FORM 10-Q

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

For the quarterly period ended March 31, 2005

or

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

For the transition period from _____ to _____

For Quarter Ended March 31, 2005         Commission File Number: 0-10140

CVB FINANCIAL CORP.

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

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

     Number of shares of common stock of the registrant: 61,450,897 outstanding as of May 4, 2005.

CVB FINANCIAL CORP.
2005 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

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PART I – FINANCIAL INFORMATION (UNAUDITED)

ITEM 1. FINANCIAL STATEMENTS

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

See accompanying notes to the consolidated financial statements.

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

See accompanying notes to the consolidated financial statements.

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CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

     The Company reported net unrealized gains on securities available-for-sale of $6.4 million, net of $4.6 million tax for the three months ended March 31, 2004. Accumulated other comprehensive income as of March 31, 2004 was $23.7 million. Comprehensive income for the three months ended March 31, 2004 was $16.5 million.

     See accompanying notes to the consolidated financial statements.

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CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

See accompanying notes to the consolidated financial statements.

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CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)

See accompanying notes to the consolidated financial statements.

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CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the three months ended March 31, 2005 and 2004

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying condensed consolidated unaudited financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America for interim financial reporting. The results of operations for the three months ended March 31, 2005 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, 2004 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 representation 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 subsidiaries: Citizens Business Bank (the “Bank”) and the Bank’s wholly owned subsidiary, Golden West Enterprises, Inc.; Community Trust Deed Services; CVB Ventures, Inc.; Chino Valley Bancorp; and ONB Bancorp after elimination of all intercompany transactions and balances. The Company is also the common stockholder of CVB Statutory Trust I and CVB Statutory Trust II, which were created in December 2003 to issue trust preferred securities in order to raise capital for the Company. In accordance with Financial Accounting Standards Board Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN No. 46R”), these trusts are not included in the consolidated financial statements.

     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 has one subsidiary, Golden West Enterprises, Inc., which is located in Costa Mesa, California, which provides automobile and equipment leasing, and brokers mortgage loans. The Bank also provides trust services to customers through its Wealth Management Division and Business Financial Centers (branch offices). The Bank’s customers consist primarily of small to mid-sized businesses and individuals located in the Inland Empire, San Gabriel Valley, Orange County, Fresno County, Tulare County, and Kern County areas of California. The Bank operates 39 Business Financial Centers with its headquarters located in the city of Ontario. Segment reporting is not presented since the Company’s revenue is attributed to a single reportable segment.

     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 holding 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. At each reporting date, available-for-sale securities are assessed to determine whether there is an other-than-temporary impairment. Such impairment, if any, is required to be recognized in current earnings rather

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than as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the interest method over the life of the security. For mortgage-related securities (i.e., securities that are collateralized and payments received from underlying mortgage) the amortization or accretion is based on the estimated average lives of the securities. The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost. At March 31, 2005, all of the Company’s investment securities are classified as available-for-sale.

     Loans and Lease Finance Receivables - Loans and lease finance receivables are reported at the principal amount outstanding, less deferred net loan origination fees. Interest on loans and lease finance receivables is credited to income based on the principal amount outstanding. Interest income is not recognized on loans and lease finance receivables when collection of interest is deemed by management to be doubtful. In the ordinary course of business, the Company enters into commitments to extend credit to its customers. These commitments are not reflected in the accompanying consolidated financial statements. As of March 31, 2005, the Company had entered into commitments with certain customers amounting to $866.8 million compared to $762.9 million at December 31, 2004. Letters of credit at March 31, 2005, and December 31, 2004, were $71.8 million and $71.5 million, respectively.

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

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

     Provision and Allowance for Credit Losses - The determination of the balance in the allowance for credit losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in management’s judgment, is adequate to provide for probable credit losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience, and such other factors as deserve current recognition in estimating inherent credit losses. The estimate is reviewed periodically by management and various regulatory entities and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. The provision for credit losses is charged to expense. The allowance for loan and lease losses was $23.9 million as of March 31, 2005. This represents an increase of $1.44 million when compared with an allowance for loan and lease losses of $22.5 million as of December 31, 2004. The increase was primarily due to the allowance for loan and lease losses acquired from Granite State Bank of $756,000 and the loan recoveries of $771,000, net of charge-off loans of $89,000 during the first quarter of 2005.

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

     At March 31, 2005, impaired loans totaled $9,000. These loans were supported by collateral with a fair market value, net of prior liens, of $18,000.

     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

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of the leases. Estimated lives are 3 to 5 years for computer and equipment, 5 to 7 years for furniture, fixtures and equipment, and 15 to 30 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 impairment is calculated as the difference between the expected undiscounted future cash flows of a long-lived asset, if lower, and its carrying value. The impairment loss, if any, would be recorded in noninterest expense.

     Other Real Estate Owned - Other real estate owned represents real estate acquired through foreclosure in satisfaction of commercial and real estate loans and is stated at fair value, minus estimated costs to sell (fair value at time of foreclosure). Loan balances in excess of fair value of the real estate acquired at the date of acquisition are charged against the allowance for credit losses. Any subsequent operating expenses or income, reduction in estimated values, and gains or losses on disposition of such properties are charged to current operations. There is no other real estate owned at March 31, 2005 and December 31, 2004.

