e10vq
Table of Contents

 
 
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 0-10140
CVB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
     
California
(State or other jurisdiction of incorporation
or organization)
  95-3629339
(I.R.S. Employer Identification No.)
     
701 North Haven Ave, Suite 350, Ontario, California
(Address of Principal Executive Offices)
  91764
(Zip Code)
(Registrant’s telephone number, including area code) (909) 980-4030
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
     Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer or smaller reporting company. See definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þAccelerated filer o 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Number of shares of common stock of the registrant: 106,231,511 outstanding as of November 03, 2009.
 
 

 


 

CVB FINANCIAL CORP.
2009 QUARTERLY REPORT ON FORM 10-Q
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 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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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
                 
    September 30,     December 31,  
    2009     2008  
ASSETS
               
Cash and due from banks
  $ 222,158     $ 95,297  
 
               
Investment securities available-for-sale
    2,285,456       2,493,476  
Investment securities held-to-maturity
    4,237       6,867  
Federal Funds Sold and
               
Interest-bearing balances due from depository institutions
    150,285       285  
Investment in stock of Federal Home Loan Bank (FHLB)
    93,240       93,240  
Loans and lease finance receivables
    3,600,087       3,736,838  
Allowance for credit losses
    (87,316 )     (53,960 )
 
           
Net Loans and lease finance receivables
    3,512,771       3,682,878  
 
           
Total earning assets
    6,045,989       6,276,746  
Premises and equipment, net
    42,285       44,420  
Bank owned life insurance
    108,744       106,366  
Accrued interest receivable
    27,430       28,519  
Intangibles
    8,763       11,020  
Goodwill
    55,097       55,097  
Other assets
    35,799       32,186  
 
           
TOTAL ASSETS
  $ 6,546,265     $ 6,649,651  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities:
               
Deposits:
               
Noninterest-bearing
  $ 1,416,558     $ 1,334,248  
Interest-bearing
    2,623,213       2,173,908  
 
           
Total deposits
    4,039,771       3,508,156  
Demand Note to U.S. Treasury
    3,441       5,373  
Repurchase agreements
    710,326       607,813  
Borrowings
    955,000       1,737,660  
Accrued interest payable
    8,420       9,741  
Deferred compensation
    9,136       8,985  
Junior subordinated debentures
    115,055       115,055  
Other liabilities
    53,606       41,976  
 
           
TOTAL LIABILITIES
    5,894,755       6,034,759  
 
           
 
               
COMMITMENTS AND CONTINGENCIES
               
 
               
Stockholders’ Equity:
               
Preferred stock, authorized, 20,000,000 shares without par; none issued or outstanding
          121,508  
Common stock, authorized, 122,070,312 shares without par; issued and outstanding 106,231,511 (2009) and 83,270,263 (2008)
    492,014       364,469  
Retained earnings
    112,596       100,184  
Accumulated other comprehensive income, net of tax
    46,900       28,731  
 
           
Total stockholders’ equity
    651,510       614,892  
 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 6,546,265     $ 6,649,651  
 
           
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
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2009     2008     2009     2008  
Interest income:
                               
Loans, including fees
  $ 50,561     $ 52,954     $ 149,858     $ 159,211  
Investment securities:
                               
Taxable
    18,278       22,142       59,848       65,448  
Tax-preferred
    6,749       7,036       20,560       21,336  
 
                       
Total investment income
    25,027       29,178       80,408       86,784  
Dividends from FHLB stock
    195       1,367       195       3,666  
Federal funds sold and Interest bearing deposits with other institutions
    136       8       195       34  
 
                       
Total interest income
    75,919       83,507       230,656       249,695  
Interest expense:
                               
Deposits
    5,934       7,417       18,963       28,233  
Borrowings
    14,265       25,365       44,367       74,552  
Junior subordinated debentures
    914       1,713       3,133       5,286  
 
                       
Total interest expense
    21,113       34,495       66,463       108,071  
 
                       
Net interest income before provision for credit losses
    54,806       49,012       164,193       141,624  
Provision for credit losses
    13,000       4,000       55,000       8,700  
 
                       
Net interest income after provision for credit losses
    41,806       45,012       109,193       132,924  
 
                       
Other operating income:
                               
