Edgar Filing: CVB FINANCIAL CORP

Form 10-Q

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

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

For the quarterly period ended June 30, 2011

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

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

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

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 x No ¨

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

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	x	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

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

Number of shares of common stock of the registrant: 106,084,192 outstanding as of July 29, 2011.

CVB FINANCIAL CORP.

2010 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		38

OVERVIEW		38

CRITICAL ACCOUNTING ESTIMATES		39

ANALYSIS OF THE RESULTS OF OPERATIONS		41

RESULTS BY BUSINESS SEGMENTS		50

ANALYSIS OF FINANCIAL CONDITION		52

RISK MANAGEMENT		66

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		71

ITEM 4. CONTROLS AND PROCEDURES		75

PART II - OTHER INFORMATION		76

ITEM 1. LEGAL PROCEEDINGS		76

ITEM 1A. RISK FACTORS		77

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		77

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		77

ITEM 4. REMOVED AND RESERVED		77

ITEM 5. OTHER INFORMATION		77

ITEM 6. EXHIBITS		78

SIGNATURES		79

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)

Amounts in thousands, except share data


	June 30, 2011			December 31, 2010
ASSETS
Cash and due from banks	$	102,600		$	67,279
Interest-bearing balances due from Federal Reserve		304,131			286,769
Interest-bearing balances due from depository institutions		50,344			50,227

Total cash and cash equivalents		457,075			404,275

Interest-bearing balances due from depository institutions		50,190			50,190
Investment securities available-for-sale		1,978,997			1,791,558
Investment securities held-to-maturity		2,814			3,143
Investment in stock of Federal Home Loan Bank (FHLB)		79,744			86,744

Loans held-for-sale		7,341			2,954

Non-covered loans and lease finance receivables		3,192,371			3,373,728
Allowance for credit losses		(96,895	)		(105,259	)

Net Loans and lease finance receivables		3,095,476			3,268,469

Covered loans and lease finance receivables, net		334,225			374,012

Premises and equipment, net		38,019			40,921
Bank owned life insurance		114,766			112,901
Accrued interest receivable		23,001			23,647
Intangibles		7,262			9,029
Goodwill		55,097			55,097
FDIC loss sharing asset		72,007			101,461
Non-covered other real estate owned		13,718			5,290
Covered other real estate owned		13,276			11,305
Deferred tax asset		40,711			52,559
Income tax receivable		40,920			21,561
Other assets		35,554			21,575

TOTAL ASSETS	$	6,460,193		$	6,436,691

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing	$	1,894,558		$	1,701,523
Interest-bearing		2,609,713			2,817,305

Total deposits		4,504,271			4,518,828
Demand Note to U.S. Treasury		2,483			1,917
Customer repurchase agreements		535,420			542,188
Borrowings		553,526			553,390
Accrued interest payable		4,477			4,985
Deferred compensation		8,827			9,221
Junior subordinated debentures		115,055			115,055
Other liabilities		52,449			47,252

TOTAL LIABILITIES		5,776,508			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 106,084,192 (2011) and 106,075,576 (2010)		491,472			490,226
Retained earnings		167,047			147,444
Accumulated other comprehensive income, net of tax		25,166			6,185

Total stockholders' equity		683,685			643,855

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	6,460,193		$	6,436,691

See accompanying notes to the consolidated financial statements

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(unaudited)

Amounts in thousands, except per share


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2011			2010			2011			2010
Interest income:
Loans, including fees	$	54,697		$	59,172		$	106,012		$	126,940
Investment securities:
Taxable		10,152			14,391			18,990			30,475
Tax-preferred		5,921			6,409			11,840			12,941

Total investment income		16,073			20,800			30,830			43,416
Dividends from FHLB stock		66			63			131			129
Federal funds sold and interest bearing deposits with other institutions		346			238			721			340

Total interest income		71,182			80,273			137,694			170,825
Interest expense:
Deposits		2,220			4,841			5,008			10,129
Borrowings		5,742			10,390			11,538			21,510
Junior subordinated debentures		825			828			1,644			1,633

Total interest expense		8,787			16,059			18,190			33,272

Net interest income before provision for credit losses		62,395			64,214			119,504			137,553
Provision for credit losses		—			11,000			7,068			23,200

Net interest income after provision for credit losses		62,395			53,214			112,436			114,353

Other operating income:
Impairment loss on investment securities		(119	)		—			(119	)		(98	)
Plus: Reclassification of credit-related impairment loss from other comprehensive income		—			—			—			(587	)

Net impairment loss on investment securities recognized in earnings		(119	)		—			(119	)		(685	)
Service charges on deposit accounts		4,029			4,196			7,752			8,461
Trust and Investment Services		2,259			2,209			4,412			4,327
Bankcard services		816			711			1,524			1,350
BOLI income		1,149			737			1,856			1,581
Increase (reduction) in FDIC loss sharing asset, net		(1,689	)		(1,587	)		(274	)		(12,170	)
Gain on sale of securities		—			8,781			—			8,781
Other		(451	)		371			821			1,562

Total other operating income		5,994			15,418			15,972			13,207

Other operating expenses:
Salaries and employee benefits		18,220			17,479			35,880			35,552
Occupancy and equipment		4,081			4,782			8,402			9,835
Professional services		5,028			2,881			8,637			5,688
Amortization of intangibles		866			939			1,767			1,889
Other		8,960			15,366			18,774			24,405

Total other operating expenses		37,155			41,447			73,460			77,369

Earnings before income taxes		31,234			27,185			54,948			50,191
Income taxes		10,196			8,170			17,310			15,057

Net earnings	$	21,038		$	19,015		$	37,638		$	35,134
Earnings allocated to restricted stock		82			64			148			119