     Business Combinations and Intangible Assets – The Company has engaged in the acquisition of financial institutions and the assumption of deposits and purchase of assets from other financial institutions in its market area. The Company has paid premiums on certain transactions, and such premiums are recorded as intangible assets, in the form of goodwill or other intangible assets. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, 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.

     Additionally, as required by SFAS No. 142, the Company completed its annual impairment test as of June 30, 2004 and did not record any impairment of goodwill. At March 31, 2005 goodwill was $28.8 million (net of amortization of $5.4 million recorded prior to the adoption of SFAS No. 142), of which $9.2 million was a result of the Granite State Bank acquisition on February 25, 2005. As of March 31, 2005, intangible assets that continue to be subject to amortization include core deposits of $14.8 million (net of $5.4 million of accumulated amortization), of which $9.0 million was a result of the Granite State Bank acquisition on February 25, 2005. The Bank is in the process of obtaining valuations of certain assets; thus, the allocation of the purchase price and the intangible assets is subject to adjustment. Amortization expense for such intangible assets, excluding the Granite State Bank acquisition, was $296,000 for the three months ended March 31, 2005. Estimated amortization expense, for the remainder of 2005 is expected to be $865,000. Estimated amortization expense, for the succeeding five fiscal years is $1.15 million for years one to three, $552,000 for year four and $498,000 for year five. The weighted average remaining life of intangible assets is approximately 4.3 years.

     Income Taxes - Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.

     Earnings per Common Share - Basic earnings per share are computed by dividing income available 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 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 actual number of shares outstanding at March 31, 2005 was 61,666,993. The table below presents the reconciliation of earnings per share for the periods indicated.

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     Stock-Based Compensation - At March 31, 2005, the Company has three stock-based employee compensation plans, which are described more fully in Note 15 in the Company’s Annual Report on Form 10-K. The Company applies the intrinsic value method as described in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its plans. Accordingly, compensation cost is not recognized when the exercise price of an employee stock option equals or exceeds the fair market value of the stock on the date the option is granted. The following table presents the pro forma effects on net income and related earnings per share if compensation costs related to the stock option plans were measured using the fair value method as prescribed under SFAS No. 123, “Accounting for Stock-Based Compensation”:

     The Black-Scholes option-pricing model requires the use of subjective assumptions, which can materially affect fair value estimates. Therefore, this model does not necessarily provide a reliable single measure of the fair value of the Company’s stock options. There were no options granted during the first three months in 2005. There were 266,000 options granted during the first three months in 2004. The fair value of each stock option granted in 2004 was estimated on the date of the grant using the following weighted-average assumptions as of March 31, 2004: (1) expected dividend yield of 2.3%; (2) risk-free interest rate of 2.8%; (3) expected volatility of 37.6%; and (4) expected lives of options of 6.4 years.

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

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     Trust Services - The Company maintains funds in trust for customers. 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.

     Recent Accounting Pronouncements - In December 2004, the Financial Accounting Standards Board (“FASB”) staff issued a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R focuses primarily on transactions in which the entity exchanges its equity instruments for employee services and generally establishes standards for the accounting for transactions in which an entity obtains goods or services in share-based payment transactions. SFAS No. 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements over the period during which an employee is required to provide service in exchange for the award. SFAS No. 123R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value based method in accounting for share-based transactions with employees. SFAS No. 123R also amends SFAS No. 95, “Statement of Cash Flows”, to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. SFAS No. 123R is effective as of the beginning of the first interim reporting period that begins after June 15, 2005. On April 14, 2005, the effective date was amended by the Securities and Exchange Commission. As a result, SFAS No. 123R is now effective for most public companies for annual (rather than interim) periods that begin after June 15, 2005. Therefore, we will begin to expense options in the first quarter of 2006, unless further amended by the Securities Exchange Commission. Management is currently evaluating the effect of adoption of SFAS No. 123R, but does not expect adoption to have a material effect on the firm’s financial condition, results of operations or cash flows.

     Reclassification - Certain amounts in the prior periods’ financial statements and related footnote disclosures have been reclassified to conform to the current presentation.

     Shareholder Rights Plan - In 2000, the Company adopted a shareholder rights plan designed to maximize long-term value and to protect shareholders from improper takeover tactics and takeover bids which are not fair to all shareholders. In accordance with the plan, preferred share purchase rights were distributed as a dividend at the rate of one right to purchase one one-thousandth of a share of the Company’s Series A Participating Preferred Stock at an initial exercise price of $50.00 (subject to adjustment as described in the terms of the plan) upon the occurrence of certain triggering events. For additional information concerning this plan, see Note 11 to Consolidated Financial Statements, “Commitments and Contingencies” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

     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.

     In early 2004, the Company experienced a burglary at one of its business financial centers. The burglary resulted in a loss to our customers of items located in their safe deposit boxes. The Company had been compensating its customers for their losses with the acknowledgement of the insurance company that they were not confirming or denying coverage to us under our insurance policies. The

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Company paid $400,000 on these claims. In early fall, the insurance company ceased approving these claims.

