionally, for financial instruments not recorded at fair value we disclose the estimate of their fair value.

ANALYSIS OF THE RESULTS OF OPERATIONS

Earnings

For the quarter ended March 31, 2011, our net earnings were $16.6 million. This represents an increase of $481,000, or 2.98%, from net earnings of $16.1 million for the first quarter of 2010. Basic and diluted earnings per common share increased to $0.16 per share for the first quarter of 2011 compared to $0.15 per share for the first quarter of 2010. The annualized return on average assets was 1.03% and 0.96% for the first quarter of 2011 and 2010, respectively. The annualized return on average equity was 10.33% and 10.07% for the first quarter of 2011 and 2010, respectively.

Net Interest Income

The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is the taxable-equivalent of net interest income as a percentage of average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average earning assets minus the cost of average interest-bearing liabilities. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the economy, in general, and the local economies in which we conduct business. Our ability to manage the net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income by affecting changes in the mix of earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to earning assets, and in the growth of earning assets.

For the first quarter ended March 31, 2011, our net interest income, before provision for credit losses, totaled $57.1 million. This represented a decrease of $16.2 million, or 22.13%, over net interest income of $73.3 million for the same period in 2010. The decrease in net interest income was due to a decrease in interest expense of $7.8 million offset by a decrease in interest income of $24.0 million.

Interest income totaled $66.5 million for the first quarter of 2011. This represented a decrease of $24.0 million, or 26.55%, compared to total interest income of $90.6 million for the same period last year. Interest income on loans decreased by $16.5 million for the first quarter of 2011 compared to the same period last year. Included in first quarter of 2011 interest income is $1.9 million discount accretion on covered loans acquired from SJB, compared to $13.4 million for the first quarter of 2010. Interest income on investment securities also decreased by $7.9 million for the first quarter of 2011 compared to the same period last year.

Interest expense totaled $9.4 million for the first quarter of 2011. This represented a decrease of $7.8 million or 45.37%, from total interest expense of $17.2 million for the same period last year. The decrease in interest expense was due to the decrease in average borrowings of $406.0 million, or 26.35%. The average rate paid on interest-bearing liabilities decreased to 0.94% for the first quarter ending March 31, 2011 from 1.52% for the same period in 2010 or 58 basis points. The average cost of deposits decreased to 0.25% for the first quarter ending March 31, 2011 from 0.48% for the same period in 2010, or 23 basis points.

Table 1 shows the average balances of assets, liabilities, and stockholders’ equity and the related interest income, expense, and yields/rates for the three-month periods ended March 31, 2011 and 2010. Yields for tax-preferenced investments are shown on a taxable equivalent basis using a 35% tax rate.

TABLE 1 — Distribution of Average Assets, Liabilities, and Stockholders’ Equity; Interest Rates and Interest Differentials


	Three-month period ended March 31,
	2011								2010
	Average					Average			Average					Average
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
	(dollar amounts in thousands)
ASSETS

Investment Securities
Taxable	$	1,249,471		$	8,839		2.84	%	$	1,428,338		$	16,084		4.50	%
Tax preferenced (1)		609,993			5,919		5.50	%		659,980			6,532		5.59	%
Investment in FHLB stock		86,591			65		0.30	%		97,582			66		0.27	%
Federal Funds Sold & Interest Bearing
Deposits with other institutions (5)		431,439			374		0.35	%		181,421			102		0.22	%
Loans HFS		3,460			20		2.34	%		2,143			18		3.41	%
Loans (2) (3)		3,791,540			49,344		5.28	%		4,200,708			54,372		5.25	%
Yield adjustment to interest income from discount accretion		(112,953	)		1,951		—			(188,812	)		13,378		—

Total Earning Assets (5)		6,059,541			66,512		4.60	%		6,381,360			90,552		5.90	%
Total Non Earning Assets		462,025								456,367

Total Assets	$	6,521,566							$	6,837,727


LIABILITIES AND STOCKHOLDERS’ EQUITY

Savings Deposits (4)	$	1,745,660		$	1,636		0.38	%	$	1,664,774		$	2,730		0.67	%
Time Deposits		1,027,962			1,152		0.45	%		1,240,528			2,558		0.84	%

Total Deposits		2,773,622			2,788		0.41	%		2,905,302			5,288		0.74	%
Other Borrowings		1,249,571			6,615		2.12	%		1,655,551			11,925		2.88	%

Interest Bearing Liabilities		4,023,193			9,403		0.94	%		4,560,853			17,213		1.52	%

Non-interest bearing deposits		1,790,839								1,574,633
Other Liabilities		55,690								53,150
Stockholders’ Equity		651,844								649,091

Total Liabilities and Stockholders’ Equity	$	6,521,566							$	6,837,727


Net interest income				$	57,109							$	73,339

Net interest income excluding discount					55,158								59,961


Net interest spread — tax equivalent							3.66	%							4.38	%
Net interest spread — tax equivalent excluding discount							3.45	%							3.39	%
Net interest margin							3.82	%							4.65	%
Net interest margin — tax equivalent							3.98	%							4.82	%
Net interest margin — tax equivalent excluding discount							3.78	%							3.86	%
Net interest margin excluding loan fees							3.78	%							4.60	%
Net interest margin excluding loan fees — tax equivalent							3.94	%							4.77	%


(1)		Non tax-equivalent rate was 3.17% for 2011, 4.33% for 2010

(2)		Loan fees are included in total interest income as follows, (000)s omitted: 2011, $524; 2010, $752

(3)		Non-performing, non-covered loans are included in net loans as follows: 2011, $108.2 million; 2010, $76.8 million (4) Includes interest bearing demand and money market accounts

(5)		For the three month periods ended March 31, 2011 through September 30, 2009, Federal Funds Sold and Interest Bearing Deposits with Other Institutions as well as Total Earning Assets were revised to include the average amount of the interest bearing balances due from the Federal Reserve. As a result, all previously reported net interest spread and net interest margin ratios were revised as follows:


													Net Interest Margin
	Net Interest Spread						Net Interest Margin						(TE) excluding
	(TE)						(TE)						discount
	Prior			Revised			Prior			Revised			Prior			Revised
Three months ended 03/31/11		3.66	%		3.66	%		3.98	%		3.98	%		3.78	%		3.78	%
Three months ended 12/31/10		3.92	%		3.68	%		4.24	%		4.03	%		3.84	%		3.66	%
Three months ended 09/30/10		3.98	%		3.72	%		4.32	%		4.11	%		3.92	%		3.73	%
Three months ended 06/30/10		4.03	%		3.76	%		4.39	%		4.18	%		3.99	%		3.80	%
Three months ended 03/31/10		4.54	%		4.38	%		4.95	%		4.82	%		3.96	%		3.86	%
Three months ended 12/31/09		3.28	%		3.18	%		3.80	%		3.73	%		3.80	%		3.73	%
Three months ended 09/30/09		3.22	%		3.17	%		3.75	%		3.72	%		3.75	%		3.72	%

As stated above, the net interest margin measures net interest income as a percentage of average earning assets. Our tax effected (TE) net interest margin for the first quarter of 2011 was 3.98%, compared to 4.82% for the first quarter of 2010. The decrease in the net interest margin over the same period last year is primarily the result of changes in the mix of assets and liabilities as discussed in the following paragraphs plus $11.4 million decrease in discount accretion on covered SJB loans which impacted interest income on loans. Generally, our net interest margin improves in a decreasing interest rate environment as our deposits and borrowings reprice much faster than our loans and securities.

The net interest spread is the difference between the yield on average earning assets and the cost of average interest-bearing liabilities. The net interest spread is an indication of our ability to manage rates received on loans and investments and rates paid on deposits and borrowings in a competitive and changing interest rate environment. For the first quarter of 2011, the Company’s net interest spread (TE) was 3.66% as compared to 4.38% for the same period last year. The decrease in net interest spread for the first quarter ended March 31, 2011 resulted from a 130 basis point decrease in yield on earning assets and a 58 basis point decrease in the cost of interest-bearing liabilities, thus generating a 72 basis point decrease in the net interest spread from the same period last year.

The net interest spread was negatively impacted by the $11.4 million decrease in discount accretion on covered SJB loans recognized as a yield adjustment to interest income.

For the first quarter of 2011, the yield (TE) on earning assets decreased to 4.60%, from 5.90% for the same period last year. The cost of average interest-bearing liabilities decreased to 0.94% for the first quarter of 2011 as compared to 1.52% for the same period in 2010. The changes reflect the decreasing interest rate environment and change in mix of earning assets and interest-bearing liabilities, reflecting similar trends as described above.

Table 2 presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to both interest rate and volume changes are calculated by multiplying the change in rate times the change in volume.


TABLE 2 —		Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income


	Comparison of three months ended March 31,
	2011 Compared to 2010
	Increase (Decrease) Due to
							Rate/
	Volume			Rate			Volume			Total
	(amounts in thousands)
Interest Income:
Taxable investment securities	$	(2,070	)	$	(5,928	)	$	753		$	(7,245	)
Tax-advantaged securities		(699	)		66			20			(613	)
Fed funds sold & interest-bearing deposits with other institutions		138			59			75			272
Investment in FHLB stock		(7	)		7			(1	)		(1	)
Loans HFS		11			(6	)		(3	)		2
Loans		(5,297	)		311			(42	)		(5,028	)
Yield adjustment to interest income from discount accretion		(5,376	)		(10,117	)		4,066			(11,427	)

Total interest on earning assets		(13,300	)		(15,608	)		4,868			(24,040	)


Interest Expense:
Savings deposits		134			(1,190	)		(38	)		(1,094	)
Time deposits		(440	)		(1,193	)		227			(1,406	)
Other borrowings		(2,923	)		(3,146	)		759			(5,310	)

Total interest on interest-bearing liabilities		(3,229	)		(5,529	)		948			(7,810	)


Net Interest Income	$	(10,071	)	$	(10,079	)	$	3,920		$	(16,230	)

Interest and Fees on Loans

Our major source of revenue and primary component of interest income is interest and fees on loans. Interest and fees on loans totaled $51.3 million for the first three months of 2011. This represented a decrease of $16.5 million, or 24.28%, from interest and fees on loans of $67.8 million for the same period in 2010. The decrease in interest on loans was primarily due to a decrease in the average loans outstanding, and a decrease in accelerated discount accretion on covered loans acquired from SJB. Average loans decreased $333.3 million, or 8.31%, from $4.01 billion for the first three months of 2010 to $3.68 billion for the first three months of 2011. In addition, the discount accretion on covered loans acquired from SJB was $2.0 million in the first quarter of 2011 compared to $13.4 million for the same period in 2010. This amount represents the discount recognized from accelerated principal payments on SJB loans. It is recorded as a yield adjustment to interest income. As a result, the yield on loans decreased to 5.65% for the first three months of 2011, compared to 6.85% for the same period in 2010.