Net earnings allocated to common shareholders	$	20,956		$	18,951		$	37,490		$	35,015

Comprehensive income	$	37,464		$	28,812		$	56,619		$	51,665

Basic earnings per common share	$	0.20		$	0.18		$	0.35		$	0.33

Diluted earnings per common share	$	0.20		$	0.18		$	0.35		$	0.33

Cash dividends per common share	$	0.085		$	0.085		$	0.17		$	0.17

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


	Common Shares Outstanding		Common Stock		Retained Earnings			Accumulated Other Comprehensive Income		Comprehensive Income		Total
Balance January 1, 2011		106,076	$	490,226	$	147,444		$	6,185			$	643,855
Proceeds from exercise of stock options		8		57									57
Tax benefit from exercise of stock options				2									2
Stock-based compensation expense				1,187									1,187
Cash dividends declared Common ($0.17 per share)						(18,035	)						(18,035	)
Comprehensive income:
Net earnings						37,638				$	37,638		37,638
Other comprehensive gain:
Unrealized gain on securities available-for-sale, net									18,981		18,981		18,981

Comprehensive income										$	56,619

Balance June 30, 2011		106,084	$	491,472	$	167,047		$	25,166			$	683,685

Balance January 1, 2010		106,263	$	491,226	$	120,612		$	26,390			$	638,228
Proceeds from exercise of stock options		173		725									725
Tax benefit from exercise of stock options				337									337
Stock-based compensation expense				1,105									1,105
Cash dividends declared Common ($0.17 per share)						(18,076	)						(18,076	)
Comprehensive income:
Net earnings						35,134				$	35,134		35,134
Other comprehensive gain:
Unrealized gain on securities available-for-sale, net									16,191		16,191		16,191
Portion of impairment loss on investment securities reclassified in the current year, net									340		340		340

Comprehensive income										$	51,665

Balance June 30, 2010		106,436	$	493,393	$	137,670		$	42,921			$	673,984


	At June 30,
	2011			2010
Disclosure of reclassification amount
Unrealized gain on securities arising during the period	$	32,726		$	28,501
Tax benefit		(13,745	)		(11,970	)

Net unrealized gain on securities	$	18,981		$	16,531

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Amounts in thousands


	For the Six Months
	Ended June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and dividends received $	$	135,906		$	156,010
Service charges and other fees received		16,241			15,668
Interest paid		(18,563	)		(34,043	)
Cash paid to vendors and employees		(64,133	)		(54,566	)
Income taxes paid		(57,000	)		(18,522	)

Net cash provided by operating activities		12,451			64,547

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities		—			173,607
Proceeds from repayment of investment securities		154,634			142,689
Proceeds from redemption of FHLB stock		7,000			3,621
Proceeds from maturity of investment securities		41,340			54,509
Purchases of investment securities		(350,443	)		(238,172	)
Net decrease in loans and lease finance receivables		192,817			136,401
Proceeds from sales of premises and equipment		147			87
Proceeds from sales of other real estate owned		4,866			7,901
Proceeds from FDIC shared-loss agreements		29,180			—
Purchase of premises and equipment		(459	)		(4,611	)
Other, net		—			(330	)

Net cash provided by investing activities		79,082			275,702

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in transaction deposits		187,962			157,890
Net (decrease)/increase in time deposits		(202,517	)		5,190
Repayment of advances from Federal Home Loan Bank		—			(100,000	)
Net increase in other borrowings		566			186
Net increase in customer repurchase agreements		(6,768	)		10,529
Cash dividends on common stock		(18,035	)		(18,076	)
Proceeds from exercise of stock options		57			725
Tax benefit related to exercise of stock options		2			337

Net cash (used in) provided by financing activities		(38,733	)		56,781

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		52,800			397,030
CASH AND CASH EQUIVALENTS, beginning of period		404,275			104,480

CASH AND CASH EQUIVALENTS, end of period $	$	457,075		$	501,510

See accompanying notes to the consolidated financial statements

CVB FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(unaudited)

Amounts in thousands


	For the Six Months Ended June 30,
	2011			2010
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net earnings	$	37,638		$	35,134
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of investment securities		—			(8,781	)
(Gain) loss on sales of premises and equipment		(13	)		65
(Gain) on sale of other real estate owned		(74	)		(910	)
Credit-related impairment loss on investment securities held-to-maturity		119			—
Increase from bank owned life insurance		(1,856	)		(1,581	)
Net amortization of premiums on investment securities		5,848			2,357
Accretion of SJB Discount		(7,658	)		(17,852	)
Provisions for credit losses		7,068			23,200
Provisions for revaluation of other real estate owned		2,347			—
(Increase)/decrease in FDIC Loss Sharing Asset		274			12,170
Stock-based compensation		1,187			1,105
Depreciation and amortization		4,995			5,206
Change in accrued interest receivable		647			1,705
Change in accrued interest payable		(508	)		(663	)
Change in other assets and liabilities		(37,563	)		13,392

Total adjustments		(25,187	)		29,413

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	12,451		$	64,547

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Securities purchased and not settled	$	5,884		$	—
Transfer from loans to other real estate owned	$	17,538		$	18,227

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

For the six months ended June 30, 2011 and 2010

1.	SUMMARY OF SIG NIFICANT 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 six months ended June 30, 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”). In accordance with ASC 810 Consolidation (previously Financial Accounting Standards Board Interpretation No. 46R “Consolidation of Variable Interest Entities”), 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 (“Centers”) and (ii) Treasury. Business Financial and Commercial Banking Centers 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 Held for Sale – Loans held for sale include mortgage loans originated for resale and are reported at the lower of cost or fair value. Cost generally approximates fair value at any reporting date, as the mortgage loans were recently originated. Gains or losses on the sale of loans that are held for sale are recognized at the time of sale and determined by the difference between net sale proceeds and the net book value of the loans. We do not currently retain servicing on any mortgage loans sold. Occasionally, we may transfer other loans from our held for investment loan portfolio to loans held for sale when a decision is made to sell a loan(s). Normally a formal marketing strategy or plan for sale is developed at the time the decision to sell the loan(s) is made. The transfer of the loan to held for sale is done at the lower of cost or fair value and if a reduction in value is required at time of the transfer, a charge-off is recorded against the allowance for credit losses. Any subsequent decline in value or any subsequent gain on sale of the loan is recorded to current earnings and reported as part of other non-interest income.