     At the end of 2004, it became apparent that the insurance company may deny coverage of our claims. Therefore, the Company reserved an additional $2.2 million as an estimate of claims yet to be paid as of December 31, 2004. During the first quarter of 2005, the insurance company expressed its interest to settle these claims. The Company settled with the insurance company in April 2005 agreeing to reimburse the Company for all of the claims paid. As a result, we reversed the reserve for claims of $2.6 million effective the first quarter of 2005. This amount is included in other operating expenses.

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

GENERAL

     Management’s discussion and analysis is written to provide greater insight into the results of operations and the financial condition of CVB Financial Corp. and its subsidiaries. Throughout this discussion, “Company” refers to CVB Financial Corp. and its subsidiaries as a consolidated entity. “CVB” refers to CVB Financial Corp. as the unconsolidated parent company and “Bank” refers to Citizens Business Bank and its wholly owned subsidiary, Golden West Enterprises, Inc. For a more complete understanding of the Company and its operations, reference should be made to the financial statements included in this report and in the Company’s 2004 Annual Report on Form 10-K. Certain statements in this Report on Form 10-Q constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 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, economic conditions, competition in the geographic and business areas in which we conduct operations, natural disasters, fluctuations in interest rates, credit quality, and government regulations. For additional information concerning these factors, see the periodic filings the Company makes with the Securities and Exchange Commission, and in particular “Item 1. Business — Factors That May Affect Results” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. 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. Additionally, our financial results and operations may be affected by competition which has manifested itself with increased pricing pressures for loans and deposits, thus compressing our net interest margin. Because of the pressure on the net interest margin, other operating income has become a more important element in the total revenue of the Company.

OVERVIEW

     We are a bank holding company with one bank subsidiary, Citizens Business Bank. We have two other active subsidiaries, Community Trust Deed Services, which is owned by CVB Financial Corp. and Golden West Enterprises, Inc, which is owned by the Bank. We have three other inactive subsidiaries: CVB Ventures, Inc.; Chino Valley Bancorp and ONB Bancorp. We are also the common stockholder of CVB Statutory Trust I and CVB Statutory Trust II, which were created in December 2003 to issue trust preferred securities in order to increase the capital of the Company. We are based in Ontario, California in what is known as the “Inland Empire”. Our geographical market area encompasses Fresno (the middle of the Central Valley) in the center of California to Laguna Beach (in Orange County) in the southern portion of California. Our mission is to offer the finest financial products and services to professionals and businesses in our market area.

     Our primary source of income is from the interest earned on our loans and investments and our primary area of expense is the interest paid on deposits, borrowings, salaries and benefits. As such our net income is subject to fluctuations in interest rates and their impact on our income statement. We believe the recent rise in interest rates may relieve some of the pressure on our net interest margin. We are also subject to competition from other financial institutions, which may affect our pricing of products and services, and the fees and interest rates we can charge on them. See the Risk Management section of this Item 2.

     Economic conditions in our California service area impact our business. The economy of this area has not experienced the decline that other areas of the state and country have witnessed during the past few years. The job market continues to strengthen in the Central Valley and Inland Empire. However, we are still subject to any changes in the economy in our market area. Although we do not originate mortgages on single-family residences, we still benefit from construction growth in Southern California

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since we provide construction loans to builders. Southern California is experiencing growth in construction on single-family residences and commercial buildings, and our balance sheet at March 31, 2005 reflects that growth from March 31, 2004.

     Our growth in loans and investments compared with the first quarter of 2004 has allowed our interest income to grow. The Bank has always had an excellent base of interest free deposits due primarily to the fact that we specialize in businesses and professionals as customers. This has allowed us to have a low cost of deposits, currently 0.70% for the first quarter of 2005.

     On February 25, 2005, we acquired Granite State Bank (“Granite”). The Company issued 696,049 common shares and $13.3 million in cash to Granite shareholders in connection with the acquisition.

     Granite had total assets of $111.4 million, total loans of $62.8 million and total deposits of $103.1 million as of the acquisition date, February 25, 2005. Granite had two offices, one in Monrovia and one in South Pasadena. These two offices are operating as business financial centers of the Bank

CRITICAL ACCOUNTING POLICIES

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

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

     Investment Portfolio: The investment portfolio is an integral part of the Company’s financial performance. We invest primarily in fixed income securities. Accounting estimates are used in the presentation of the investment portfolio and these estimates do impact the presentation of our financial condition and results of operations. Many of the securities included in the investment portfolio are purchased at a premium or discount. The premiums or discounts are amortized or accreted over the life of the security. For mortgage-related securities (i.e., securities that are collateralized and payments received from underlying mortgages), 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 amount of prepayments varies from time to time based on the interest rate environment (i.e., lower interest rates increase the likelihood of refinances) and the rate of turnover of the mortgages (i.e., how often the underlying properties are sold and mortgages paid-off). We use estimates for the average lives of these mortgage-related securities based on information received from third parties whose business it is to compile mortgage related data and develop a consensus of that data. We adjust the rate of amortization or accretion regularly to reflect changes in the estimated average lives of these securities.