In general, we stop accruing interest on a loan after its principal or interest becomes 90 days or more past due. When a loan is placed on nonaccrual, all interest previously accrued but not collected is charged against earnings. There was no interest income that was accrued and not reversed on non-performing non-covered loans at March 31, 2011 and 2010.

Fees collected on loans are an integral part of the loan pricing decision. Loan fees and the direct costs associated with the origination of loans are deferred and deducted from the loan balance. Deferred net loan fees are recognized in interest income over the term of the loan using the effective-yield method. We recognized loan fee income of $524,000 for the first three months of 2011, as compared to $752,000 for the same period in 2010, a decrease of $228,000 or 30.40%.

Interest on Investments

The second most important component of interest income is interest on investments, which totaled $14.8 million for the first three months of 2011. This represented a decrease of $7.9 million, or 34.74%, from interest on investments of $22.6 million for the same period in 2010. The decrease in interest on investments for the three months of 2011 from the same period last year was the result of a decrease in yield on investments and a decrease in average investments. The interest rate environment and the investment strategies we employ directly affect the yield on the investment portfolio. We continually adjust our investment strategies in response to the changing interest rate environment in order to maximize the rate of total return consistent within prudent risk parameters, and to minimize the overall interest rate risk of the Company. The total yield (TE) on investments decreased to 3.72% for the first three months of 2011 compared to 4.85% for the first three months of 2010. Average investment balances for the first three months for 2011 decreased $228.9 million, or 10.96% from the same period last year.

Interest on Deposits

For the first quarter of 2011, interest on deposits totaled $2.8 million. This represented a decrease of $2.5 million, or 47.28%, from interest on deposits of $5.3 million for the same period in 2010. The decrease is due to the decrease in interest rates on deposits plus a decrease in average interest-bearing deposits of $131.7 million, or 4.53%, from the same period last year. The cost of interest-bearing deposits decreased to 0.41% for the first quarter of 2011 from 0.74% for the first quarter of 2010. The cost of total deposits decreased to 0.25% for the first quarter of 2011 from 0.48% for the first quarter of 2010.

Interest on Borrowings

For the first quarter of 2011, interest on borrowings totaled $6.6 million. This represented a decrease of $5.3 million, or 44.53%, from interest on borrowings of $11.9 million for the same period of 2010. The decrease is due to the decrease in interest rates paid on borrowings and a decrease in average borrowings. Interest rates on borrowings decreased 76 basis points, from 2.88% for the first quarter of 2010 to 2.12% for the first quarter of 2011. Average borrowings decreased $406.0 million, or 24.52%.

Provision for Credit Losses

We maintain an allowance for inherent credit losses that is increased by a provision for credit losses charged against operating results. The provision for credit losses is determined by management as the amount to be added to the allowance for probable credit losses after net charge-offs have been deducted to bring the allowance to an adequate level which, in management’s best estimate, is necessary to absorb probable credit losses within the existing loan portfolio.

We made a provision for credit losses of $7.1 million during the first three months of 2011 and $12.2 million during the same period in 2010. We continue to make provisions for credit losses based on historical losses and current economic indicators. We believe the allowance is appropriate as of the end of the period covered by this report. We continually assess the quality of our portfolio to determine whether additional provision for credit losses is necessary. We anticipate future provisions will be required to account for probable credit losses. The ratio of the allowance for credit losses to total non-covered loans as of March 31, 2011 and 2010 was 3.11% and 3.20%, respectively.

No assurance can be given that economic conditions which adversely affect the Company’s service areas, past credit loss experience, the characteristics of our loan portfolio or other circumstances will not be reflected in increased provisions for credit losses in the future. The nature of this process requires considerable judgment. Net charge-offs totaled $11.3 million for the first three months of 2011 and $8.8 million during the same period of 2010. See “Risk Management — Credit Risk” herein.

Other Operating Income

Other operating income for the Company includes income derived from special services offered by the Bank, such as CitizensTrust, merchant card, international banking, and other business services. Also included in other operating income are service charges and fees, primarily from deposit accounts; gains (net of losses) from the sale of investment securities, other real estate owned, and fixed assets; and other revenues not included as interest on earning assets.

We reported other operating income of $10.0 million for the first three months of 2011, compared to other operating income of $(2.2) million during the same period of 2010. This represents an increase of $12.2 million, primarily due to a $10.6 million reduction in the FDIC loss sharing asset during the first three months of 2010.

During the first three months of 2011, we reported increases in trust and investment services income and bankcard services income compared to the same period last year. Service charge fee income of $3.7 million for the three months ended March 31, 2011 decreased $541,000, or 12.69%, from service charge fee income of $4.3 million for the same period last year. Trust and investment services income of $2.2 million during the first three months of 2011 increased $34,000, or 1.61%, over trust and investment service income of $2.1 million during the first three months of 2010, and a $1.4 million increase in the FDIC loss sharing asset.

Other Operating Expenses

Other operating expenses for the Company include expenses for salaries and benefits, occupancy, equipment, stationary and supplies, professional services, amortization of intangibles, and other expenses. Other operating expenses totaled $36.3 million for the first three months of 2011. This represents an increase of $383,000 million, or 1.07% over other operating expenses of $35.9 million for the same period in 2010. We also had a decrease in salaries and employee expenses of $413,000, or 2.29%. In addition, professional services expenses were up $803,000, or 28.61%, compared to the same period last year, primarily due to legal expenses related to the management and collection of credit-impaired loans acquired from the acquisition of SJB, the management and collection of CBB legacy non-accrual loans, and legal expenses related to the SEC investigation.

At March 31, 2011, we employed 763 full-time equivalent employees, compared to 740 full-time equivalent employees at March 31, 2010.

For the most part, other operating expenses reflect the direct expenses and related administrative expenses associated with staffing, maintaining, promoting, and operating branch facilities. Our ability to control other operating expenses in relation to asset growth can be measured in terms of other operating expenses as a percentage of average assets. Operating expenses measured as a percentage of average assets was 2.26% and 2.13% for the first three months of 2011 and 2010, respectively.

Our ability to control other operating expenses in relation to the level of net revenue (net interest income after provision for credit losses plus other operating income) is measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. For the first three months of 2011, the efficiency ratio was 60.49%, compared to a ratio of 60.96% for the same period in 2010. The efficiency ratio, before the provision for credit losses, was 54.12% for the first three months of 2011 and 50.50% for the first three months of 2010. The increase in the efficiency ratio was primarily due higher other operating income partially offset by lower net interest income (after provision).

Income Taxes

The Company’s effective tax rate for the three months of 2011 was 30.00%, compared to 29.94% for the same period in 2010. The effective tax rates are below the nominal combined Federal and State tax rates as a result of the tax-preferenced income from certain investments and municipal loans/leases as a percentage of total income for each period. The majority of tax preferenced income is derived from municipal securities.

RESULTS BY BUSINESS SEGMENTS

We have two reportable business segments: Business Financial and Commercial Banking Centers, and Treasury. The results of these two segments are included in the reconciliation between business segment totals and our consolidated total. Our business segments do not include the results of administration units that do not meet the definition of an operating segment.

Business Financial and Commercial Banking Centers

Key measures we use to evaluate the Business Financial and Commercial Banking Center’s performance are included in the following table for the three months ended March 31, 2011 and 2010. The table also provides additional significant segment measures useful to understanding the performance of this segment.


	Three months ended
	March 31,
	2011			2010
	*(amounts in thousands)*
Key Measures:
Statement of Operations
Interest income	$	45,465		$	59,575
Interest expense		4,554			10,157

Net Interest Income	$	40,911		$	49,418

Non-interest income		5,212			5,604
Non-interest expense		12,631			13,132

Segment pretax profit	$	33,492		$	41,890

Balance Sheet
Average loans	$	2,698,124		$	2,857,110
Average interest-bearing deposits and customer repos	$	3,109,420		$	3,172,430
Yield on loans		5.93	%		6.01	%
Rate paid on interest-bearing deposits and customer repos		0.43	%		0.85	%


(1)		Interest income and interest expense include credit for funds provided and charge for funds used, respectively. These are eliminated in the consolidated presentation.

(2)		Yield on loans excludes SJB discount accretion as this is accounted for at the Corporate level.

For the three months ended March 31, 2011, segment profit decreased by $8.4 million, or 20.05%, compared to the same period last year. This was primarily due to the decrease in net interest income of $8.5 million, or 17.21%, due to decreases in loan balances. Average loan balances decreased $159.0 million or 5.56%, from the same period last year. This decrease also included a decrease in loan yield of 8 basis points. Rates paid on deposits decreased 42 basis points, while average interest-bearing deposits and customer repos decreased $63.0 million, or 1.99%. Non-interest income decreased by $392,000, or 7.00%, compared to the first three months of 2010. Non-interest expense decreased $501,000, or 3.82%, compared to the same period last year. Certain average loans and deposits in the quarter ended March 31, 2010 were reclassified between segments to be consistent with the quarter ended March 31, 2011 presentation.