Impairment loss on investment securities
    (1,850 )           (1,850 )      
Less: Noncredit-related impairment loss recorded in other comprehensive income
    1,618             1,618        
 
                       
Net impairment loss on investment securities recognized in earnings
    (232 )           (232 )      
Service charges on deposit accounts
    3,720       3,829       11,080       11,381  
Trust and Investment Services
    1,682       2,019       4,948       5,906  
Bankcard services
    605       580       1,725       1,779  
BOLI income
    685       932       2,081       3,151  
Other
    1,744       1,013       3,120       2,999  
Gain on sale of securities
    6,898             28,446        
 
                       
Total other operating income
    15,102       8,373       51,168       25,216  
 
                       
Other operating expenses:
                               
Salaries and employee benefits
    15,618       15,943       46,814       46,987  
Occupancy and Equipment
    4,330       4,811       13,199       14,430  
Professional services
    1,646       1,600       4,998       5,015  
Amortization of intangibles
    734       898       2,257       2,694  
Other
    7,517       5,805       26,953       18,708  
 
                       
Total other operating expenses
    29,845       29,057       94,221       87,834  
 
                       
Earnings before income taxes
    27,063       24,328       66,140       70,306  
Income taxes
    7,741       6,868       17,789       19,510  
 
                       
Net earnings
  $ 19,322     $ 17,460     $ 48,351     $ 50,796  
Preferred stock dividend and other reductions
    8,838       23       12,879       67  
 
                       
Net earnings allocated to common shareholders
  $ 10,484     $ 17,437     $ 35,472     $ 50,729  
 
                       
Comprehensive income
  $ 41,749     $ 6,949     $ 66,520     $ 30,437  
 
                       
Basic earnings per common share
  $ 0.10     $ 0.21     $ 0.40     $ 0.61  
 
                       
Diluted earnings per common share
  $ 0.10     $ 0.21     $ 0.40     $ 0.61  
 
                       
Cash dividends per common share
  $ 0.085     $ 0.085     $ 0.255     $ 0.255  
 
                       
See accompanying notes to the consolidated financial statements.

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CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
Amounts and shares in thousands
                                                         
                                    Accumulated              
    Common                             Other              
    Shares     Preferred     Common     Retained     Comprehensive     Comprehensive        
    Outstanding     Stock     Stock     Earnings     Income     Income     Total  
Balance January 1, 2009
    83,270     $ 121,508     $ 364,469     $ 100,184     $ 28,731             $ 614,892  
Repurchase of Preferred Stock
            (130,000 )                                     (130,000 )
Amortization of preferred stock discount
            8,492               (8,492 )                      
Issuance of Common Stock
    22,655               126,066                               126,066  
Proceeds from exercise of stock options
    307               280                               280  
Tax benefit from exercise of stock options
                    62                               62  
Stock-based Compensation Expense
                    1,137                               1,137  
Cash dividends declared
                                                       
Common ($0.255 per share)
                            (23,174 )                     (23,174 )
Preferred
                            (4,273 )                     (4,273 )
Comprehensive income:
                                                    0  
Net earnings
                            48,351             $ 48,351       48,351  
Other comprehensive gain:
                                                    0  
Unrealized gain on securities
                                                    0  
available-for-sale, net
                                    19,107       19,107       19,107  
Non-credit-related impairment loss on investment securities recorded in the current year, net
                                    (938 )     (938 )     (938 )
 
                                                     
Comprehensive income
                                          $ 66,520          
 
                                         
Balance September 30, 2009
    106,232     $     $ 492,014     $ 112,596     $ 46,900             $ 651,510  
 
                                           
                                                 
                            Accumulated              
    Common                     Other              
    Shares     Common     Retained     Comprehensive     Comprehensive        
    Outstanding     Stock     Earnings     Loss     Income     Total  
Balance January 1, 2008
    83,165     $ 354,249     $ 66,569     $ 4,130             $ 424,948  
Issuance of common stock
    176       606                               606  
Repurchase of common stock
    (71 )     (650 )                             (650 )
Tax benefit from exercise of stock options
            172                               172  
Stock-based Compensation Expense
            1,117                               1,117  
Adoption of EITF 06-4 Split Dollar Life Insurance
                    (571 )                     (571 )
Cash dividends ($0.255 per share)
                    (21,239 )                     (21,239 )
Comprehensive income:
                                               
