CVB FINANCIAL CORP - Quarter Report: 2011 March (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

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

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

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 individual securities to determine whether a decline in fair value below the amortized cost is other-than-temporary.

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