Loans and Lease Finance Receivables – Non-covered loans and lease finance receivables are reported at the principal amount outstanding, less deferred net loan origination fees. 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 June 30, 2011, the Company had entered into commitments with certain customers amounting to $571.8 million compared to $570.1 million at December 31, 2010. Letters of credit at June 30, 2011 and December 31, 2010, were $65.6 million and $70.4 million, respectively.

Interest on non-covered loans and lease finance receivables is credited to income based on the principal amount outstanding. Non-covered loans are considered delinquent when principal or interest payments are past due 30 days or more and generally remain on accrual status between 30 and 89 days past due. Interest income is not recognized on non-covered loans and lease finance receivables when collection of interest is deemed by management to be doubtful. Non-covered loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. In general, the accrual of interest on non-covered loans is discontinued when the loan becomes 90 days past due, or when the full collection of principal and interest is no longer probable. Factors considered in determining that the full collection of principal and interest is no longer probable include cash flow and liquidity of the borrower or property, the financial position of the guarantors and their willingness to support the loan as well as other factors and involve significant judgment. 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. Interest is not recognized using a cash-basis method. Non-accrual loans may be restored to accrual status when principal and interest become current and when the borrower is able to demonstrate payment performance for a sustained period, typically for six months. A non-accrual loan may return to accrual status sooner based on other significant events or mitigating circumstances. This policy is consistently applied to all classes of non-covered financing receivables.

The Company 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 non-covered 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.

Loans are reported as a troubled debt restructuring when the Company grants a significant 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, reduction of the stated interest rate, or extending the maturity date(s) at a stated interest rate lower than the current market rate for new debt with similar risk. Loans modified that are not reported as a troubled debt restructuring include modifications such as certain extensions of maturity dates, insignificant changes in payment terms, or reductions of interest rates to current market rates where the modified terms are not considered concessions taken into account such items as additional payments made by the borrower to reduce the balance of the loan, additional collateral provided by the borrower, the proportion of the loan to the current liquidity and financial position of guarantors, an insignificant delay in the timing of payments, current market rates for new debt with similar risk to a borrower not in financial difficulty and other factors.

As a result of concessions on troubled debt restructured loans, these loans (both nonaccrual and accrual restructured loans) are deemed impaired. Impairment 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. The impairment amount if any is normally charged-off against the allowance for loan and lease losses.

A loan that has been placed on nonaccrual that is subsequently restructured will usually remain on nonaccrual status until the borrower is able to demonstrate repayment performance in compliance with the restructured terms for a sustained period, typically for six months. A troubled debt restructured loan may return to accrual status sooner based on other significant events or mitigating circumstances. A loan that has not been placed on nonaccrual may be restructured and such loan may remain on accrual status after such troubled debt restructuring.

A loan is generally considered impaired when based on current events and information it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan for which there is an insignificant delay or amount of payments is not considered an impaired loan. Generally, impaired loans include loans on nonaccrual status and performing restructured loans. Depending on a particular loan's circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of the collateral less estimated costs to sell if the loan is collateral-dependent or an observable market price of the loan (usually only if the loan is held for sale). 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. The majority of impaired loans that are collateral dependent are charged-off down to their estimated fair value of the collateral at each reporting date. The fair value is based on current appraisals. These are typically ordered at the time the loan is transferred to our special assets group or when the loan is showing signs of weakness or concern. These appraisals are normally updated at least annually, or more frequent, if there are concerns or indications that the value of the collateral may have changed significantly since the previous appraisal. The appraisals are performed by Bank-approved third-party appraisers. A specific valuation allowance is usually only recorded on collateral dependent impaired loans when a current appraisal is not yet available, an appraisal is still under review or on single-family mortgage loans if the loans are currently under review for a loan modification. These valuation allowances are generally based on previous appraisals adjusted for current market conditions, based on preliminary appraisal values that are still being reviewed or for single-family loans under review for modification on an appraisal or indications of comparable home sales from external sources. Charge-offs on non-collateral dependent loans are generally recorded when the probability of collection is remote. Charge-offs of unsecured consumer loans are recorded when the loan reaches 120 days past due or sooner as circumstances dictate. Except for the charge-offs of unsecured consumer loans, the charge-off policy is applied consistently across all portfolio segments. Generally, loans that have been charged-off remain on nonaccrual unless the loan has been restructured and the borrower has demonstrated repayment performance under the modified terms for a sustained period and the company believes it will collect all principal and interest due according to the modified terms.

Impairment of single-family mortgage loans that have been modified in accordance with the various government modification programs has been measured based on the present value of the expected cash flows discounted at the loan’s pre-modification interest rate. Three such single-family mortgage loans have been returned to accrual status after demonstrating sustained repayment performance. The Company recognizes the change in present value attributable to the passage of time as interest income on such performing single-family mortgage loans and the amount of interest income recognized has been insignificant.