Net earnings
                    50,796             $ 50,796       50,796  
Other comprehensive loss:
                                               
Unrealized loss on securities available-for-sale, net
                            (20,359 )     (20,359 )     (20,359 )
 
                                             
Comprehensive income
                                  $ 30,437          
 
                                   
Balance September 30, 2008
    83,270     $ 355,494     $ 95,555     $ (16,229 )           $ 434,820  
 
                                     
                 
    At September 30,  
    2009     2008  
Disclosure of reclassification amount
               
Unrealized gain/(loss) on securities arising during the period
  $ 59,540     $ (35,101 )
Tax (benefit)/expense
    (25,007 )     14,742  
Less:
               
Reclassification adjustment for net gain on securities included in net income
    (28,214 )      
Add:
               
Tax expense on reclassification adjustments
    11,850        
 
           
Net unrealized gain/(loss) on securities
  $ 18,169     $ (20,359 )
 
           
See accompanying notes to the consolidated financial statements.

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CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Dollar amounts in thousands
                 
    For the Nine Months  
    Ended September 30,  
    2009     2008  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Interest and dividends received
  $ 230,996     $ 247,921  
Service charges and other fees received
    22,407       25,195  
Interest paid
    (67,785 )     (103,215 )
Cash paid to vendors and employees
    (81,618 )     (84,264 )
Income taxes paid
    (34,586 )     (19,346 )
 
           
Net cash provided by operating activities
    69,414       66,291  
 
           
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sales of investment securities
    459,092        
Proceeds from repayment of investment securities
    296,052       262,540  
Proceeds from maturity of investment securities
    153,562       25,244  
Purchases of investment securities
    (790,231 )     (328,089 )
Purchases of FHLB stock
          (12,371 )
Net decrease/(increase) in loans and lease finance receivables
    111,125       (98,568 )
Proceeds from sales of premises and equipment
    234       110  
Proceeds from sales of other real estate owned
    12,823        
Purchase of premises and equipment
    (3,297 )     (2,966 )
Other, net
    (410 )     (293 )
 
           
Net cash provided by/(used in) investing activities
    238,950       (154,393 )
 
           
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net increase/(decrease) in transaction deposits
    338,369       (93,208 )
Net increase/(decrease) in time deposits
    193,246       (75,600 )
Advances from Federal Home Loan Bank
          450,000  
Repayment of advances from Federal Home Loan Bank
    (600,000 )     (100,000 )
Net decrease in other borrowings
    (184,592 )     (93,708 )
Net increase in repurchase agreements
    102,513       24,664  
Cash dividends on preferred stock
    (4,273 )      
Cash dividends on common stock
    (23,174 )     (21,239 )
Repurchase of preferred stock
    (130,000 )      
Issuance of common stock
    126,066       (650 )
Proceeds from exercise of stock options
    280       606  
Tax benefit related to exercise of stock options
    62       172  
 
           
Net cash (used in)/provided by financing activities
    (181,503 )     91,037  
 
           
NET INCREASE IN CASH AND CASH EQUIVALENTS
    126,861       2,935  
CASH AND CASH EQUIVALENTS, beginning of period
    95,297       89,486  
 
           
CASH AND CASH EQUIVALENTS, end of period
  $ 222,158     $ 92,421  
 
           
See accompanying notes to the consolidated financial statements.

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CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
Dollar amounts in thousands
                 
    For the Nine Months  
    Ended September 30,  
    2009     2008  
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
               
OPERATING ACTIVITIES:
               
Net earnings
  $ 48,351     $ 50,796  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Gain on sale of investment securities
    (28,446 )      
Loss on sale of premises and equipment
    53       169  
Gain on sale of other real estate owned
    (512 )      
Credit-related impairment loss on investment securities held-to-maturity
    232        
Increase from bank owned life insurance
    (2,081 )     (3,151 )
Net amortization of premiums on investment securities
    1,715       1,205  
Provisions for credit losses
    55,000       8,700  
Stock-based compensation
    1,137       1,117  
Depreciation and amortization
    7,401       8,290  
Change in accrued interest receivable
    1,089       934  
Change in accrued interest payable
    (1,320 )     4,856  
Change in other assets and liabilities
    (13,205 )     (6,625 )
 