Treasury

Key measures we use to evaluate the Treasury’s performance are included in the following table for the three months ended March 31, 2011 and 2010. The table also provides additional significant segment measures useful to understanding the performance of this segment.


	Three months ended
	March 31,
	2011			2010
	*(amounts in thousands)*
Key Measures:
Statement of Operations
Interest income	$	15,221		$	22,804
Interest expense		13,593			18,763

Net Interest Income	$	1,628		$	4,041

Non-interest income (expense)		—			(685	)
Non-interest expense		216			380

Segment pretax profit	$	1,412		$	2,976

Balance Sheet
Average investments	$	2,377,494		$	2,367,321
Average interest-bearing deposits	$	240,001		$	238,612
Average borrowings	$	1,134,516		$	1,540,496
Yield on investments-TE		3.72	%		4.85	%
Non-tax equivalent yield		3.17	%		4.33	%
Rate paid on borrowings		2.04	%		2.89	%

For the quarter ended March 31, 2011, segment profit decreased by $1.6 million over the same period last year. This was primarily due to a decrease in net interest income of $2.4 million, or 59.71%, from $4.0 million as of March 31, 2010. Certain average loans and deposits in the quarter ended March 31, 2010 were reclassified between segments to be consistent with the quarter ended March 31, 2011 presentation.

There are no provisions for credit losses or taxes in the segments as these are accounted for at the corporate level.

Other


	Three months ended
	March 31,
	2011			2010
	*(amounts in thousands)*
Key Measures:
Statement of Operations
Interest income	$	14,540		$	32,012
Interest (income) expense		(30	)		12,132

Net interest income	$	14,570		$	19,880

Provision for Credit Losses		7,068			12,200
Non-interest income (expense)		4,766			(7,130	)
Non-interest expense		23,458			22,410

Pre-tax loss	$	(11,190	)	$	(21,860	)


Balance Sheet
Average loans	$	983,923		$	1,156,929
Average interest-bearing deposits and customer repos	$	522		$	63,401
Yield on loans		4.89	%		8.92	%

The Company’s administration and other operating departments reported pre-tax loss of $11.2 million for the first three months of 2011. This represents a decrease of pre-tax loss of $10.7 million or 48.81%, from a pre-tax loss of $21.9 million for the same period in 2010. The decrease in pre-tax loss is primarily attributed to a decrease in net interest income of $5.3 million which is primarily due to the $11.4 million decrease in discount accretion on SJB loans plus non-interest expense also increased $1.0 million primarily due to higher legal expenses as discussed above. This was partially offset by increase in non-interest income of $11.9 million which is primarily due to the increase in the FDIC loss sharing asset of $12.0 million. Certain average loans and deposits in the quarter ended March 31, 2010 were reclassified between segments to be consistent with the quarter ended March 31, 2011 presentation.

ANALYSIS OF FINANCIAL CONDITION

The Company reported total assets of $6.50 billion at March 31, 2011. This represented an increase of $61.7 million, or 0.96%, from total assets of $6.44 billion at December 31, 2010. This increase was primarily due to a an increase in investment securities of $225.9 million, partially offset by a decrease in loans of $149.3 million and a $20.3 million decrease in the FDIC loss sharing asset. Earning assets totaled $5.76 billion at March 31, 2011. This represented an increase of $73.7 million, or 1.30%, from total earning assets of $5.68 billion at December 31, 2010, due to an increase in investments partially offset by a decrease in loans. Total liabilities were $5.84 billion at March 31, 2011, an increase of $50.9 million, or 0.88%, over total liabilities of $5.79 billion at December 31, 2010. Total equity increased $10.7 million, or 1.67%, to $654.6 million at March 31, 2011, compared with total equity of $643.9 million at December 31, 2010.

Investment Securities

The Company reported total investment securities of $2.02 billion at March 31, 2011. This represented an increase of $225.9 million, or 12.59%, from total investment securities of $1.79 billion at December 31, 2010. Investment securities comprise 35.10% of the Company’s total earning assets at March 31, 2011.

Securities held as “available-for-sale” are reported at fair value for financial reporting purposes. The related unrealized gains or losses, net of income taxes, are recorded in stockholders’ equity. At March 31, 2011, securities held as available-for-sale had a fair value of $2.02 billion, representing 99.85% of total investment securities, with an amortized cost of $2.00 billion. At March 31, 2011, the net unrealized holding gain on securities available-for-sale was $15.4 million and that resulted in accumulated other comprehensive income of $8.7 million (net of $6.7 million in deferred taxes). At December 31, 2010, the Company reported net unrealized gain on investment securities available-for-sale of $11.1 million and accumulated other comprehensive income of $6.2 million (net of deferred taxes of $4.9 million).

Table 3 sets forth investment securities available-for-sale at March 31, 2011 and December 31, 2010.

Table 3 — Composition of Investment Securities
(amounts in thousands)


	March 31, 2011					December 31, 2010
								Total
	Fair Value		Total Percent			Fair Value		Percent
Investment Securities Available-for-Sale:
Mortgage-backed securities	$	892,495		44.24	%	$	808,409		45.12	%
CMO’s / REMIC’s		418,887		20.76	%		270,477		15.10	%
Government agency		85,970		4.26	%		106,273		5.93	%
Municipal bonds		620,176		30.74	%		606,399		33.85	%

Total Investment Securities	$	2,017,528		100.00	%	$	1,791,558		100.00	%

The weighted-average yield (TE) on the investment portfolio at March 31, 2011 was 3.72% with a weighted-average life of 4.3 years. This compares to a yield of 3.62% at December 31, 2010 with a weighted-average life of 4.6 years and a yield of 4.85% at March 31, 2010 with a weighted-average life of 4.7 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal paydowns.

Approximately 69% of the available-for-sale portfolio represents securities issued by the U.S government or U.S. government-sponsored enterprises, which guarantee payment of principal and interest.

Composition of the Fair Value and Gross Unrealized Losses of Securities:


	March 31, 2011
	Less than 12 months				12 months or longer				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
			Holding				Holding				Holding
Description of Securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(amounts in thousands)
Held-To-Maturity
CMO	$	—	$	—	$	3,039	$	288	$	3,039	$	288

Available-for-Sale
Government agency	$	79,440	$	404	$	—	$	—	$	79,440	$	404
Mortgage-backed securities		453,643		6,846		—		—		453,643		6,846
CMO/REMICs		162,094		1,402		—		—		162,094		1,402
Municipal bonds		168,299		5,088		5,599		888		173,898		5,976

	$	863,476	$	13,740	$	5,599	$	888	$	869,075	$	14,628


	December 31, 2010
	Less than 12 months				12 months or longer				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
			Holding				Holding				Holding
Description of Securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(amounts in thousands)
Held-To-Maturity
CMO (1)	$	—	$	—	$	3,143	$	401	$	3,143	$	401

Available-for-Sale
Government agency	$	79,635	$	214	$	—	$	—	$	79,635	$	214
Mortgage-backed securities		449,806		6,366		—		—		449,806		6,366
CMO/REMICs		144,234		1,379		—		—		144,234		1,379
Municipal bonds		225,928		8,844		5,585		899		231,513		9,743

	$	899,603	$	16,803	$	5,585	$	899	$	905,188	$	17,702


(1)		For 2010, the Company recorded a $587,000 charge, on a pre-tax basis, of the non-credit portion of OTTI for this security in other comprehensive income, which is included as gross unrealized losses.

The tables above show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010. The Company has reviewed the individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. A summary of our analysis of these securities and the unrealized losses is described more fully in Note 2 — Investment Securities in the notes to the consolidated financial statements. Economic trends may adversely affect the value of the portfolio of investment securities that we hold.

During the first three months of 2010, the Company recognized an other-than-temporary impairment on the held-to-maturity investment security. The credit-impairment loss of $685,000 was recognized as an offset to other operating income. We recognized no other-than-temporary impairment loss in the first quarter of 2011.

Loans

At March 31, 2011, we reported total loans, net of deferred loan fees, of $3.60 billion. This represents a decrease of $149.3 million, or 3.98%, from total loans, net of deferred loan fees, of $3.75 billion at December 31, 2010. We attribute a significant portion of the decrease to the following:

•

$51.9 million to the non-covered dairy and livestock portfolio. Historically, dairies tend to seasonally draw down on available lines of credit in the fourth quarter and repay these advances in the first quarter.

•

$42.9 million in note sales related to our former largest borrower.

•

$25.3 million from working down problem assets acquired from SJB.

We also experienced a $15.4 million decline in non-covered construction loans and a $11.3 million decline in purchased mortgage pool loans. These two areas are considered non-core lending niches. Our core lending strategy is focused on commercial & industrial business lending, dairy/livestock/agribusiness lending and commercial real estate loans.

We continue to see moderate loan demand in our market areas as a result of the weakness in the state and local economies. Many of our business owner clients are hesitating to invest in new equipment, buildings, or employees until they see stronger signs of economic recovery and stability.

Total loans, net of deferred loan fees, comprise 62.53% of our total earning assets. The following tables present our loan portfolio, excluding held for sale loans, segregated into covered versus non-covered loans, by category as of March 31, 2011 and December 31, 2010.