At June 30, 2011, the Company had non-covered impaired loans of $107.8 million. Of this amount, $1.1 million consisted of non-accrual residential construction and land loans, $24.0 million in non-accrual commercial construction loans, $17.8 million of non-accrual single family mortgage loans, $24.7 million of non-accrual commercial real estate loans, $4.6 million of non-accrual commercial and industrial loans, $2.7 million of non-accrual dairy and livestock loans and $179,000 of non-accrual consumer loans. Non-covered impaired loans also include $63.1 million of loans whose terms were modified in a troubled debt restructure, of which $30.3 million are classified as non-accrual. The remaining balance of $32.8 million consists of 11 loans performing according to the restructured terms. These impaired loans had specific reserves of $1.2 million at June 30, 2011. At December 31, 2010, the Company had classified as impaired, non-covered loans with a balance of $170.3 million.

Covered Loans - We refer to “covered loans” as those loans that we acquired in the San Joaquin Bank acquisition for which we will be reimbursed for a substantial portion of any future losses under the terms of the FDIC loss sharing agreement. We account for loans under ASC 310-30, Loans and Debt Securities

Acquired with Deteriorated Credit Quality (“acquired impaired loan accounting”) when (i) we acquire loans deemed to be impaired when there is evidence of credit deterioration since their origination and it is probable at the date of acquisition that we would be unable to collect all contractually required payments and (ii) as a general policy election for non-impaired loans that we acquire in a distressed bank acquisition. Acquired impaired loans are accounted for individually or in pools of loans based on common risk characteristics. 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).

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 appropriate 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.

There are different qualitative risks for the loans in each portfolio segment. The construction and real estate segments’ predominant risk characteristic is the collateral and the geographic location of the property collateralizing the loan as well as the operating cash flow for commercial real estate properties. The commercial and industrial segment’s predominant risk characteristics are the cash flow of the businesses we lend to, the global cash flows and liquidity of the guarantors as well as economic and market conditions. The dairy and livestock segment’s predominant risk characteristics are milk and beef prices in the market as well as the cost of feed and cattle. The municipal lease segment’s predominant risk characteristics are the municipality’s general financial condition and tax revenues or if applicable the specific project related financial condition. The consumer, auto and other segment’s predominant risk characteristics are employment and income levels as it relates to consumers and cash flows of the businesses as it relates to equipment and vehicle leases to businesses.

The Company’s methodology is consistently applied across all the portfolio segments taking into account the applicable historical loss rates and the qualitative factors applicable to each pool of loans. A key factor in the Company’s methodology is the loan risk rating (Pass, Special Mention, Substandard, Doubtful and Loss). Loan risk ratings are updated as facts related to the loan or borrower become available. In addition, all term loans in excess of $1.0 million are subject to an annual internal credit review process where all factors underlying the loan, borrower and guarantors are reviewed and may result in changes to the loan’s risk rating. There has been no significant changes to the methodology or policies in the periods presented. 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.

A provision for credit losses on the covered portfolio will be recorded if there is deterioration in the expected cash flows on covered loans compared to those previously estimated without regard to the reimbursement from the FDIC under the FDIC loss sharing agreement. The portion of the loss on covered loans reimbursable from the FDIC is recorded in noninterest income as an increase in FDIC loss sharing asset. Decreases in expected cash flows on the acquired impaired loans as of the measurement date compared to previously estimated are recognized by recording a provision for credit losses on acquired impaired loans. Loans accounted for as part of a pool are measured based on the expected cash flows of the entire pool.

The provision for credit losses is charged to expense. During the first six months of 2011, we recorded a provision for credit losses of $7.1 million. The allowance for credit losses was $96.9 million as of June 30, 2011, or 3.04% of total non-covered loans and leases compared to $105.3 million as of December 31, 2010, or 3.12% of total non-covered loans and leases.

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 is 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. 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.

Non-covered Other Real Estate Owned – Non-covered 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). Non-covered 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.

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. 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 Company charged against earnings.

Business Combinations and Intangible Assets – The Company has engaged in the acquisition of non FDIC-assisted 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 June 30, 2011 goodwill was $55.1 million. As of June 30, 2011, intangible assets that continue to be subject to amortization include core deposit premiums of $7.3 million (net of $24.7 million of accumulated amortization). Amortization expense for such intangible assets was $1.8 million for the six months ended June 30, 2011. Estimated amortization expense for the remainder of 2011 is expected to be $1.7 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 1.9 years.

Bank Owned Life Insurance - The Company invests in Bank-Owned Life Insurance (“BOLI”). BOLI involves the purchasing of life insurance by the Company on a select group of employees. The Company is the owner and primary 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 June 30, 2011 was 106,084,192. The tables below presents the reconciliation of earnings per share for the periods indicated.

Earnings Per Share Reconciliation

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


	For the three months ended June 30,				For the six months ended June 30,
	2011		2010		2011		2010

Earnings per common share
Net earnings available to common shareholders	$	21,038	$	19,015	$	37,638	$	35,134
Less: Net earnings allocated to restricted stock		82		64		148		119

Net earnings allocated to common shareholders (numerator)	$	20,956	$	18,951	$	37,490	$	35,015

Weighted Average Shares Outstanding (denominator)		105,659		105,989		105,655		105,961
Earnings per common share	$	0.20	$	0.18	$	0.35	$	0.33

Diluted earnings per common share
Net income allocated to common shareholders (numerator)	$	20,956	$	18,951	$	37,490	$	35,015

Weighted Average Shares Outstanding		105,659		105,989		105,655		105,961
Incremental shares from assumed exercise of outstanding options		105		284		79		271

Diluted Weighted Average Shares Outstanding (denominator)		105,764		106,273		105,734		106,232
Diluted earnings per common share	$	0.20	$	0.18	$	0.35	$	0.33

Stock-Based Compensation - At June 30, 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, interest-bearing balances due from depository institutions and federal funds sold with original maturities of three months or less. 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 determinations and disclosures, impairment of investments, goodwill, loans, determining the amount and 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 June 30, 2011 the Company believes that the resolution of any legal action or complaints will not have a material adverse impact on the financial position, results of operations or liquidity of the Company. As of June 30, 2011, the Company does not have any significant litigation reserves.