     We classify securities as held-to-maturity those debt securities that we have the positive intent and ability to hold to maturity. Securities classified as trading are those securities that are bought and held

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principally for the purpose of selling them in the near term. All other debt and equity securities are classified as available-for-sale. Securities held-to-maturity are accounted for at cost and adjusted for amortization of premiums and accretion of discounts. Trading securities are accounted for at fair value with the unrealized holding gains and losses being included in current earnings. Securities available-for-sale are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate component of stockholders’ equity. At each reporting date, available-for-sale securities are assessed to determine whether there is an other-than-temporary impairment. Such impairment, if any, is required to be recognized in current earnings rather than as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities, except for mortgage-related securities as discussed in the previous paragraph. Our investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost.

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

     Goodwill and Intangible Assets: We have acquired entire banks and branches of banks. Those acquisitions accounted for under the purchase method of accounting have given rise to goodwill and intangible assets. We record the assets acquired and liabilities assumed at their fair value. These fair values are arrived at by use of internal and external valuation techniques. The purchase price is allocated to the assets and liabilities, resulting in identifiable intangibles. Any excess purchase price after this allocation results in goodwill. Goodwill is tested on an annual basis for impairment.

ANALYSIS OF THE RESULTS OF OPERATIONS

Earnings

     We reported net earnings of $17.7 million for the three months ended March 31, 2005. This represented an increase of $7.6 million or 75.75%, over net earnings of $10.1 million, for the three months ended March 31, 2004. Basic earnings per share for the three-month period increased to $.29 per share for 2005, compared to $0.17 per share for 2004. Diluted earnings per share increased to $.29 per share for the first three months of 2005, compared to $0.16 per share for the same three-month period last year. The annualized return on average assets was 1.58% for the first three months of 2005 compared to a return on average assets of 1.03% for the three months ended March 31, 2004. The annualized return on average equity was 21.86% for the three months ended March 31, 2005, compared to a return of 13.79% for the three months ended March 31, 2004.

     In early 2004, the Company experienced a burglary at one of its business financial centers. The burglary resulted in a loss to our customers of items located in their safe deposit boxes. The Company had been compensating its customers for their losses with the acknowledgement of the insurance company that they were not confirming or denying coverage to us under our insurance policies. The Company paid $400,000 on these claims. In early fall, the insurance company ceased approving these claims.

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     At the end of 2004, it became apparent that the insurance company may deny coverage of our claims. Therefore, the Company reserved an additional $2.2 million as an estimate of claims yet to be paid as of December 2004. During the first quarter of 2005, the insurance company expressed its interest in settling these claims. The Company settled with the insurance company in April 2005 agreeing to reimburse the Company for all of the claims paid. This allowed the Company to reverse the $2.6 million estimated robbery loss in the first quarter of 2005. This amount is included in other operating expenses.

     During the first quarter of 2004, the Company wrote down the carrying value of two issues of Federal Home Loan Mortgage Association preferred stock. These securities pay dividends based on a variable rate related to LIBOR (London Interbank Offered Rate). Consequently, the value of these securities declined as the result of historically low interest rates. Since this loss of value was deemed other-than-temporary, the Company charged $6.3 million against earnings in the first quarter of 2004 to adjust for the impairment of these preferred securities.

     During the three months ended March 31, 2005 and 2004, the Company had no net gains or losses on sales of securities or sales of other real estate owned.

     Net earnings, excluding the settlement of the robbery, totaled $16.0 million for the three months ended March 31, 2005. This represented an increase of $1.7 million, or 11.63%, compared to net earnings, excluding the impact of the other-than-temporary impairment write-down on investment securities, of $14.3 million for the first three months of 2004.

     The following table reconciles the differences in net earnings with and without the settlement of robbery loss and the other-than-temporary impairment write-down in conformity with accounting principles generally accepted in the United States of America:

     We have presented net earnings without the settlement of robbery loss and the other-than-temporary impairment write-down on investment securities to show shareholders the earnings from operations unaffected by the impact of these items. We believe this presentation allows the reader to more easily assess the results of the Company’s operations and business.

Net Interest Income

     The principal component of the Company’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). When net interest income is expressed as a percentage of average earning assets, the result is the net interest margin. The net interest spread is the yield on average earning assets minus the cost of average interest-bearing liabilities. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the economy, in general, and the local economies in which we conduct business. Our

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ability to manage the net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to earning assets, and in the growth of earning assets.

     The Company’s net interest income totaled $40.9 million for the three months ended March 31, 2005. This represented an increase of $5.4 million, or 15.11%, over net interest income of $35.5 million for the same period in 2004. The increase in net interest income of $5.4 million resulted from a $10.0 million increase in interest income, offset by a $4.7 million increase in interest expense. The $10.0 million increase in interest income resulted from the $592.1 million increase in average earning assets and an increase in average yield on earning assets to 5.40% for the first three months of 2005 from 5.14% for the same period in 2004. The $4.7 million increase in interest expense resulted from a $385.0 million increase in average interest-bearing liabilities and an increase in the average rate paid on interest-bearing liabilities to 2.11% for the first three months of 2005 from 1.66% for the same period in 2004.