           
Total adjustments
    21,063       15,495  
 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES
  $ 69,414     $ 66,291  
 
           
 
               
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
               
Transfer from loans to Other Real Estate Owned
  $ 7,644     $ 1,927  
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 nine months ended September 30, 2009 and 2008
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 nine months ended September 30, 2009 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, 2008 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 Orange National Bancorp. The Company is also the common stockholder of CVB Statutory Trust I, CVB Statutory Trust II, CVB Statutory Trust III and FCB Trust II. CVB Statutory Trusts I and II were created in December 2003 and CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. The Company acquired FCB Trust II through the acquisition of First Coastal Bancshares (“FCB”). These trusts do not meet the criteria for consolidation.
     Nature of Operations — The Company’s primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides automobile and equipment leasing to customers through its Citizens Financial Services Division and trust 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 41 Business Financial Centers and 5 Commercial Banking Centers with its headquarters located in the city of Ontario.
     The Company’s operating business units have been combined into two main segments: (i) Business Financial and Commercial Banking Centers and (ii) Treasury. Business Financial and Commercial Banking Centers (branches) are comprised of loans, deposits, and products and services the Bank offers to the majority of its customers. The other segment is Treasury, which manages the investment portfolio of the Company. The Company’s remaining centralized functions and eliminations of inter-segment amounts have been aggregated and included in “Other.”
     The internal reporting of the Company considers all business units. Funds are allocated to each business unit based on its need to fund assets (use of funds) or its need to invest funds (source of funds). Net income is determined based on the actual net income of the business unit plus the allocated income or expense based on the sources and uses of funds for each business unit. Non-interest income and non-interest expense are those items directly attributable to a business unit.

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     FASB Accounting Standards Codification — The FASB has issued FASB Statement No. 168, The “FASB Accounting Standards Codification™” and the Hierarchy of Generally Accepted Accounting Principles. Statement 168 establishes the FASB Accounting Standards Codification as the single source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative.
     Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.
     GAAP is not intended to be changed as a result of the FASB’s Codification project, but it will change the way the guidance is organized and presented. As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009.
     Cash and due from banks — Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Bank are included in Cash and due from banks.
     Investment Securities — The Company classifies as held-to-maturity those debt securities that the Company has the positive intent and ability to hold to maturity. Securities classified as trading are those securities that are bought and held principally for the purpose of selling them in the near term. All other debt and equity securities are classified as available-for-sale. Securities held-to-maturity are accounted for at cost and adjusted for amortization of premiums and accretion of discounts. Trading securities are accounted for at fair value with the unrealized gains and losses being included in current earnings. Available-for-sale securities are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the effective-yield method over the terms of the securities. For mortgage-backed securities (“MBS”), the amortization or accretion is based on estimated average lives of the securities. The lives of these securities can fluctuate based on the amount of prepayments received on the underlying collateral of the securities. The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost.
     At each reporting date, securities are assessed to determine whether there is an other-than-temporary impairment. Other-than-temporary impairment on investment securities is recognized in earnings when there are credit losses on a debt security for which management does not intend to sell and for which it is more-likely-than-not that the Company will not have to sell prior to recovery of the noncredit impairment. In those situations, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security’s amortized cost and its fair value would be included in other comprehensive income.
     Loans and Lease Finance Receivables — Loans and lease finance receivables are reported at the principal amount outstanding, less deferred net loan origination fees. Interest on loans and lease finance receivables is credited to income based on the principal amount outstanding. Interest income is not recognized on loans and lease finance receivables when collection of interest is deemed by management to be doubtful. In the ordinary course of business, the Company enters into commitments to extend credit to its customers. These commitments are not reflected in the accompanying consolidated financial statements. As of September 30, 2009, the Company had entered into commitments with certain