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.

Reclassification - Certain amounts in the prior periods’ financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity.

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.


	June 30, 2011
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		Total Percent
	(Amounts in thousands)
Investment Securities Available-for-Sale:
Government agency & government-sponsored enterprises	$	86,226	$	311	$	—		$	86,537		4.37	%
Mortgage-backed securities		844,064		16,122		(1,287	)		858,899		43.40	%
CMO's / REMIC's		394,028		8,531		(31	)		402,528		20.34	%
Municipal bonds		611,023		21,709		(1,699	)		631,033		31.89	%

Total Investment Securities	$	1,935,341	$	46,673	$	(3,017	)	$	1,978,997		100.00	%


	December 31, 2010
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		Total 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 68% of the available-for-sale portfolio at June 30, 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 June 30, 2011 and December 31, 2010.

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


	June 30, 2011
Description of Securities	Less than 12 months				12 months or longer				Total
Description of Securities	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
	(amounts in thousands)
Held-To-Maturity
CMO	$	—	$	—	$	2,814	$	268	$	2,814	$	268

Available-for-Sale
Government agency	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities		255,095		1,287		—		—		255,095		1,287
CMO/REMICs		3,373		31		—		—		3,373		31
Municipal bonds		63,259		929		8,170		770		71,429		1,699

	$	321,727	$	2,247	$	8,170	$	770	$	329,897	$	3,017


	December 31, 2010

Description of Securities	Less than 12 months				12 months or longer				Total

	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
	(amounts in thousands)
Held-To-Maturity
CMO	$	—	$	—	$	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 June 30, 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, $2.8 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 June 30, 2011, the unrealized loss on this security was $268,000 and the fair value on the security was 63% 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 June 30, 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 second quarter of 2011 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 an other-than-temporary impairment loss of $119,000 during the first six months of 2011.

The following table provides a roll-forward of credit-related other-than-temporary impairment recognized in earnings for the six months ended June 30, 2011.


	For the six months ended June 30, 2011
	(amounts in thousands)
Balance, beginning of the period	$	1,227
Addition of OTTI that was not previously recognized		119
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	$	1,346

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 Company 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 June 30, 2011.

Mortgaged-Backed Securities and CMO/REMICs – Almost all of the 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 mortgage-backed securities are rated investment grade with an average life of approximately 3.5 years. The contractual cash flows of 99.50% of these investments are guaranteed by U.S. government-sponsored agencies. The remaining 0.50% is 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 June 30, 2011.

Municipal Bonds – Ninety-eight percent of our $631.0 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 remaining maturities of approximately 10.2 years. The unrealized loss greater than 12 months on these securities at June 30, 2011 was $770,000. The Company diversifies its holdings by owning selections of securities from different issuers and by holding securities from geographically diversified municipal issuers, thus reducing the Company’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 Company does not intend to sell the investments and it is more likely than not that the Company 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 June 30, 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 June 30, 2011 and December 31, 2010, investment securities having an amortized cost of approximately $1.76 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 June 30, 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
	Amortized Cost		Fair Value		Weighted- Average Yield
	(amounts in thousands)
Due in one year or less	$	162,951	$	165,537		2.64	%
Due after one year through five years		1,329,793		1,359,768		3.10	%
Due after five years through ten years		377,990		389,669		3.82	%
Due after ten years		64,607		64,023		4.05	%

	$	1,935,341	$	1,978,997		3.24	%

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 June 30, 2011.

3.	LOAN AND LEASE FINANCE RECEIVABLES

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


	June 30, 2011
	Non-Covered Loans			Covered Loans			Total
Commercial and Industrial	$	469,699		$	31,046		$	500,745
Real Estate:
Construction		85,106			34,532			119,638
Commercial Real Estate		1,961,288			276,687			2,237,975
SFR Mortgage		196,681			4,776			201,457
Consumer		50,717			8,779			59,496
Municipal lease finance receivables		119,419			373			119,792
Auto and equipment leases, net of unearned discount		16,998			—			16,998
Dairy and Livestock		296,801			—			296,801
Agribusiness		1,047			51,481			52,528

Gross Loans	$	3,197,756		$	407,674		$	3,605,430

Less: Purchase Accounting Discount		—			(73,449	)		(73,449	)
Less: Deferred net loan fees		(5,385	)		—			(5,385	)

Gross loans, net of deferred loan fees	$	3,192,371		$	334,225		$	3,526,596
Less: Allowance for credit losses		(96,895	)		—			(96,895	)

Net Loans	$	3,095,476		$	334,225		$	3,429,701


	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 June 30, 2011, the Company held approximately $1.35 billion of fixed rate loans. As of June 30, 2011, 62.1% of the loan portfolio consisted of commercial real estate loans, 3.3% of the loan portfolio consisted of construction loans and 5.6% 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.