Table 4 — Distribution of Loan Portfolio by Type (Dollar amounts in thousands)


	March 31, 2011
	Non-Covered
	Loans			Covered Loans			Total
Commercial and Industrial	$	456,040		$	34,276		$	490,316
Real Estate:
Construction		109,540			60,022			169,562
Commercial Real Estate		1,966,589			288,658			2,255,247
SFR Mortgage		205,583			4,862			210,445
Consumer		51,818			9,804			61,622
Municipal lease finance receivables		122,422			475			122,897
Auto and equipment leases, net of unearned discount		17,399			—			17,399
Dairy and Livestock		325,052			—			325,052
Agribusiness		885			48,779			49,664

Gross Loans	$	3,255,328		$	446,876		$	3,702,204

Less: Purchase Accounting Discount		—			(98,117	)		(98,117	)
Less: Deferred net loan fees		(5,640	)		—			(5,640	)

Gross loans, net of deferred loan fees	$	3,249,688		$	348,759		$	3,598,447
Less: Allowance for credit losses		(101,067	)		—			(101,067	)

Net Loans	$	3,148,621		$	348,759		$	3,497,380


Allowance for Credit Losses as a % of Loans, net of deferred loan fees		3.11	%


	December 31, 2010
	Non-Covered
	Loans			Covered Loans			Total
Commercial and Industrial	$	460,399		$	39,587		$	499,986
Real Estate:
Construction		138,980			84,498			223,478
Commercial Real Estate		1,980,256			292,014			2,272,270
SFR Mortgage		218,467			5,858			224,325
Consumer		56,747			10,624			67,371
Municipal lease finance receivables		128,552			576			129,128
Auto and equipment leases, net of unearned discount		17,982			—			17,982
Dairy and Livestock/Agribusiness		376,143			—			376,143
Agribusiness		1,686			55,618			57,304

Gross Loans	$	3,379,212		$	488,775		$	3,867,987

Less: Purchase Accounting Discount		—			(114,763	)		(114,763	)
Less: Deferred net loan fees		(5,484	)		—			(5,484	)

Gross loans, net of deferred loan fees	$	3,373,728		$	374,012		$	3,747,740
Less: Allowance for credit losses		(105,259	)		—			(105,259	)

Net Loans	$	3,268,469		$	374,012		$	3,642,481


Allowance for Credit Losses as a % of Loans, net of deferred loan fees		3.12	%

Commercial and industrial loans are primarily loans and leases to commercial entities to finance capital purchases or improvements, or to provide cash flow for operations. Real estate loans are loans secured by trust deeds on real property, including property under construction, commercial property and single family and multifamily residences. Consumer loans include installment loans to consumers as well as home equity loans and other loans secured by junior liens on real property. Municipal lease finance receivables provide financing to municipalities, school districts, and other special districts. Auto and equipment leases provide financing to both commercial entities as well as consumers. Dairy and livestock/agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers, and farmers.

Our loan portfolio is from a variety of areas throughout our marketplace. The following is the breakdown of our total non-covered loans and commercial real estate loans by region as of March 31, 2011.


	March 31, 2011
					Non-Covered
Non-Covered					Commercial
Loans by Market Area	Total Non-Covered Loans				Real Estate Loans
	*(amounts in thousands)*
Los Angeles County	$	1,102,224	33.9	%	$	704,905	35.8	%
Inland Empire		648,417	19.9	%		550,713	28.0	%
Central Valley		573,659	17.6	%		328,728	16.7	%
Orange County		504,638	15.5	%		208,141	10.6	%
Other Areas		426,390	13.1	%		174,102	8.9	%

	$	3,255,328	100.0	%	$	1,966,589	100.0	%


	March 31, 2011
Covered Loans					Covered Commercial
Loans by Market Area	Total Covered Loans				Real Estate Loans
	*(amounts in thousands)*
Los Angeles County	$	16,531	3.7	%	$	3,011	1.0	%
Inland Empire		2,943	0.6	%		174	0.1	%
Central Valley		342,598	76.7	%		224,467	77.8	%
Orange County		2,584	0.6	%		—	0.0	%
Other Areas (1)		82,220	18.4	%		61,006	21.1	%

	$	446,876	100.0	%	$	288,658	100.0	%


(1)		Other areas include church and hotel loans that are out-of-state or in other areas of California

Of particular concern in the current credit and economic environments is our real estate and real estate construction loans. Our real estate loans are comprised of single-family residences, multifamily residences, industrial, office and retail. We strive to have a maximum loan-to-value ratio of 65-75% at loan origination. This table breaks down our real estate portfolio, with the exception of construction loans, which are discussed in greater detail below.


	March 31, 2011
						*Percent*			*Average*
Non-Covered Real Estate Loans						*Owner-*			*Loan*
*(amounts in thousands)*	*Loan Balance*		*Percent*			*Occupied (1)*			*Balance*
Single Family-Direct	$	46,716		2.2	%		100.0	%	$	349
Single Family-Mortgage Pools		158,867		7.3	%		100.0	%		303
Multifamily		115,851		5.3	%		0.0	%		1,044
Industrial		639,884		29.5	%		35.4	%		880
Office		371,297		17.1	%		25.4	%		964
Retail		272,465		12.5	%		11.6	%		1,206
Medical		141,235		6.5	%		38.2	%		1,811
Secured by Farmland		161,506		7.4	%		100.0	%		2,153
Other		264,351		12.2	%		53.0	%		1,041

	$	2,172,172		100.0	%		42.1	%		864


(1)		Represents percentage of owner-occupied in each real estate loan category

In the table above, Single Family-Direct represents those single-family residence loans that we have made directly to our customers. These loans totaled $46.7 million at March 31, 2011. In addition, we have purchased pools of owner-occupied single-family loans from real estate lenders totaling $158.9 million at March 31, 2011. These loans were purchased with FICO scores predominantly ranging from 700 to over 800 and original loan-to-value ratios of 60% to 80%. These pools were purchased to diversify our loan portfolio since we make few single-family loans. Due to market conditions, we have not purchased any mortgage pools since August 2007.

The table below provides a breakdown of our covered real estate loans, with the exception of construction loans, which are discussed in greater detail below.


	March 31, 2011
Covered Real Estate Loans						*Average Loan*
*(amounts in thousands)*	*Loan Balance*		*Percent*			*Balance*
Single Family-Direct	$	4,862		1.7	%	$	270
Multifamily		7,697		2.6	%		962
Industrial		54,806		18.7	%		751
Office		27,743		9.5	%		495
Retail		37,962		12.9	%		904
Medical		27,385		9.3	%		1,191
Secured by Farmland		1,460		0.5	%		292
Secured by Hotels		49,557		16.9	%		3,097
Church Loans		42,197		14.4	%		1,563
Other		39,851		13.5	%		569

	$	293,520		100.0	%		868

As of March 31, 2011, the Company had $169.6 million in construction loans, both non-covered and covered. This represents 4.6% of gross loans outstanding of $3.70 billion. The following table presents a break-down of our non-covered construction loans by county and type.


	March 31, 2011
Non-Covered	SFR & Multifamily
Construction Loans	Land
(amounts in thousands)	Development				Construction				Total
Inland Empire	$	—	0.0	%	$	—	0.0	%	$	—	0.0	%
Los Angeles		—	0.0	%		9,477	75.4	%		9,477	58.5	%
Central Valley		1,095	30.1	%		556	4.4	%		1,651	10.2	%
Orange		135	3.7	%		—	0.0	%		135	0.8	%
San Diego		2,408	66.2	%		2,541	20.2	%		4,949	30.5	%

	$	3,638	100.0	%	$	12,574	100.0	%	$	16,212	100.0	%


Total Non-Performing	$	2,345	64.5	%	$	—	0.0%		$	2,345	14.5	%


	Commercial
	Land
	Development				Construction				Total
Inland Empire	$	3,008	18.7	%	$	26,298	34.0	%	$	29,306	31.4	%
Los Angeles		1,559	9.7	%		31,341	40.6	%		32,900	35.2	%
Central Valley		4,571	28.3	%		5,862	7.6	%		10,433	11.2	%
Orange		—	0.0	%		—	0.0	%		—	0.0	%
San Diego		—	0.0	%		—	0.0	%		—	0.0	%
Other (includes out-of-state)		6,977	43.3	%		13,712	17.8	%		20,689	22.2	%

	$	16,115	100.0	%	$	77,213	100.0	%	$	93,328	100.0	%


Total Non-Performing	$	14,016	87.0	%	$	25,960	33.6	%	$	39,976	42.8	%

Of the $109.5 million in non-covered construction loans, $42.3 million, or 38.64% is non-performing. Approximately 14.80%, or $16.2 million, were loans for single-family residences (“SFR”), residential land loans, and multi-family land development loans. The remaining construction loans, totaling $93.3 million, were related to commercial construction. The average balance of any single construction loan is approximately $2.7 million. Our construction loans are located throughout our marketplace as can be seen in the table above.

The following table presents a break-down of our covered construction loans by county and type.


	March 31, 2011
Covered	SFR & Multifamily
Construction Loans	Land
(amounts in thousands)	Development				Construction				Total
Central Valley	$	14,955	78.7	%	$	7,652	80.1	%	$	22,607	79.2	%
Other (includes out-of-state)		4,048	21.3	%		1,897	19.9	%		5,945	20.8	%

	$	19,003	100.0	%	$	9,549	100.0	%	$	28,552	100.0	%


	Commercial
	Land
	Development				Construction				Total
Central Valley	$	5,612	100.0	%	$	25,858	100.0	%	$	31,470	100.0	%

	$	5,612	100.0	%	$	25,858	100.0	%	$	31,470	100.0	%

Allowance for Credit Losses

The allowance for credit losses was $101.1 million as of March 31, 2011. This represents a decrease of $4.2 million, or 3.98%, compared to allowance for credit losses of $105.3 million as of December 31, 2010. Activity in the allowance for credit losses was as follows for the first three months of 2011 and for the year ended December 31, 2010.