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customers amounting to $559.5 million compared to $642.7 million at December 31, 2008. Letters of credit at September 30, 2009 and December 31, 2008, were $69.8 million and $63.1 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 using the effective-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 that would deserve current recognition in estimating inherent credit losses. The estimate is reviewed quarterly by the Board of Directors and management and periodically by various regulatory entities and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. The provision for credit losses is charged to expense. During the first nine months of 2009, we recorded a provision for credit losses of $55.0 million. The allowance for credit losses was $87.3 million as of September 30, 2009.
     In addition to the allowance for credit losses, the Company also has a reserve for undisbursed commitments for loans and letters of credit. This reserve is carried in the liabilities section of the balance sheet in other liabilities. Provisions to this reserve are included in other expense. For the first nine months of 2009, the Company recorded an increase of $1.8 million in the reserve for undisbursed commitments. As of September 30, 2009, the balance in this reserve was $6.0 million.
     A loan for which collection of principal and interest according to its original terms is not probable is considered to be impaired. The Company’s policy is to record a specific valuation allowance, which is included in the allowance for credit losses, or charge off that portion of an impaired loan that exceeds its fair value. Fair value is usually based on the value of underlying collateral.
     At September 30, 2009, the Company had impaired loans of $61.1 million. Of this amount, $15.7 million consisted of non-accrual residential construction and land loans, $19.6 million in non-accrual commercial construction loans, $8.1 million of non-accrual single family mortgage loans, $13.5 million of non-accrual commercial real estate loans, $1.1 million of non-accrual commercial and industrial loans, $100,000 of non-accrual consumer loans and $3.0 million of loans whose terms were modified in a troubled debt restructure. The impaired loans of $61.1 million, net of $16.2 million in charge-offs, are supported by collateral with a fair value less selling costs, net of prior liens. For the collateral-deficient loans, the amount of specific reserve was $2.0 million at September 30, 2009. At December 31, 2008, the Bank had classified as impaired, loans with a balance of $20.2 million.
     Premises and Equipment — Premises and equipment are stated at cost, less accumulated depreciation, which is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. Properties under capital lease and leasehold improvements are amortized over the shorter of estimated economic lives of 15 years or the initial terms of the leases. Estimated lives are 3 to 5 years for computer and 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

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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.
     Other Real Estate Owned — Other real estate owned (“OREO”) represents real estate acquired through foreclosure in satisfaction of commercial and real estate loans and is stated at fair value, minus estimated costs to sell (fair value at time of foreclosure). Loan balances in excess of fair value of the real estate acquired at the date of acquisition are charged against the allowance for credit losses. Any subsequent operating expenses or income, reduction in estimated values, and gains or losses on disposition of such properties are charged to current operations. OREO is recorded in other assets on the consolidated balance sheets.
     Business Combinations and Intangible Assets — The Company has engaged in the acquisition of financial institutions and the assumption of deposits and purchase of assets from other financial institutions in its market area. The Company has paid premiums on certain transactions, and such premiums are recorded as intangible assets, in the form of goodwill or other intangible assets. Goodwill is not being amortized whereas identifiable intangible assets with finite lives are amortized over their useful lives. On an annual basis, the Company tests goodwill and intangible assets for impairment. The Company completed its annual impairment test as of July 1, 2009; there was no impairment of goodwill.
     At September 30, 2009 goodwill was $55.1 million. As of September 30, 2009, intangible assets that continue to be subject to amortization include core deposit premiums of $8.8 million (net of $18.3 million of accumulated amortization). Amortization expense for such intangible assets was $2.3 million for the nine months ended September 30, 2009. Estimated amortization expense, for the remainder of 2009 is expected to be $733,000. Estimated amortization expense, for the succeeding five fiscal years is $2.9 million for year one, $2.8 million for year two, $1.6 million for year three, $627,000 for year four and $26,000 for year five. The weighted average remaining life of intangible assets is approximately 2.4 years.
     Bank Owned Life Insurance — The Bank invests in Bank-Owned Life Insurance (“BOLI”). BOLI involves the purchasing of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in other non-interest income and are not subject to income tax.
     Income Taxes — Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. Based on historical and future expected taxable earnings and available strategies, the Company considers the future realization of these deferred tax assets more likely than not.
     The tax effects from an uncertain tax position are recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of other operating expense.
     Earnings per Common Share — The Company calculates earnings per common share (“EPS”) using the two-class method. The two-class method requires the Company to present EPS as if all of the earnings for the period are distributed to common shareholders and any participating securities, regardless of whether any actual dividends or distributions are made. All outstanding unvested share-based payment