The following is the activity of loans held for sale for the six months ended June 30, 2011 and 2010:


	Six months ended
	June 30, 2011			June 30, 2010
Balance at beginning of period	$	2,954		$	1,439

Originations of mortage loans		11,509			14,473
Sales of mortgage loans		(10,958	)		(9,291	)
Transfer of mortgage loans to held for investment		—			(4,000	)
Transfers of other loans to held for sale		—			2,521

Balance at March 31		3,505			5,142

Originations of mortage loans		4,972			5,716
Sales of mortgage loans		(5,063	)		(7,717	)
Transfer of mortgage loans to held for investment		(417	)		(320	)
Transfers of other loans to held for sale		6,000			—
Write-down of loans held for sale		(1,656	)		(267	)

Balance at June 30	$	7,341		$	2,554

During the three months ended June 30, 2011, a decision was made to sell one loan and it was transferred to held for sale at a fair value of $6.0 million and resulted in a charge-off against the allowance for loan losses of $619,000 at the time of transfer. This loan was subsequently sold in July, 2011 at a small gain. Also, in the three months ended June 30, 2011, another loan classified as held for sale with a book value of $1.7 million was written-off to zero with the write-off reported as part of non-interest income. The loan was the subject of legal proceedings regarding our lien position and a preliminary decision by the court found that our lien was not in a first priority position. After careful analysis of the preliminary court decision and valuation of the subject collateral, we wrote off the remaining carrying amount.

Occasionally, the Company may decide to retain and not sell certain mortgage loans originated and will transfer them to its held for investment loan portfolio. This is generally done for customer service purposes.

4.	ALLOWANCE FOR CREDIT LOSSES AND OTHER REAL ESTATE OWNED

The 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.

Central to 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 (Credit Quality Indicators): Pass, Pass Watch List, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:

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 Company 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 Company’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 Company 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 Company 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.

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 phases.

In the first phase, individual loans are reviewed to identify loans for impairment. A loan is generally considered impaired when principal and interest are deemed uncollectible in accordance with the contractual terms of the loan. A loan for which there is an insignificant delay or amount of payments is not considered an impaired 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 is determined that such amount represents a confirmed loss. Loans determined to be impaired are excluded from the formula allowance so as not to double-count the loss exposure.

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.

Included in this second phase is our consideration 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. 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 methodology is consistently applied across all the portfolio segments taking 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 Company 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 Company recorded an increase of $732,000 and $1.7 million in the reserve for undisbursed commitments for the first six months of 2011 and 2010, respectively. As of June 30, 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 appropriate at June 30, 2011. No assurance can be given that economic conditions which adversely affect our 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 based on impairment method as of June 30, 2011 and June 30, 2010:


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

	Commercial and Industrial			Construction			Real Estate			Municipal Lease Finance Receivables			Dairy and Livestock			Consumer, Auto & Other			Covered Loans (1)			Unallocated			Total
Three and Six Months Ended June 30, 2011
Allowance for Credit Losses:

Beginning balance, March 31, 2011	$	10,443		$	6,378		$	42,790		$	2,811		$	33,427		$	1,673		$	—		$	3,545		$	101,067
Charge-offs		(194	)		(1,257	)		(1,912	)		0			(1,087	)		(132	)		(24	)		—			(4,606	)
Recoveries		29			155			102			0			39			107			2			—			434
Provision		1,008			(938	)		4,285			(193	)		(8,868	)		(40	)		22			4,724			—

Ending balance, June 30, 2011	$	11,286		$	4,338		$	45,265		$	2,618		$	23,511		$	1,608		$	—		$	8,269		$	96,895

Beginning balance, December 31, 2010	$	11,472		$	10,188		$	43,529		$	2,172		$	36,061		$	1,034		$	—		$	803		$	105,259
Charge-offs		(883	)		(7,417	)		(4,383	)		0			(3,291	)		(252	)		(418	)		—			(16,644	)
Recoveries		171			403			434			0			39			160			5			—			1,212
Provision		526			1,164			5,685			446			(9,298	)		666			413			7,466			7,068

Ending balance, June 30, 2011	$	11,286		$	4,338		$	45,265		$	2,618		$	23,511		$	1,608		$	—		$	8,269		$	96,895

Ending balance: Individually evaluated for impairment	$	379		$	158		$	646		$	—		$	—		$	24		$	—		$	—		$	1,207

Ending balance: Collectively evaluated for impairment	$	10,907		$	4,180		$	44,619		$	2,618		$	23,511		$	1,584		$	—		$	8,269		$	95,688

Financing receivables:
Ending balance, June 30, 2011	$	470,746		$	85,106		$	2,157,969		$	119,419		$	296,801		$	67,715		$	334,225		$	—		$	3,531,981

Ending balance: Individually evaluated for impairment	$	7,218		$	39,500		$	52,247		$	—		$	2,672		$	179		$	11,048		$	—		$	112,864

Ending balance: Collectively evaluated for impairment	$	463,528		$	45,606		$	2,105,722		$	119,419		$	294,129		$	67,536		$	323,177		$	—		$	3,419,117

Three and Six Months Ended June 30, 2010
Allowance for Credit Losses:

Beginning balance, March 31, 2010	$	7,945		$	19,069		$	43,776		$	2,071		$	32,584		$	1,777		$	—		$	5,099		$	112,321
Charge-offs		(1,221	)		(2,231	)		(1,283	)		—			—			(73	)		(32	)		—			(4,840	)
Recoveries		24			—			—			—			—			40			3			—			67
Provision		1,752			1,888			12,043			122			(217	)		(21	)		29			(4,596	)		11,000

Ending balance, June 30, 2010	$	8,500		$	18,726		$	54,536		$	2,193		$	32,367		$	1,723		$	—		$	503		$	118,548

Beginning balance, December 31, 2009	$	7,530		$	21,222		$	42,215		$	1,724		$	31,051		$	1,004		$	—		$	4,178		$	108,924
Charge-offs		(3,790	)		(6,916	)		(2,863	)		—			—			(170	)		(32	)		—			(13,771	)
Recoveries		143			—			1			—			—			48			3			—			195
Provision		4,617			4,420			15,183			469			1,316			841			29			(3,675	)		23,200