	March 31,			December 31,
	2011			2010
	(amounts in thousands)
Balance, beginning of year	$	105,259		$	108,924
Provision charged to operations		7,068			61,200
Loans charged off (1)		(12,038	)		(65,524	)
Recoveries on loans previously charged off		778			659

Balance, end of period	$	101,067		$	105,259

Non-performing Assets (Non-Covered)

We had non-covered non-performing assets of $114.4 million at March 31, 2011. Non-performing assets represent 3.52% of total loans and OREO and 1.77% of total assets at March 31, 2011. We had non-performing assets of $162.3 million at December 31, 2010. Non-performing assets include non-accrual loans plus other real estate owned (foreclosed property).

TABLE 5 - Non-Performing Assets
(Non-covered)


	March 31,			December 31,
	2011			2010
	(Amounts in thousands)
Non-accrual loans	$	81,687		$	84,050
Restructured loans (non-performing)		26,463			72,970
Other real estate owned (OREO), net		6,240			5,290

Total non-performing assets	$	114,390		$	162,310


Restructured loans (performing)	$	11,925		$	13,274

Percentage of non-performing assets to total loans outstanding & OREO		3.51	%		4.80	%

Percentage of non-performing assets to total assets		1.76	%		2.52	%

We had loans with a balance of $120.1 million classified as impaired at March 31, 2011. This balance includes the non-performing loans of $108.2 million and loans which were restructured in a troubled debt restructuring with a balance of $38.4 million, of which $26.5 million are non-performing and $11.9 million are performing, as of March 31, 2011. The decrease in impaired loans of $50.2 million over December 31, 2010 is primarily due to the sale of loans related to our former largest borrowing relationship. At December 31, 2010, we had impaired loans with a balance of $170.3 million. Impaired loans were 3.69% of total non-covered loans as of March 31, 2011.

As of March 31, 2011, we had $6.2 million in non-covered OREO compared to $5.3 million as of December 31, 2010, an increase of $950,000. During the first three months of 2011, we added two properties for a total of $1.0 million to OREO. We sold one property with an OREO value of $119,000 for cash proceeds of $101,000. We now have four OREO properties. During the first three months of 2011, the Bank incurred expenses of $1.1 million related to the holding of OREO.

The table below provides trends in our non-covered non-performing assets and delinquencies over the past year.

Non-Performing Assets & Delinquency Trends

(Non-Covered Loans)


	March 31,			December 31,			September 30,			June 30,			March 31,
	2011			2010			2010			2010			2010
Non-Performing Loans
Residential Construction and Land	$	4,001		$	4,090		$	5,085		$	2,789		$	2,855
Commercial Construction		39,976			60,591			71,428			39,114			31,216
Residential Mortgage		18,425			17,800			14,543			12,638			13,726
Commercial Real Estate		34,950			64,859			56,330			20,639			22,041
Commercial and Industrial		7,542			3,936			6,067			7,527			6,879
Dairy & Livestock		2,996			5,207			5,176			—			—
Consumer		260			537			242			143			123

Total	$	108,150		$	157,020		$	158,871		$	82,850		$	76,840


% of Total Loans		3.33	%		4.65	%		4.65	%		2.36	%		2.19	%

Past Due 30-89 Days
Residential Construction and Land	$	—		$	—		$	—		$	—		$	—
Commercial Construction		1,492			—			—			9,093			8,143
Residential Mortgage		993			2,597			2,779			2,552			3,746
Commercial Real Estate		898			3,194			1,234			1,966			3,286
Commercial and Industrial		239			3,320			2,333			634			2,714
Dairy & Livestock		—			—			1,406			—			—
Consumer		9			29			494			139			28

Total	$	3,631		$	9,140		$	8,246		$	14,384		$	17,917


% of Total Loans		0.11	%		0.27	%		0.24	%		0.41	%		0.51	%

OREO
Residential Construction and Land	$	—		$	—		$	11,113		$	11,113		$	11,113
Commercial Construction		2,709			2,709			2,709			—			—
Commercial Real Estate		3,322			2,581			3,220			3,220			3,746
Commercial and Industrial		209			—			—			668			—
Residential Mortgage		—			—			345			—			319
Consumer		—			—			—			—			—

Total	$	6,240		$	5,290		$	17,387		$	15,001		$	15,178


Total Non-Performing, Past Due & OREO	$	118,021		$	171,450		$	184,504		$	112,235		$	109,935


% of Total Loans		3.63	%		5.08	%		5.40	%		3.20	%		3.13	%

We had $108.2 million in non-covered non-performing loans at March 31, 2011, or 3.33% of total non-covered loans. This compares to $157.0 million in non-performing loans at December 31, 2010 and $76.8 million in non-performing loans at March 31, 2010. During the first quarter of 2011 we sold loans related to our former largest borrower with a carrying value of $42.9 million.

The economic downturn has had an impact on our market area and on our loan portfolio. The dairy industry and the commercial real estate industry are under stress. We continually monitor these conditions in determining our estimates of needed reserves. We anticipate that there will be some additional losses in the loan portfolio given the current state of the economy. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, increase in general rates of interest, change in the financial conditions or business of a borrower may adversely affect a borrower’s ability to pay. See “Risk Management — Credit Risk” herein.

Covered Loans and OREO

Loans acquired through the SJB acquisition are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). Covered loans accounted for under ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of future cash flows is not reasonably estimable, the loans may be classified as non-performing loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. As of March 31, 2011, there are no non-performing covered loans. We have sixteen properties in covered OREO totaling $11.5 million as of March 31, 2011 compared to seventeen properties totaling $11.3 million at December 31, 2010.

Deposits

The primary source of funds to support earning assets (loans and investments) is the generation of deposits from our customer base. The ability to grow the customer base and subsequently deposits is a crucial element in the performance of the Company.

At March 31, 2011, total deposits were $4.49 billion, representing a decrease of $33.1 million, or 0.73%, from total deposits of $4.52 billion at December 31, 2010. The composition of deposits is as follows:


	March 31, 2011				December 31, 2010
	(Amounts in thousands)

Non-interest bearing deposits
Demand deposits	$	1,817,951	40.6	%	$	1,701,523	37.7	%
Interest bearing deposits
Savings Deposits		1,706,329	38.0	%		1,727,432	38.2	%
Time deposits		961,409	21.4	%		1,089,873	24.1	%

Total deposits	$	4,485,689	100.0	%	$	4,518,828	100.0	%

The amount of non-interest-bearing demand deposits in relation to total deposits is an integral element in achieving a low cost of funds. Demand deposits totaled $1.82 billion at March 31, 2011, representing an increase of $116.4 million, or 6.84%, over total demand deposits of $1.70 billion at December 31, 2010. Non-interest-bearing demand deposits represented 40.6% of total deposits as of March 31, 2011 and 37.7% of total deposits as of December 31, 2010.

Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $1.71 billion at March 31, 2011, representing a decrease of $21.1 million, or 1.22%, from savings deposits of $1.73 billion at December 31, 2010.

Time deposits totaled $961.4 million at March 31, 2011. This represented a decrease of $128.5 million, or 11.79%, from total time deposits of $1.09 billion at December 31, 2010.

Other Borrowed Funds

To achieve the desired growth in earning assets and to fully utilize our capital, we first pursue non-interest-bearing deposits (the lowest cost of funds to the Company). Next, we pursue interest-bearing deposits and finally we supplement the growth in deposits with borrowed funds. Average borrowed funds, as a percent of average total funding (total deposits plus demand notes plus borrowed funds) was 19.91% for the quarter ending March 31, 2011, as compared to 23.11% for the quarter ending December 31, 2010.

In June 2006, the Company purchased securities totaling $250.0 million. This purchase was funded by a repurchase agreement with J.P. Morgan of $250.0 million, with a double cap embedded in the repurchase agreement. The interest rate on this agreement was fixed at 4.95% and the maturity was September 30, 2011. During the first nine months of 2010, we prepaid this structured repurchase agreement. The transaction resulted in a $13.3 million prepayment charge recorded in other operating expense.

In November 2006, we began a repurchase agreement product with our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day. These repurchase agreements are with customers who have other banking relationships with us. As of March 31, 2011 and December 31, 2010, total customer repurchases were $578.0 million and $542.2 million, respectively, with weighted average interest rates of 0.36% and 0.55%, respectively.

We entered into long-term borrowing agreements (borrowings with original maturities of one year or longer) with the Federal Home Loan Bank (“FHLB”). We had outstanding balances of $548.5 million under these agreements at March 31, 2011 and $548.4 million at December 31, 2010. The weighted average interest rate was 3.71% at both March 31, 2011 and December 31, 2010. The FHLB holds certain investment securities and loans of the Bank as collateral for these borrowings.

The Bank has an agreement, known as the Treasury Tax & Loan (“TT&L”) Note Option Program, with the Federal Reserve Bank and the U.S. Department of Treasury in which federal tax deposits made by depositors can be held by the Bank until called (withdrawn) by the U.S. Department of Treasury. The maximum amount of accumulated federal tax deposits allowable to be held by the Bank, as set forth in the agreement, is $15.0 million. On March 31, 2011 and December 31, 2010 the amounts held by the Bank in the TT&L Note Option Program were $3.0 million and $1.9 million, collateralized by securities, respectively. Amounts are payable on demand.

Through the acquisition of FCB in June 2007, the Bank acquired $5 million in junior subordinated debt.

At March 31, 2011, borrowed funds totaled $1.13 billion, representing an increase of $36.9 million, or 3.37%, from total borrowed funds of $1.10 billion at December 31, 2010.