     Interest income totaled $56.0 million for the first three months of 2005. This represented an increase of $10.0 million, or 21.86%, compared to total interest income of $46.0 million for the same period last year. The increase in interest income was primarily the result of the increase in average earnings assets from $3.69 billion in the first three months of 2004 to $4.29 billion in the same period in 2005. This represents a 16.02% increase for the first three months of 2005 over the same period last year and an increase in the average yield on earning assets by 26 basis points.

     Interest expense totaled $15.1 million for the first three months of 2005. This represented an increase of $4.7 million, or 44.98%, over total interest expense of $10.4 million for the same period last year. The increase in interest expense was primarily the result of an increase in average interest-bearing liabilities and an increase in the cost of these liabilities by 45 basis points.

     Table 1 shows the average balances of assets, liabilities, and stockholders’ equity and the related interest income, expense, and rates for the three-month periods ended March 31, 2005, and 2004. Yields for tax-preferenced investments are shown on a taxable equivalent basis using a 35% tax rate.

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

     As stated above, the net interest margin measures net interest income as a percentage of average earning assets. The net interest margin is an indication of how effectively the Company generates its source of funds and employs its earning assets. The Company’s taxable equivalent (TE) net interest margin declined slightly from 4.02% for the first three months of 2004 to 3.99% for the first three months of 2005. The decrease in the net interest margin over the same period last year is the result of a number of factors. The most significant of which includes changes in the mix of assets and liabilities as follows:

	•	Increase in average demand deposits (interest free deposits) as a percent of average earning assets from 29.84% in the first three months of 2004 to 31.19% for the same period in 2005
	•	Decrease in average interest-bearing liabilities as a percent of average earning assets from 67.28% (TE) in the first three months of 2004 to 66.97% (TE) for the same period in 2005
	•	Increase in average borrowings as a percent of average earning assets from 25.67% in the first three months of 2004 to 29.85% in the same period of 2005
	•	Decrease in average investment securities as a percent of average earning assets from 52.19% in the first three months of 2004 to 51.03% in the same period of 2005
	•	Interest expense as a percent of average earning assets increased from 1.12% in the first three months of 2004 to 1.41% in the same period of 2005, an increase of 29 basis points

It is difficult to attribute the above changes to any one factor. However, the banking and financial service businesses in our market areas are highly competitive. This competition has an influence on the strategies we employ.

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     The net interest spread is the difference between the yield on average earning assets less the cost of average interest-bearing liabilities. The net interest spread is an indication of our ability to manage interest rates received on loans and investments and paid on deposits and borrowings in a competitive and changing interest rate environment. Our net interest spread (TE) was 3.29% for the first three months of 2005 and 3.48% for the same period last year. The decrease in the net interest spread for the three months ended March 31, 2005 resulted from a 26 basis point increase in the yield on earning assets offset by a 45 basis point increase in the cost of interest-bearing liabilities, thus generating a 19 basis point decrease in the net interest spread over the same period last year.

     The yield (TE) on earning assets increased to 5.40% for the first three months of 2005, from 5.14% for the same period last year, and reflects an increasing interest rate environment and a change in the mix of earning assets. Average loans as a percent of earning assets increased to 48.97% in the first three months of 2005 from 47.81% for the same period in 2004. Average investments as a percent of earning assets decreased to 49.61% in the first three months of 2005 from 51.09% for the same period in 2004. There were no federal funds invested in 2005. Average federal funds sold as a percent of earning assets was 0.02% for the first three months in 2004. As a result of the Granite State Bank acquisition, we inherited the investment in interest-bearing deposits with other financial institutions. The average interest-bearing deposits with other financial institutions as a percent of earning assets was 0.13% for the first three months in 2005. Investments and federal funds sold typically have a lower yield than loans. The yield on loans for the first three months of 2005 increased to 6.32% as compared to 5.98% for the same period in 2004 as a result of the growth in average loans, the increasing interest rate environment and competition for quality loans. The yield (TE) on investments for the first three months of 2005 increased to 4.55% compared to 4.37% for the same period in 2004 as a result of an increase in average investment balances and an increase in interest rates. The increase in the yield on earning assets for the first three months of 2005 was the result of higher yields on loans and investments.

     The cost of average interest-bearing liabilities increased to 2.11% for the first three months of 2005 as compared to 1.66% for the same period in 2004, reflecting a recent increase in interest rates and a change in the mix of interest-bearing liabilities. Average borrowings as a percent of average interest-bearing liabilities increased to 29.85% during the first three months of 2005 as compared to 25.67% for the same period in 2004. Borrowings typically have a higher cost than interest-bearing deposits. The cost of interest-bearing deposits for the first three months of 2005 increased to 1.29% as compared to 0.96% for the same period in 2004, reflecting the recent increase in interest rates and the competition for interest-bearing deposits. The cost of borrowings for the first three months of 2005 increased to 3.12% as compared to 2.80% for the same period in 2004, also reflecting the recent increase in interest rates. The FDIC has approved the payment of interest on certain demand deposit accounts. This could have a negative impact on our net interest margin, net interest spread, and net earnings, should this be implemented fully. Currently, we pay interest on NOW and Money Market Accounts.