Ending balance, June 30, 2010	$	8,500		$	18,726		$	54,536		$	2,193		$	32,367		$	1,723		$	—		$	503		$	118,548

Ending balance: Individually evaluated for impairment	$	302		$	47		$	384		$	—		$	—		$	74		$	—		$	—		$	807

Ending balance: Collectively evaluated for impairment	$	8,198		$	18,679		$	54,152		$	2,193		$	32,367		$	1,649		$	—		$	503		$	117,741

Financing receivables:
Ending balance, June 30, 2010	$	457,209		$	185,237		$	2,250,251		$	153,262		$	378,784		$	86,036		$	424,377		$	—		$	3,935,156

Ending balance: Individually evaluated for impairment	$	7,058		$	42,149		$	34,386		$	—		$	—		$	612		$	23,114		$	—		$	107,319

Ending balance: Collectively evaluated for impairment	$	450,151		$	143,088		$	2,215,865		$	153,262		$	378,784		$	85,424		$	401,263		$	—		$	3,827,837

(1)	Net of purchase accounting discount

Past Due and Non-Performing Loans

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 June 30, 2011, December 31, 2010 and June 30, 2010:

Loan Aging

As of June 30, 2011, December 31, 2010 and June 30, 2010

(Amounts in Thousands)


June 30, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due and Accruing		Total Past Due and Accruing		Nonaccrual		Current		Total Financing Receivables
Commercial & Industrial	$	199	$	476	$	—	$	675	$	4,649	$	464,375	$	469,699
Construction - Speculative		—		—		—		—		19,033		52,914		71,947
Construction - Non-Speculative		—		—		—		—		—		13,159		13,159
Commercial Real Estate - Owner-Occupied		1,227		352		—		1,579		8,192		692,438		702,209
Commercial Real Estate - Non-Owner-Occupied		—		1,011		—		1,011		16,539		1,241,529		1,259,079
Residential Real Estate (SFR 1-4)		—		460		—		460		17,786		178,435		196,681
Dairy & Livestock		—		—		—		—		2,672		294,129		296,801
Agribusiness		—		—		—		—		—		1,047		1,047
Municipal Lease Finance Receivables		—		—		—		—		—		119,419		119,419
Consumer		26		65		—		91		179		50,447		50,717
Auto & Equipment Leases		65		—		—		65		—		16,933		16,998

Total Non-covered Loans excluding Held For Sale		1,517		2,364		—		3,881		69,050		3,124,825		3,197,756
Held for Sale Construction - Speculative		—		—		—		—		6,000		—		6,000
Held for Sale Residential Real Estate (SFR 1-4)		—		—		—		—		—		1,341		1,341

Total	$	1,517	$	2,364	$	—	$	3,881	$	75,050	$	3,126,166	$	3,205,097


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

Commercial & Industrial	$	2,177	$	1,036	$	—		3,213	$	3,887	$	453,299	$	460,399
Construction - Speculative		—		—		—		—		53,552		66,343		119,895
Construction - Non-Speculative		—		—		—		—		9,473		9,612		19,085
Commercial Real Estate - Owner-Occupied		62		—		—		62		5,457		706,911		712,430
Commercial Real Estate - Non-Owner-Occupied		3,132		—		—		3,132		59,402		1,205,292		1,267,826
Residential Real Estate (SFR 1-4)		1,473		1,124		—		2,597		17,800		198,070		218,467
Dairy & Livestock		—		—		—		—		5,207		370,936		376,143
Agribusiness		—		—		—		—		—		1,686		1,686
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 Non-covered Loans excluding Held For Sale		6,937		2,203		—		9,140		155,364		3,214,708		3,379,212
Held for Sale Construction - Speculative		—		—		—		—		1,656		—		1,656
Held for Sale Residential Real Estate (SFR 1-4)		—		—		—		—		—		1,298		1,298

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


June 30, 2010	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due and Accruing		Total Past Due and Accruing		Nonaccrual		Current		Total Financing Receivables
Commercial & Industrial	$	173	$	161	$	—	$	334	$	7,058	$	448,808	$	456,200
Construction - Speculative		—		9,093		—		9,093		29,821		125,862		164,776
Construction - Non-Speculative		—		—		—		—		9,828		10,633		20,461
Commercial Real Estate - Owner-Occupied		—		935		—		935		992		725,508		727,435
Commercial Real Estate - Non-Owner-Occupied		—		1,031		—		1,031		19,647		1,255,326		1,276,004
Residential Real Estate (SFR 1-4)		424		2,128		—		2,552		12,638		231,622		246,812
Dairy & Livestock		—		—		—		—		—		378,784		378,784
Agribusiness		—		—		—		—		—		1,009		1,009
Municipal Lease Finance Receivables		—		—		—		—		—		153,262		153,262
Consumer		2		137		—		139		143		62,000		62,282
Auto & Equipment Leases		75		225		—		300		469		22,985		23,754

Total Non-covered Loans excluding Held For Sale		674		13,710		—		14,384		80,596		3,415,799		3,510,779
Held for Sale Construction - Speculative		—		—		—		—		2,254		—		2,254
Held for Sale Residential Real Estate (SFR 1-4)		—		—		—		—		—		300		300

Total	$	674	$	13,710	$	—	$	14,384	$	82,850	$	3,416,099	$	3,513,333

Credit Quality Indicators

The following table summarizes our internal risk grouping by loan class as of June 30, 2011, December 31, 2010 and June 30, 2010:

Credit Quality Indicators

As of June 30, 2011, December 31, 2010 and June 30, 2010

(Amounts in Thousands)