Aggregate Contractual Obligations

The following table summarizes our contractual commitments as of March 31, 2011:


			Maturity by Period
			Less Than		One Year		Four Year		After
			One		to Three		to Five		Five
	Total		Year		Years		Years		Years
	(amounts in thousands)

Deposits	$	4,485,689	$	3,538,942	$	941,515	$	1,665	$	3,567
Customer Repurchase Agreements		578,009		578,009		—		—		—
FHLB and Other Borrowings		556,424		2,966		100,000		255,000		198,458
Junior Subordinated Debentures		115,055		—		—		—		115,055
Deferred Compensation		9,212		809		1,599		1,432		5,372
Operating Leases		23,885		5,579		8,193		5,101		5,012
Advertising Agreements		8,616		1,561		2,750		1,856		2,449

Total	$	5,776,890	$	4,127,866	$	1,054,057	$	265,054	$	329,913

Deposits represent non-interest bearing, money market, savings, NOW, certificates of deposits, brokered and all other deposits held by the Company.

Repurchase agreements represent amounts due to customers.

FHLB borrowings represent the amounts that are due to the Federal Home Loan Bank. These borrowings have fixed maturity dates. Other borrowings represent the amounts on subordinated debt and TT&L.

Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust I, CVB Statutory Trust II & CVB Statutory Trust III. The debentures have the same maturity as the Trust Preferred Securities. CVB Statutory Trust I, which matures in 2033, became callable in whole or in part in December 2008. CVB Statutory Trust II, which matures in 2034, became callable in whole or in part in January 2009. CVB Statutory Trust III, which matures in 2036, will become callable in whole or in part in 2011. It also represents FCB Capital Trust II which matures in 2033 and became callable in 2008. We have not called any of our debentures as of March 31, 2011.

Deferred compensation primarily represents the amounts that are due to current employees’ salary deferral agreements and former employees’ salary continuation agreements as a result of acquisitions. Operating leases represent the total minimum lease payments under noncancelable operating leases. Advertising agreements represent the amounts that are due on various agreements that provide advertising benefits to the Company.

Off-Balance Sheet Arrangements

At March 31, 2011, we had commitments to extend credit of approximately $595.8 million and obligations under letters of credit of $68.3 million and available lines of credit totaling $1.29 billion from certain institutions. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. The Bank uses the same credit underwriting policies in granting or accepting such commitments or contingent obligations as it does for on-balance-sheet instruments, which consist of evaluating customers’ creditworthiness individually. The Company has a reserve for undisbursed commitments of $11.2 million as of March 31, 2011 and $10.5 million as of December 31, 2010.

Standby letters of credit written are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, the Bank holds appropriate collateral supporting those commitments.

The following table summarizes the off-balance sheet arrangements at March 31, 2011:


			Maturity by Period
			Less Than		One Year		Four Year		After
			One		to Three		to Five		Five
	Total		Year		Years		Years		Years
	(Amounts in thousands)
Commitment to extend credit	$	595,821	$	450,121	$	68,895	$	20,820	$	55,985
Obligations under letters of credit		68,267		58,248		9,819		200		—

Total	$	664,088	$	508,369	$	78,714	$	21,020	$	55,985

Liquidity and Cash Flow

Since the primary sources and uses of funds for the Bank are deposits and loans, the relationship between gross loans and total deposits provides a useful measure of the Bank’s liquidity. Typically, the closer the ratio of loans to deposits is to 100%, the more reliant the Bank is on its loan portfolio to provide for short-term liquidity needs. Since repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan to deposit ratio the less liquid are the Bank’s assets. For the first three months of 2011, the Bank’s loan to deposit ratio averaged 80.59%, compared to an average ratio of 89.55% for the same period in 2010. The Bank’s ratio of loans to deposits and customer repurchases averaged 71.56% for the first three months of 2011 and 79.46% for the same period in 2010.

CVB is a company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations. Substantially all of CVB’s revenues are obtained from dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. In addition, our regulators could limit the ability of the Bank or the Company to pay dividends or make other distributions. At March 31, 2011, approximately $105.1 million of the Bank’s equity was unrestricted and available to be paid as dividends to CVB. Management of CVB believes that such restrictions will not have an impact on the ability of CVB to meet its ongoing cash obligations.

For the Bank, sources of funds normally include principal and interest payments on loans and investments, other borrowed funds, and growth in deposits. Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and other operating expenses.

Net cash provided by operating activities totaled $5.8 million for the first three months of 2011, compared to $41.9 million for the same period last year. The decrease in cash provided by operating activities is primarily attributed to an increase in cash paid to vendors and employees and an increase in income taxes paid and a decrease in interest and dividends received, offset by a decrease in interest paid on deposits.

Net cash used in investing activities totaled $5.7 million for the first three months of 2011, compared to net cash provided by investing activities of $162.0 million for the same period in 2010. The cash used in investing activities was primarily the result of sales, purchases, repayments and maturities of investment securities partially offset by a decrease in loans and net proceeds from the FDIC shared-loss agreement during the first three months of 2011.

Net cash used in financing activities totaled $5.3 million for the first three months of 2011, compared to net cash provided by financing activities of $23.1 million for the same period last year. The cash used in financing activities during the first three months of 2011 was primarily due to the net decrease in time deposits and payment of dividends, partially offset by net increases in transaction accounts and customer repurchase agreements.

At March 31, 2011, cash and cash equivalents totaled $399.1 million. This represented an increase of $67.6 million, or 20.39%, over a total of $331.5 million at March 31, 2010 and a decrease of $5.2 million, or 1.29%, from a total of $404.3 million at December 31, 2010.

Capital Resources

Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of capital. Based on the Board of Directors analysis of our capital needs (including any capital needs arising out of our financial condition and results of operations or from any acquisitions we may make) and the input of our regulators, we could determine or, our regulators could require us, to raise additional capital.

Regulatory risk-based capital standards require the achievement of a minimum ratio of total capital to risk-weighted assets of 8.0% (of which at least 4.0% must be Tier 1 capital). In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered “well-capitalized” for bank regulatory purposes, it is necessary for the Bank and the Company to achieve a Tier 1 risk-based capital ratio equal to or greater than 6%, a total risk-based capital ratio equal to or greater than 10% and a Tier 1 leverage ratio equal to or greater than 5%. At March 31, 2011, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes.

The Company’s equity capital was $654.6 million at March 31, 2011. This represented an increase of $10.7 million, or 1.67%, over equity capital of $643.9 million at December 31, 2010. The Company’s 2010 Annual Report on Form 10-K (Management’s Discussion and Analysis and Note 18 of the accompanying financial statements) describes the regulatory capital requirements of the Company and the Bank.

During the first three months of 2011, the Board of Directors of the Company declared quarterly common stock cash dividends that totaled $0.085 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB’s ability to pay cash dividends to its shareholders is subject to restrictions under federal and California law, including restrictions imposed by the FRB and covenants set forth in various agreements we are a party to including covenants set forth in our junior subordinated debentures.

The table below presents the Company’s and the Bank’s risk-based and leverage capital ratios as of March 31, 2011, and December 31, 2010.


	Adequately			Well
	Capitalized			Capitalized			March 31, 2011						December 31, 2010
Capital Ratios	Ratios			Ratios			Company			Bank			Company			Bank
Risk-based capital ratios:
Tier I		4.0	%		6.0	%		17.0	%		17.0	%		16.6	%		16.6	%
Total		8.0	%		10.0	%		18.4	%		18.2	%		18.0	%		17.8	%
Leverage ratio		4.0	%		5.0	%		10.8	%		10.7	%		10.6	%		10.5	%
Tangible Capital Ratio								9.2	%		10.9	%		9.1	%		10.8	%

RISK MANAGEMENT

We have adopted a Risk Management Plan to ensure the proper control and management of all risk factors inherent in the operation of the Company and the Bank. Specifically, credit risk, counterparty risk, interest rate risk, liquidity risk, transaction risk, compliance risk, strategic risk, reputation risk, price risk and foreign exchange risk, can all affect the market risk exposure of the Company. These specific risk factors are not mutually exclusive. It is recognized that any product or service offered by us may expose the Bank to one or more of these risks. Our Risk Management Committee and Risk Management Department monitors these risks to minimize exposure to the Company.

Credit Risk

Credit risk is defined as the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counter party, issuer, or borrower performance. Credit risk arises through the extension of loans and leases, certain securities, and letters of credit.

Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Bank’s policy statements. In addition, certain securities carry insurance to enhance credit quality of the bond. Limitations on industry concentration, aggregate customer borrowings, geographic boundaries and standards on loan quality also are designed to reduce loan credit risk. Senior Management, Directors’ Committees, and the Board of Directors are provided with information to appropriately identify, measure, control and monitor the credit risk of the Bank.

Implicit in lending activities is the risk that losses will occur and that the amount of such losses will vary over time. Consequently, we maintain an allowance for credit losses by charging a provision for credit losses to earnings. Loans determined to be losses are charged against the allowance for credit losses. Our allowance for credit losses is maintained at a level considered by us to be adequate to provide for estimated probable losses inherent in the existing portfolio.

The allowance for credit losses is based upon estimates of probable losses inherent in the loan and lease portfolio. The nature of the process by which we determine the appropriate allowance for credit losses requires the exercise of considerable judgment. The amount actually observed in respect of these losses can vary significantly from the estimated amounts. We employ a systematic methodology that is intended to reduce the differences between estimated and actual losses.

Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers all loans. The systematic methodology consists of two major elements.

Central to the first phase of our credit risk management is its loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is reviewed and possibly changed by Credit Management. The risk rating is based primarily on a thorough analysis of each borrower’s financial capacity in conjunction with industry and economic trends. Credit approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and Credit Management personnel. Credits are monitored by line and Credit Management personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.

Loans are risk rated into the following categories: Pass, Special Mention, Substandard, Doubtful, and Loss. Each of these groups is assessed and appropriate amounts used in determining the adequacy of our allowance for losses. The Impaired and Doubtful loans are analyzed on an individual basis for allowance amounts. The other categories have formulae used to determine the needed allowance amount.

The Bank obtains a quarterly independent credit review by engaging an outside party to review our loans. The primary purpose of this review is to evaluate our existing loan ratings and provide an assessment as to the effectiveness of our allowance process.