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     Table 2 summarizes the changes in interest income and interest expense based on changes in average asset and liability balances (volume) and changes in average rates (rate). For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in volume (change in volume multiplied by initial rate), (2) changes in rate (change in rate multiplied by initial volume) and (3) changes in rate/volume (change in rate multiplied by change in volume).

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

     Interest and Fees on Loans

     Our major source of revenue and primary component of interest income is interest and fees on loans. Interest and fees on loans totaled $32.7 million for the first three months of 2005. This represented an increase of $6.4 million, or 24.54%, over interest and fees on loans of $26.2 million for the same period in 2004. The increase in interest and fees on loans for the first three months of 2005 reflects increases in the average balance of loans and the recent increase in interest rates. The yield on loans increased to 6.32% for the first three months of 2005, compared to 5.98% for the same period in 2004. Deferred loan origination fees, net of costs, totaled $15.3 million at March 31, 2005. This represented an increase of $7.4 million, or 93.14%, from deferred loan origination fees, net of costs, of $7.9 million at March 31, 2004. The increase was primarily contributed by Golden West Enterprises auto and equipment leases.

     In general, we stop accruing interest on a loan after its principal or interest becomes 90 days or more past due. When a loan is placed on nonaccrual, all interest previously accrued but not collected is charged against earnings. There was no interest income that was accrued and not reversed on non-performing loans at March 31, 2005 and 2004.

     Fees collected on loans are an integral part of the loan pricing decision. Loan fees and the direct costs associated with the origination of loans are deferred and deducted from the loan balance. Deferred net loan fees are recognized in interest income over the term of the loan in a manner that approximates the level-yield method. We recognized loan fee income of $2.1 million for the first three months of 2005, as compared to $1.8 million for the same period in 2004, an increase of $227,000, or 12.26%.

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Interest on Investments

     The second most important component of interest income is interest on investments, which totaled $22.8 million for the first three months of 2005. This represented an increase of $3.6 million, or 18.65%, over interest on investments of $19.2 million for the same period in 2004. The increase in interest on investments for the first three months of 2005 over the same period last year reflected increases in the average balance of investments and the increase in interest rates. The interest rate environment and the investment strategies we employ directly affect the yield on the investment portfolio. We continually adjust our investment strategies in response to the changing interest rate environment in order to maximize the rate of total return consistent within prudent risk parameters, and to minimize the overall interest rate risk of the Company. The weighted-average yield (TE) on investments increased to 4.55% for the first three months of 2005, compared to 4.37% for the same period in 2004 as a result of the recent increase in interest rates.

Provision for Credit Losses

     The Company maintains an allowance for inherent credit losses that is increased by a provision for credit losses charged against operating results. We did not make a provision for credit losses during the first three months of 2005 or 2004 and we believe the allowance is appropriate. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for credit losses in the future. The nature of this process requires considerable judgment. See “Risk Management - Credit Risk” herein.

Other Operating Income

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

     Other operating income totaled $7.1 million for the first three months of 2005. This represents an increase of $6.3 million, or 805.79%, from other operating income of $0.8 million for the same period in 2004, including other-than-temporary impairment write-down of investment securities in 2004. The increase was the result of a $6.3 million other-than-temporary impairment write-down of two issues of preferred stock issued by Freddie Mac in the first three months of 2004. Other operating income without the other-than-temporary impairment write-down of investment securities in 2004 would have been $7.1 million for the first three months in 2004, which is the same as 2005.

     Other operating income as a percent of net revenues (net interest income before loan loss provision plus other operating income) was 14.74% for the first three months of 2005, as compared to 2.15% for the same period in 2004. Excluding the other-than-temporary impairment write-down of investment securities, other operating income as a percent of net revenues would have been 14.74% for the first three months of 2005, as compared to 16.60% for the same period in 2004.

     The following table reconciles the differences in other operating income and the percentage of net revenues with and without the other-than-temporary impairment write-down of investment securities in conformity with accounting principles generally accepted in the United States of America:

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     There were no gains on sales of securities in 2005 and 2004. We have presented other operating income without the other-than-temporary impairment write-down of investment securities to show shareholders the earnings from operations unaffected by the impact of these items. We believe this presentation allows the reader to determine our profitability before the impact of these items. We believe the reader will be able to more easily assess the results of the Company’s operations and business.

     Service charges on deposit accounts totaled $3.0 million in the first three months of 2005. This represented a decrease of $751,000, or 19.81% from service charges on deposit accounts of $3.8 million for the same period in 2004. Service charges for demand deposits (checking) accounts for business customers are generally charged based on an analysis of their activity and include an earnings allowance based on their average balances. Contributing to the decrease in service charges on deposit accounts in 2005 was the higher average demand deposit balances that resulted in a higher account earnings allowance, which offsets services charges and the implementation of a revised service charge schedule. Service charges on deposit accounts represented 42.97% of other operating income in the first three months of 2005, as compared to 485.36% in the same period in 2004.

     Wealth Management consists of Trust Services and Investment Services. Trust Services provides a variety of services, which include asset management services (both full management services and custodial services), estate planning, retirement planning, private and corporate trustee services, and probate services. Trust Services generated fees of $1.2 million in the first three months of 2005. Fees generated by Trust Services in the first three months of 2005 increased $70,000, or 6.02% over fees generated by the Trust Services of $1.2 million in the same period in 2004. Fees generated by the Trust Services represented 17.41% of other operating income in the first three months of 2005, as compared to 148.75% for the same period in 2004.