Credit Risk Profile by Internally Assigned Grade


	June 30, 2011
	Pass		Watch List		Special Mention		Sub-Standard		Doubtful & Loss		Total
Commercial & Industrial	$	312,091	$	83,203	$	41,301	$	33,104	$	—	$	469,699
Construction - Speculative		1,683		—		25,996		44,268		—		71,947
Construction - Non-Speculative		1,676		—		960		10,523		—		13,159
Commercial Real Estate - Owner-Occupied		374,356		117,605		103,413		106,835		—		702,209

Commercial Real Estate - Non-Owner-Occupied		852,013		219,219		80,973		105,942		932		1,259,079
Residential Real Estate (SFR 1-4)		164,223		7,471		7,141		17,846		—		196,681
Dairy & Livestock		7,327		14,991		168,451		106,032		—		296,801
Agribusiness		340		119		588		—		—		1,047
Municipal Lease Finance Receivables		66,277		26,003		17,640		9,499		—		119,419
Consumer		41,220		4,375		2,738		2,384		—		50,717
Auto & Equipment Leases		13,604		1,125		380		1,889		—		16,998

Total Non-covered Loans		1,834,810		474,111		449,581		438,322		932		3,197,756
Covered Loans		106,123		60,803		22,022		217,898		828		407,674

Total Loans excluding Held For Sale		1,940,933		534,914		471,603		656,220		1,760		3,605,430
Held For Sale Loans		1,341		—		—		6,000		—		7,341

Total Gross Loans	$	1,942,274	$	534,914	$	471,603	$	662,220	$	1,760	$	3,612,771


	December 31, 2010
	Pass		Watch List		Special Mention		Sub-Standard		Doubtful & Loss		Total
Commercial & Industrial	$	310,207	$	79,860	$	35,526	$	34,741	$	65	$	460,399
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		371,575		109,784		91,751		139,320		—		712,430

Commercial Real Estate - Non-Owner-Occupied		851,980		197,696		64,808		153,342		—		1,267,826
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
Agribusiness		1,096		446		144		—		—		1,686
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 Loans excluding Held For Sale		2,022,803		503,020		440,422		901,404		338		3,867,987
Held For Sale Loans		1,298		—		—		1,656		—		2,954

Total Gross Loans	$	2,024,101	$	503,020	$	440,422	$	903,060	$	338	$	3,870,941


	June 30, 2010
	Pass		Watch List		Special Mention		Sub-Standard		Doubtful		Total
Commercial & Industrial	$	303,776	$	82,127	$	37,457	$	32,696	$	144	$	456,200
Construction - Speculative		606		15,155		41,355		107,591		69		164,776
Construction - Non-Speculative		7,257		3,421		6		9,777		—		20,461
Commercial Real Estate - Owner-Occupied		399,282		110,415		74,425		143,313		—		727,435

Commercial Real Estate - Non-Owner-Occupied		858,940		207,459		46,384		163,221		—		1,276,004
Residential Real Estate (SFR 1-4)		219,371		9,423		528		17,490		—		246,812
Dairy & Livestock		11,931		54,321		114,025		198,507		—		378,784
Agribusiness		666		343		—		—		—		1,009
Municipal Lease Finance Receivables		115,228		18,852		15,566		3,616		—		153,262
Consumer		51,935		4,950		3,303		2,094		—		62,282
Auto & Equipment Leases		14,511		3,673		2,401		3,169		—		23,754

Total Non-covered Loans		1,983,503		510,139		335,450		681,474		213		3,510,779
Covered Loans		144,142		82,292		44,397		312,939		—		583,770

Total Loans excluding Held For Sale		2,127,645		592,431		379,847		994,413		213		4,094,549
Held For Sale Loans		300		—		—		2,254		—		2,554

Total Gross Loans	$	2,127,945	$	592,431	$	379,847	$	996,667	$	213	$	4,097,103

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 June 30, 2011, December 31, 2010 and June 30, 2010:

Non-Covered Impaired Loans

As of June 30, 2011, December 31, 2010 and June 30, 2010

(Amounts in Thousands)


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment			Interest Income Recognized
June 30, 2011
With no related allowance recorded:
Commercial & Industrial	$	6,040	$	7,303	$	—	$	6,465		$	92
Held for Sale Construction - Speculative		6,000		15,573		—		7,148			—
Construction - Speculative		29,201		32,511		—		30,157			269
Construction - Non-Speculative		9,219		10,149		—		9,276			254
Commercial Real Estate - Owner-Occupied		7,401		7,641		—		7,460			—
Commercial Real Estate - Non-Owner-Occupied		24,795		33,930		—		25,891			231
Residential Real Estate (SFR 1-4)		15,593		18,566		—		16,160			13
Dairy & Livestock		2,672		6,114		—		4,132			—

		100,921		131,787		—		106,689			859

With a related allowance recorded:
Commercial & Industrial	$	1,178	$	1,222	$	379	$	2,352		$	—
Construction - Speculative		1,080		1,080		158		1,080			—
Commercial Real Estate - Owner-Occupied		791		794		116		780			—
Commercial Real Estate - Non-Owner-Occupied		226		343		21		313			—
Residential Real Estate (SFR 1-4)		3,441		3,567		509		3,459			—
Consumer		179		184		24		182			—

		6,895		7,190		1,207		8,166			—

Total	$	107,816	$	138,977	$	1,207	$	114,855		$	859


December 31, 2010
With no related allowance recorded:
Commercial & Industrial	$	9,060	$	9,600	$	—	$	9,972		$	339
Held for Sale Construction - Speculative		1,656		3,739		—		2,311			—
Construction - Speculative		45,672		61,382		—		54,299			—
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			—
Consumer		334		334		—		336			—

		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			—
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			—
Consumer		203		205		21		207			—
Auto & Equipment Leases		49		49		7		77			—

		13,742		18,520		4,059		14,930	&nbs

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