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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 September 30, 2009 was 106,231,511. The tables below presents the reconciliation of earnings per share for the periods indicated.
Earnings Per Share Reconciliation
(Dollars and shares in thousands, except per share amounts)
                                 
    For the nine months ended     For the three months ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
     
Earnings per common share
                               
Net earnings
  $ 48,351     $ 50,796     $ 19,322     $ 17,460  
Less: Dividends on preferred stock and discount amortization
    12,765             8,804        
 
                       
Net earnings available to common shareholders
  $ 35,586     $ 50,796     $ 10,518     $ 17,460  
 
                       
Less: Net earnings allocated to restricted stock
    114       67       34       23  
 
                       
Net earnings allocated to common shareholders (numerator)
  $ 35,472     $ 50,729     $ 10,484     $ 17,437  
     
 
                               
Weighted Average Shares Outstanding (denominator)
    88,601       83,106       99,242       83,148  
Earnings per common share (1)
  $ 0.40     $ 0.61     $ 0.10     $ 0.21  
     
 
                               
Diluted earnings per common share
                               
Net income allocated to common shareholders (numerator)
  $ 35,472     $ 50,729     $ 10,484     $ 17,437  
     
 
                               
Weighted Average Shares Outstanding
    88,601       83,106       99,242       83,148  
Incremental shares from assumed exercise of outstanding options
    97       223       90       225  
                 
Diluted Weighted Average Shares Outstanding (denominator)
    88,698       83,329       99,332       83,373  
Diluted earnings per common share (1)
  $ 0.40     $ 0.61     $ 0.10     $ 0.21  
     
 
                               
 
(1)   Substantially all of the decrease in earnings and diluted earnings per common share for each period presented is due to the preferred stock dividend and discount amortization
     Stock-Based Compensation — At September 30, 2009, 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.
     There were 922,500 options and 250,000 restricted stock awards granted in September 2009. The options and stock awards will vest, in equal installments, over a five-year period. The options and restricted stock awards were issued at the stock price on the date of grant at $8.61. The fair value of each stock option granted was estimated on the date of grant using the following weighted-average assumptions:
         
    2009
Dividend Yield
    3.95 %
Volatility
    47.3 %
Risk-free interest rate
    2.5 %
Expected life
    7.2 years
Fair Value
  $ 2.89  
     The expected volatility is solely based on the daily historical stock price volatility over the expected option life. The expected life of options granted is derived from the output of the option valuation model and represents the period of time an optionee will hold an option before exercising it. The risk-free rate

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for periods within the contractual life of the option is based on the U.S. Treasury five-year constant maturity yield curve in effect at the time of the grant.
     Option activity under the Company’s stock compensation plans as of September 30, 2009 and changes for the nine months ended September 30, 2009 were as follows:
                                 
    Number of             Weighted        
    Stock     Weighted     Average     Aggregate  
    Options     Average     Remaining     Intrinsic  
    Outstanding     Exercise     Contractual     Value  
Options   (000)     Price     Term (in Years)     ($000)  
Outstanding at January 1, 2009
    2,249     $ 10.64                  
Granted
    931     $ 8.59                  
Exercised
    (56 )   $ 4.97                  
Forfeited or expired
    (8 )   $ 11.76                  
 
                       
Outstanding at September 30, 2009
    3,116     $ 10.13       6.60     $ 862  
 
                       
Vested or expected to vest at September 30, 2009
    2,921     $ 10.16       6.40     $ 861  
 
                       
Exercisable at September 30, 2009
    1,598     $ 10.56       4.14     $ 855  
 
                       
     As of September 30, 2009, there was $4.2 million of total unrecognized compensation costs related to non-vested options granted under the plans. The cost is expected to be recognized over a weighted-average period of approximately 3.9 years. The expense recognized for stock options was $270,000 and $913,000 for the three and nine months ended September 30, 2009.
     A summary of the activity of the Company’s non-vested restricted shares as of September 30, 2009 and changes during the nine months ended September 30, 2009, is presented below:
                 