     Investment Services, which provides mutual funds, certificates of deposit, and other non-insured investment products, generated fees totaling $446,000 in the first three months of 2005. This represented an increase of $71,000, or 18.90%, over fees generated of $375,000 for the same period in 2004. Fees generated by Investment Services represented 6.30% of other operating income in the first three months of 2005, as compared to 47.98% for the same period in 2004.

     Bankcard, which provides merchant bankcard services (credit card processing, merchant terminals, and customer support), generated fees totaling $604,000 in the first three months of 2005. This represented an increase of $179,000, or 41.95%, over fees generated of $425,000 for the same period in 2004. Fees generated by Bankcard represented 8.53% of other operating income in the first three months of 2005, as compared to 54.43% for the same period in 2004. The increase in Bankcard fees can primarily be attributed to an increase in the number of customers using merchant bankcard services.

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     Bank Owned Life Insurance (“BOLI”) income totaling $342,000 in the first three months of 2005. This represented an increase of $131,000, or 62.02%, over the BOLI income generated of $211,000 for the same period in 2004.

     Other fees and income, which includes wire fees, other business services, international banking fees, check sales, ATM fees, miscellaneous income, etc., generated fees totaling $1.4 million in the first three months of 2005. This represented an increase of $298,000, or 26.77%, over other fees and income generated of $1.1 million for the same period in 2004.

     Other fees and income also includes revenue from Community Trust Deed Services, a subsidiary of the Company. Total revenue was approximately $15,000 in the first three months of 2005 and $15,000 for the same period in 2004. Other fees and income represented 19.96% of other operating income in the first three months of 2005, as compared to 142.65% for the same period in 2004.

Other Operating Expenses

     Other operating expenses for the Company include expenses for salaries and benefits, occupancy, equipment, stationary and supplies, professional services, promotion, data processing, amortization of intangibles, and other expenses. Other operating expenses totaled $20.7 million for the first three months of 2005. This represents a decrease of $808,000, or 3.76% from other operating expenses of $21.5 million for the same period in 2004. The decrease is partially due to the reversal of $2.6 million in estimated robbery loss in the first three months of 2005.

     For the most part, other operating expenses reflect the direct expenses and related administrative expenses associated with staffing, maintaining, promoting, and operating branch facilities. Our ability to control other operating expenses in relation to asset growth can be measured in terms of other operating expenses as a percentage of average assets. Operating expenses measured as a percentage of average assets decreased to 1.84% for the first three months of 2005, compared to a ratio of 2.06% for the same period in 2004. The decrease in percentage was primarily due to the increase in total average assets for the three months ended March 31, 2005 as compared to the same period in 2004.

     Our ability to control other operating expenses in relation to the level of net revenue (net interest income plus other operating income) is measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. For the first three months of 2005, the efficiency ratio was 43.10%, compared to a ratio of 59.17% for the same period in 2004. The decrease was primarily due to the reversal of $2.6 million estimated robbery loss as a result of the settlement in the first three months of 2005 and the impact of the $6.3 million other-than-temporary impairment write-down in the first three months of 2004. Without the settlement of robbery loss and the impairment charge on investment securities, the efficiency ratio would have been 48.52% in 2005 as compared to 50.43% in 2004.

     The following table reconciles the differences in operating efficiency ratio with and without the settlement of robbery loss and other-than-temporary impairment write-down of investment securities:

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     We have presented the operating efficiency ratio without the settlement of robbery loss and the other-than-temporary impairment write-down of investment securities to show shareholders the earnings from operations unaffected by the impact of these items. We believe this presentation allows the reader to determine our profitability before the impact of items that may not be considered as normal operating items. We believe that the reader will be able to more easily assess the results of the Company’s operations and business.

     Salaries and related expenses comprise the greatest portion of other operating expenses. Salaries and related expenses totaled $13.1 million for the first three months of 2005. This represented an increase of $1.4 million, or 11.95%, over salaries and related expenses of $11.7 million for the same period in 2004. The increases for 2005 primarily resulted from increased staffing levels and annual salary adjustments. At March 31, 2005, we employed 652 full time equivalent employees, compared to 649 full time equivalent employees at March 31, 2004. Salaries and related expenses as a percent of average assets increased to 1.17% for the first three months of 2005, compared to 1.13% for the same period in 2004.

     Occupancy and equipment expenses represent the cost of operating and maintaining branch and administrative facilities, including the purchase and maintenance of furniture, fixtures, office equipment and data processing equipment. Occupancy expense totaled $2.0 million for the first three months of 2005. This represented an increase of $224,000, or 12.63%, over occupancy expense of $1.8 million for the same period in 2004. The increase in occupancy expense is primarily due to the on-going remodeling and upkeep of our facilities. Equipment expense totaled $1.7 million for the first three months of 2005. This represented a decrease of $112,000, or 6.01%, over the $1.9 million expense for the same period in 2004.