Based on the risk rating system, specific allowances are established in cases where we have identified significant conditions or circumstances related to a credit that we believe indicates the probability that a loss has been incurred. We perform a detailed analysis of these loans, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. We then determine the inherent loss potential and allocate a portion of the allowance for losses as a specific allowance for each of these credits.

The second phase is conducted by evaluating or segmenting the remainder of the loan portfolio into groups or pools of loans with similar characteristics in accordance with ASC No. 450-10, “Contingencies.” In this second phase, groups or pools of homogeneous loans are reviewed to determine a portfolio formula allowance. In the case of the portfolio formula allowance, homogeneous portfolios, such as small business loans, consumer loans, agricultural loans, and real estate loans, are aggregated or pooled in determining the appropriate allowance. The risk assessment process in this case emphasizes trends in the different portfolios for delinquency, loss, and other-behavioral characteristics of the subject portfolios.

The second major element in our methodology for assessing the appropriateness of the allowance consists of our considerations of all known relevant internal and external factors that may affect a loan’s collectability. This includes our estimates of the amounts necessary for concentrations, economic uncertainties, the volatility of the market value of collateral, and other relevant factors. The relationship of the two major elements of the allowance to the total allowance may fluctuate from period to period.

In the second major element of the analysis which considers all known relevant internal and external factors that may affect a loan’s collectability, we perform an evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed as of the balance sheet date:

• then-existing general economic and business conditions affecting the key lending areas of the Company,

• then-existing economic and business conditions of areas outside the lending areas, such as other sections of the United States

• credit quality trends (including trends in non-performing loans expected to result from existing conditions),

• collateral values

• loan volumes and concentrations,

• specific industry conditions within portfolio segments,

• recent loss experience in particular segments of the portfolio,

• duration of the current business cycle,

• bank regulatory examination results and

• findings of the Company’s external credit examiners.

We review these conditions in discussion with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, our estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, our evaluation of the inherent loss related to such condition is reflected in the second major element of the allowance. Although we have allocated a portion of the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety.

Table 7 presents a comparison of net credit losses, the provision for credit losses (including adjustments incidental to mergers), and the resulting allowance for credit losses for the three months ended March 31, 2011 and 2010.

TABLE 7 — Summary of Credit Loss Experience


	As of and for three months
	ended March 31,
	2011			2010
	(Dollars in thousands)
Amount of Total Non-Covered Loans at End of Period (1)	$	3,249,688		$	3,508,590

Average Total Non-Covered Loans Outstanding (1)	$	3,329,828		$	3,557,310


Allowance for Credit Losses at Beginning of Period	$	105,259		$	108,924

Non-Covered Loans Charged-Off:
Construction		6,160			4,685
Real Estate		2,471			1,580
Commercial and Industrial		689			2,569
Dairy & Livestock		2,204			—
Consumer, Auto & Other		120			97

Total Non-Covered Loans Charged-Off		11,644			8,931


Non-Covered Loan Recoveries:
Real Estate Loans		581			1
Commercial and Industrial		142			119
Consumer, Auto & Other		52			8

Total Non-Covered Loans Recovered		775			128

Net Non-Covered Loans (Charged-Off)		(10,869	)		(8,803	)

Provision Charged to Operating Expense		6,677			12,200

Covered Loan Activity:
Covered Loans (Charged-Off)		(394	)		—
Covered Loans Recovered		3			—
Provision Charged to Operating Expense		391			—

Net Covered Loan Activity		—			—

Allowance for Credit Losses at End of period	$	101,067		$	112,321


Net Loans Charged-Off to Average Non-Covered Loans		0.33	%		0.25	%
Net Loans Charged-Off to Non-Covered Loans at End of Period		0.33	%		0.25	%
Allowance for Credit Losses to Average Non-Covered Loans		3.04	%		3.16	%
Allowance for Credit Losses to Non-Covered Loans at End of Period		3.11	%		3.20	%
Net Non-Covered Loans Charged-Off to Allowance for Credit Losses		(10.75	)%		(7.84	)%
Net Non-Covered Loans Charged-Off to Provision for Credit Losses		(162.78	)%		(72.16	)%


(1)		Net of deferred loan origination fees.

While we believe that the allowance at March 31, 2011, was adequate to absorb losses from any known or inherent risks in the portfolio, no assurance can be given that economic conditions, conditions of our borrowers, or natural disasters which adversely affect the Company’s service areas or other circumstances or conditions, including those identified above, will not be reflected in increased provisions or credit losses in the future.


ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

In the normal course of our business activities, we are exposed to market risks, including price and liquidity risk. Market risk is the potential of loss from adverse changes in market rates and prices, such as interest rates (interest rate risk). Liquidity risk arises from the possibility that we may not be able to satisfy current or future commitments or that we may be more reliant on alternative funding sources such as long-term debt. Financial products that expose us to market risk include securities, loans, deposits, debts and derivative financial instruments.

Counterparty Risk

Recent developments in the financial markets have placed an increased awareness of Counterparty Risks. These risks occur when a financial institution has an indebtedness or potential for indebtedness to another financial institution. We have assessed our Counterparty Risk at the end of the first quarter with the following results:

•

We do not have any investments in the preferred stock of any other company.

•

We do not have in our investment portfolio any trust preferred securities of any other company.

•

Most of our investments securities are either municipal securities or securities backed by mortgages, FNMA, FHLMC or FHLB.

•

All of our commercial line insurance policies are with companies with the highest AM Best ratings of AXV or above, except for our travel/accident carrier who is rated AVIII.

•

We have no significant Counterparty exposure related to derivatives such as interest rate swaps with a major financial institution.

•

We have no significant exposure to our Cash Surrender Value of Life insurance since all of the insurance companies carry an AM Best rating of A - or greater.

•

We have $323.0 million in Fed Funds lines of credit with other banks. All of these banks are major U.S. banks, each with over $20.0 billion in assets. We rely on these funds for overnight borrowings. We currently have no outstanding Fed Funds balance.

Interest Rate Risk

During periods of changing interest rates, the ability to reprice interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in the Bank’s service area. Short-term repricing risk is minimized by controlling the level of floating rate loans and maintaining a downward sloping ladder of bond payments and maturities. Basis risk is managed by the timing and magnitude of changes to interest-bearing deposit rates. Yield curve risk is reduced by keeping the duration of the loan and bond portfolios balanced to attempt to minimize the risks of rising or falling yields. Options risk in the bond portfolio is monitored monthly and actions are recommended when appropriate.

We monitor the interest rate “sensitivity” risk to earnings from potential changes in interest rates using various methods, including a maturity/repricing gap analysis. This analysis measures, at specific time intervals, the differences between earning assets and interest-bearing liabilities for which repricing opportunities will occur. A positive difference, or gap, indicates that earning assets will reprice faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates, and a lower net interest margin during periods of declining interest rates. Conversely, a negative gap indicates that interest-bearing liabilities will reprice faster than earning assets. This will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates.

The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans. In addition, the magnitude of changes in the rates charged on loans is not always proportionate to the magnitude of changes in the rates paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest-bearing liabilities. In general, whether we report a positive gap in the short-term period or negative gap in the long-term period does not necessarily indicate that, if interest rates decreased, net interest income would increase, or if interest rates increased, net interest income would decrease.

Approximately $1.3 billion, or 65%, of the total investment portfolio at March 31, 2011 consisted of securities backed by mortgages. The final maturity of these securities can be affected by the speed at which the underlying mortgages repay. Mortgages tend to repay faster as interest rates fall, and slower as interest rates rise. As a result, we may be subject to a “prepayment risk” resulting from greater funds available for reinvestment at a time when available yields are lower. Conversely, we may be subject to “extension risk” resulting from lesser amounts available for reinvestment at a time when available yields are higher. Prepayment risk includes the risk associated with the payment of an investment’s principal faster than originally intended. Extension risk is the risk associated with the payment of an investment’s principal over a longer time period than originally anticipated. In addition, there can be greater risk of price volatility for mortgage-backed securities as a result of anticipated prepayment or extension risk.

We also utilize the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of our net interest income is measured over a rolling two-year horizon.

The Balance Sheet Management Committee (“BSMC”) meets quarterly to review the results of the simulation model. The BSMC proactively focuses on strategy development and implementation based on a clear understanding of the Bank’s risk and return profile. The quarterly BSMC meeting was facilitated by the Bank’s outside consultant. In addition, periodically the BSMC reviews the analysis prepared and presented by one of the approved broker-dealers that specifically measure the interest rate risk inherent in the Bank’s investment portfolio.

The simulation model estimates the impact of changing interest rates on the interest income from all interest-earning assets and the interest expense paid on all interest-bearing liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and 100 basis point downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed.

The following depicts the Company’s net interest income sensitivity analysis as of March 31, 2011:


		Estimated Net
Simulated		Interest Income
Rate Changes		Sensitivity
+ 200 basis points		(3.07%)
- 100 basis points		0.88%

The Company is currently more liability sensitive. The estimated sensitivity does not necessarily represent our forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.

Liquidity Risk

Liquidity risk is the risk to earnings or capital resulting from our inability to meet our obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect our ability to liquidate assets quickly and with minimum loss of value. Factors considered in liquidity risk management are: stability of the deposit base; marketability, maturity, pledging of investments; the demand for credit; and the ability to enter the public markets to sell our stock.

In general, liquidity risk is managed daily by controlling the level of fed funds and the use of funds provided by the cash flow from the investment portfolio. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal Reserve Bank. The sale of bonds maturing in the near future can also serve as a contingent source of funds. Increases in deposit rates are considered a last resort as a means of raising funds to increase liquidity.