     Stationary and supplies expense totaled $1.2 million for the first three months of 2005. This represented a decrease of $24,000, or 1.98%, from the expense of $1.2 million for the same period in 2004. Professional services totaled $1.0 million for the first three months of 2005. This represented a decrease of $96,000 or 8.56%, from an expense of $1.1 million for the same period in 2004. Promotion expense totaled $1.8 million for the first three months of 2005. This represented an increase of $276,000, or 18.16%, over an expense of $1.5 million for the same period in 2004. Data processing expense totaled $357,000 for the first three months of 2005. This represented an increase of $3,000, or 0.93%, over an expense of $354,000 for the same period in 2004.

     The amortization expense of intangibles totaled $296,000 for the first three months of 2005 and 2004. The Bank is in the process of obtaining valuations of certain assets of the acquisition of Granite State Bank; thus, amortization of intangible assets is not included in the first three months of 2005.

     Other operating expense totaled negative $859,000 for the first three months of 2005. This represented a decrease of $2.5 million, or 152.84%, from an expense of $1.6 million for the same period

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in 2004. The decrease is primarily due to the reversal of $2.6 million of estimated robbery loss as a result of the settlement with the insurance company.

Income Taxes

     The Company’s effective tax rate for the first three months of 2005 was 35.21%, compared to 32.13% for the same period in 2004. The effective tax rates are below the nominal combined Federal and State tax rates as a result of tax preferenced income from certain investments for each period. The majority of tax preferenced income is derived from municipal securities.

ANALYSIS OF FINANCIAL CONDITION

     The Company reported total assets of $4.83 billion at March 31, 2005. This represented an increase of $321.0 million, or 7.12%, over total assets of $4.51 billion at December 31, 2004. Earning assets totaled $4.50 billion at March 31, 2005, increasing $248.2 million, or 5.83%, over earning assets of $4.26 billion at December 31, 2004. Total liabilities were $4.51 billion at March 31, 2005, up $314.2 million, or 7.49%, over total liabilities of $4.19 billion at December 31, 2004. Total equity increased $6.7 million, or 2.13%, to $324.2 million at March 31, 2005, compared with total equity of $317.5 million at December 31, 2004.

Investment Securities

     The Company reported total investment securities of $2.27 billion at March 31, 2005. This represented an increase of $185.4 million, or 8.89%, over total investment securities of $2.09 billion at December 31, 2004. Investment securities comprise 50.41% of the Company’s total earning assets at March 31, 2005.

     In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, securities held as “available-for-sale” are reported at current market value for financial reporting purposes. The related unrealized gains or losses, net of income taxes, are recorded in stockholders’ equity. At March 31, 2005, securities held as available-for-sale had a fair market value of $2.27 billion, representing 97.52% of total investment securities, with an amortized cost of $2.29 billion. At March 31, 2005, the net unrealized holding loss on securities available-for-sale was $17.5 million and that resulted in accumulated other comprehensive loss of $10.1 million (net of $7.4 million in deferred taxes). At December 31, 2004, the Company reported net unrealized gains on investment securities available-for-sale of $15.3 million and accumulated other comprehensive income of $8.9 million (net of deferred taxes of $6.4 million).

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Table 3 sets forth investment securities at March 31, 2005 and December 31, 2004.

     The weighted-average yield (TE) on the investment portfolio at March 31, 2005 was 4.38% with a weighted-average life of 3.78 years. This compares to a yield of 4.38% at December 31, 2004 with a weighted-average life of 3.6 years and a yield of 4.37% at March 31, 2004 with a weighted-average life of 3.6 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal paydowns.

     Approximately 90.80% of the portfolio 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 CMO/REMIC issues held are rated “A” or better by either Standard & Poor’s or Moody’s, as of March 31, 2005 and December 31, 2004.

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Composition of the Fair Value and Gross Unrealized Losses of Securities Available-for-Sale:

     The tables above show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2005 and December 31, 2004. We have reviewed individual securities classified as available-for-sale to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. If it is probable that we will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an other-than-temporary impairment shall be considered to have occurred. If an other-than-temporary impairment occurs the cost basis of the security would be written down to its fair value as a new cost basis and the write down accounted for as a realized loss.

     Despite the unrealized loss position of these securities, we have concluded, as of March 31, 2005, that these investments are not other-than-temporarily impaired. This assessment was based on the following factors: i) the length of time and the extent to which the market value has been less than cost; ii) the financial condition and near-term prospects of the issuer; iii) the intent and ability of the Company to retain its investment in a security for a period of time sufficient to allow for any anticipated recovery in market value; and iv) general market conditions which reflect prospects for the economy as a whole, including interest rates and sector credit spreads.

     At March 31, 2005 and December 31, 2004, investment securities having an amortized cost of approximately $1.84 billion and $1.66 million, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

Loans

     At March 31, 2005, we reported total loans, net of deferred loan fees, of $2.18 billion. This represents an increase of $43.9 million, or 2.05%, over total loans, net of deferred loan fees, of $2.14 billion at December 31, 2004. Total loans, net of deferred loan fees, comprise 48.49% of our total earning assets.

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Table 4 — Distribution of Loan Portfolio by Type (dollar amount in thousands)