Transaction Risk

Transaction risk is the risk to earnings or capital arising from problems in service or product delivery. This risk is significant within any bank and is interconnected with other risk categories in most activities throughout the Bank. Transaction risk is a function of internal controls, information systems, associate integrity, and operating processes. It arises daily throughout the Bank as transactions are processed. It pervades all divisions, departments and branches and is inherent in all products and services we offer.

In general, transaction risk is defined as high, medium or low by the internal auditors during the audit process. The audit plan ensures that high-risk areas are reviewed at least annually. We utilize third party audit firms to supplement our internal audit services.

The key to monitoring transaction risk is in the design, documentation and implementation of well-defined procedures. All transaction related procedures include steps to report events that might increase transaction risk. Dual controls are also a form of monitoring.

Compliance Risk

Compliance risk is the risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain Bank products or activities of the Bank’s customers may be ambiguous or untested. Compliance risk exposes us to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk can also lead to a diminished reputation, reduced business value, limited business opportunities, lessened expansion potential, and lack of contract enforceability.

There is no single or primary source of compliance risk. It is inherent in every Bank activity. Frequently, it blends into operational risk and transaction processing. A portion of this risk is sometimes referred to as legal risk. This is not limited solely to risk from failure to comply with consumer protection laws; it encompasses all laws, as well as prudent ethical standards and contractual obligations. It also includes the exposure to litigation from all aspects of banking, traditional and non-traditional.

Our Risk Management Policy and Program and the Code of Ethical Conduct are the cornerstone for controlling compliance risk. An integral part of controlling this risk is the proper training of associates. The Chief Risk Officer is responsible for developing and executing a comprehensive compliance training program. The Chief Risk Officer will ensure that each associate receives adequate training with regard to their position to ensure that laws and regulations are not violated. All associates who deal in compliance high risk areas are trained to be knowledgeable about the level and severity of exposure in those areas and the policies and procedures in place to control such exposure.

Our Risk Management Policy and Program includes an audit program aimed at identifying problems and ensuring that problems are corrected. The audit program includes two levels of review. One is in-depth audits performed by our internal audit department under the direction of the Chief Risk Officer and supplemented by independent external firms, and the other is periodic monitoring performed by the Risk Management Division.

The Bank utilizes an independent external firm to conduct compliance audits as a means of identifying weaknesses in the compliance program itself. The independent external firm’s audit plan includes a periodic review of each branch and department of the Bank.

The branch or department that is the subject of an audit is required to respond to the audit and correct any violations noted. The Chief Risk Officer will review audit findings and the response provided by the branch or department to identify areas which pose a significant compliance risk.

The Risk Management Division conducts periodic monitoring of our compliance efforts with a special focus on those areas that expose us to compliance risk. The purpose of the periodic monitoring is to ensure that our associates are adhering to established policies and procedures adopted by the Bank. The Chief Risk Officer will notify the appropriate department head and the Management Compliance Committee, the Audit Committee and the Risk Management Committee of any violations noted. The branch or department that is the subject of the review will be required to respond to the findings and correct any noted violations.

The Bank recognizes that customer complaints can often identify weaknesses in our compliance program which could expose the Bank to risk. Therefore, all complaints are given prompt attention. Our Risk Management Policy and Program includes provisions on how customer complaints are to be addressed. The Chief Risk Officer reviews all complaints to determine if a significant compliance risk exists and communicates those findings to the Risk Management Committee.

Strategic Risk

Strategic risk is the risk to earnings or capital arising from adverse decisions or improper implementation of strategic decisions. This risk is a function of the compatibility between an organization’s goals, the resources deployed against those goals and the quality of implementation.

Strategic risks are identified as part of the strategic planning process. Offsite strategic planning sessions are held annually. The strategic review consists of an economic assessment, competitive analysis, industry outlook and legislative and regulatory review.

A primary measurement of strategic risk is peer group analysis. Key performance ratios are compared to three separate peer groups to identify any sign of weakness and potential opportunities. The peer group consists of:

All banks of comparable size

High performing banks

A list of specific banks

Another measure is the comparison of the actual results of previous strategic initiatives against the expected results established prior to implementation of each strategy.

The corporate strategic plan is formally presented to all branch managers and department managers at an annual leadership conference as well as the Board of Directors.

Reputation Risk

Reputation risk is the risk to capital and earnings arising from negative public opinion. This affects our ability to establish new relationships or services, or continue servicing existing relationships. It can expose us to litigation and, in some instances, financial loss.

Price and Foreign Exchange Risk

Price risk arises from changes in market factors that affect the value of traded instruments. Foreign exchange risk is the risk to earnings or capital arising from movements in foreign exchange rates.

Our current exposure to price risk is nominal. We do not have trading accounts. Consequently, the level of price risk within the investment portfolio is primarily driven by the underlying credit quality of the issuer and the interest rate environment, and is limited to the need to sell securities for reasons other than investment purposes. The section of this policy pertaining to liquidity risk addresses this risk.

We maintain deposit accounts with various foreign banks. Our Interbank Liability Policy limits the balance in any of these accounts to an amount that does not present a significant risk to our earnings from changes in the value of foreign currencies.

Our asset liability model calculates the market value of the Bank’s equity. In addition, management prepares on a monthly basis a Capital Volatility report that compares changes in the market value of the investment portfolio.

The Balance Sheet Management Policy requires the submission of a Fair Value Matrix Report to the Balance Sheet Management Committee on a quarterly basis. The report calculates the economic value of equity under different interest rate scenarios, revealing the level or price risk of the Bank’s interest sensitive asset and liability portfolios.


ITEM 4.		CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II — OTHER INFORMATION


ITEM 1.		LEGAL PROCEEDINGS

Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against us or our affiliates. Where appropriate, as we determine, we establish reserves in accordance with FASB guidance over contingencies (ASC 450). The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal or regulatory matters currently pending or threatened could have a material adverse effect on our liquidity, consolidated financial position, and/or results of operations. As of March 31, 2011, the Company does not have any significant litigation reserves.

In addition, the Company is involved in the following significant legal actions and complaints.

On July 26, 2010, we received a subpoena from the Los Angeles office of the Securities and Exchange Commission (“SEC”). We are fully cooperating with the SEC in its investigation, including its follow-up requests. We cannot predict the timing or outcome of the investigation.

On August 23, 2010, a purported shareholder class action complaint was filed against the Company in an action captioned Lloyd v. CVB Financial Corp., et al., Case No. CV 10- 06256-MMM, in the United States District Court for the Central District of California. Along with the Company, Christopher D. Myers (President and Chief Executive Officer) and Edward J. Biebrich Jr. (our former Chief Financial Officer) were also named as defendants. On September 14, 2010, a second purported shareholder class action complaint was filed against the Company in an action originally captioned Englund v. CVB Financial Corp., et al., Case No. CV 10-06815-RGK, in the United States District Court for the Central District of California. The Englund complaint named the same defendants as the Lloyd complaint and made allegations substantially similar to those included in the Lloyd complaint.

On January 21, 2011, the Court consolidated the two actions for all purposes under the Lloyd action now captioned as Case No. CV 10-06256-MMM (PJWx). That same day, the Court also appointed the Jacksonville Police and Fire Pension Fund (the “Jacksonville Fund”) as lead plaintiff and approved the Jacksonville Fund’s selection of lead counsel.

On March 7, 2011, the Jacksonville Fund filed a consolidated complaint naming the same defendants and alleging violations by all defendants of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and violations by the individual defendants of Section 20(a) of the Exchange Act. Specifically, the complaint alleges that defendants misrepresented and failed to disclose conditions adversely affecting the Company throughout the purported class period, which is alleged to be between October 21, 2009 and August 9, 2010. The complaint seeks compensatory damages and other relief in favor of the purported class. Our initial response to the complaint is due on May 13, 2011.

On February 28, 2011, a purported shareholder derivative complaint was filed in an action captioned Sanderson v. Borba, et al., Case No. CIVRS1102119, in California State Superior Court in San Bernardino County. The complaint names as defendants the members of our board of directors and also refers to unnamed defendants allegedly responsible for the conduct alleged. The Company is included as a nominal defendant. The complaint alleges breaches of fiduciary duties, abuse of control, gross mismanagement and corporate waste. Specifically, the complaint alleges, among other things, that defendants engaged in accounting manipulations in order to falsely portray the Company’s financial results in connection with its commercial real estate portfolio. Plaintiff seeks compensatory and exemplary damages to be paid by the defendants and awarded to the Company, as well as other relief.

Because we are in the early stages, we cannot predict any range of loss or even if any loss is probable related to the actions described above.


ITEM 1A.		RISK FACTORS

There were no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010. The materialization of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form 10-K and any subsequent Form 10-Q or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General” in this Quarterly Report on Form 10-Q.


ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Our Board of Directors has authorized the repurchase of up to 10,000,000 shares of our common stock. We authorized this repurchase program on July 16, 2008. There is no expiration date for our current stock repurchase program. There have been no repurchases of common stock for the three months ended March 31, 2011. As of March 31, 2011, we have 9,400,000 shares of our common stock which are available for repurchase.


ITEM 3.		DEFAULTS UPON SENIOR SECURITIES

Not Applicable


ITEM 4.		REMOVED AND RESERVED


ITEM 5.		OTHER INFORMATION


ITEM 6.		EXHIBITS


Exhibit No.		Description of Exhibits

	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	CVB FINANCIAL CORP. (Registrant)
Date: May 10, 2011	/s/ Richard C. Thomas
	Richard C. Thomas
	Duly Authorized Officer and Chief Financial Officer

TABLE OF CONTENTS

Part I Financial Information (unaudited)Item 1. Financial Statements Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Removed and Reserved Item 5. Other Information Item 6. Exhibits

Exhibits

Exhibit 31.1 Exhibit 31.2 Exhibit 32.1 Exhibit 32.2

CVBF 10-Q Quarter ended March 31, 2011

Exhibits