    2009  
            Weighted  
            Average  
Nonvested Restricted Shares   Shares (000)     Fair Value  
Nonvested at January 1,
    105     $ 10.55  
Granted
    250     $ 8.61  
Vested
    (25 )   $ 10.98  
Forfeited
        $  
 
           
Nonvested at September 30,
    330     $ 9.04  
 
           
     As of September 30, 2009, there was $2.5 million of total unrecognized compensation costs related to non-vested shares granted under the plans. The cost is expected to be recognized over a weighted- average period of approximately 4.4 years. The expense recognized for restricted stock was $84,000 and $224,000 for the three and nine months ended September 30, 2009.
     Derivative Financial Instruments — All derivative instruments, including certain derivative instruments embedded in other contracts, are recognized on the consolidated balance sheet at fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. Changes in fair value of derivatives designated and accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in “Other Comprehensive Income,” net of deferred taxes and are subsequently reclassified to earnings when the hedged transaction affects earnings. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item.
     Statement of Cash Flows — Cash and cash equivalents as reported in the statements of cash flows include cash and due from banks. Cash flows from loans and deposits are reported net.
     CitizensTrust — This division provides trust, investment and brokerage related services, as well as financial, estate and business succession planning services. The Company maintains funds in trust for customers. CitizensTrust has approximately $1.9 billion in assets under administration, including $991.9

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million 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 disclosures, impairment of investments and goodwill, and valuation of deferred tax assets, other intangibles and OREO.
     Recent Accounting Pronouncements — In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, Fair Value Measurements and Disclosures (Topic 820) - Measuring Liabilities at Fair Value. The update addresses practice difficulties caused by the tension between fair-value measurements based on the price that would be paid to transfer a liability to a new obligor and contractual or legal requirements that prevent such transfers from taking place. Companies determining the fair value of a liability may use the perspective of an investor that holds the related obligation as an asset. The new guidance is effective for interim and annual reporting periods beginning after August 27, 2009, and applies to all fair-value measurements of liabilities required by GAAP. The adoption of ASU 2009-05 did not have a material effect on the Company’s consolidated financial position or results of operations.
     Shareholder Rights Plan — The Company has 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, 2008.
     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. At September 30, 2009, the Company does not have any litigation reserves and is not aware of any material pending legal action or complaints asserted against the Company.
2. INVESTMENTS
     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.

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Table 3 — Composition of Investment Securities
                                         
    September 30, 2009  
            Gross     Gross                
            Unrealized     Unrealized                
    Amortized     Holding     Holding             Total  
    Cost     Gain     Loss     Fair Value     Percent  
    (Amounts in thousands)  
Investment Securities Available-for-Sale:
                                       
Government agency & government-sponsored enterprises
  $ 96,386     $ 253     $ (78 )   $ 96,561       4.23 %
Mortgage-backed securities
    666,402       22,382             688,784       30.13 %
CMO’s / REMIC’s
    781,293       23,075       (1,002 )     803,366       35.15 %
Municipal bonds
    658,896       38,121       (272 )     696,745       30.49 %
 
                             
Total Investment Securities
  $ 2,202,977     $ 83,831     $ (1,352 )   $ 2,285,456       100.00 %
 
                             
                                         
    December 31, 2008  
            Gross     Gross                
            Unrealized     Unrealized                
    Amortized     Holding     Holding             Total  
    Cost     Gain     Loss     Fair Value     Percent  
    (Amounts in thousands)  
Investment Securities Available-for-Sale:
                                       
Government agency & government-sponsored enterprises
  $ 27,105     $ 673     $     $ 27,778       1.11 %
Mortgage-backed securities
    1,150,650       33,836       (1 )     1,184,485       47.50 %
CMO’s / REMIC’s
    591,531       9,855       (4,595 )     596,791       23.94 %
Municipal bonds
    674,655       16,704       (6,937 )     684,422       27.45 %
 
                             
Total Investment Securities
  $ 2,443,941     $ 61,068     $ (11,533 )   $ 2,493,476       100.00 %
 
                             
     Approximately 68% of the available-for-sale portfolio represents securities issued by the U.S government or U.S. government-sponsored enterprises, which guarantee payment of principal and interest.
     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 September 30, 2009 and December 31, 2008.
     Gross realized gains were $28.4 million and $6.9 million for the nine and three months ended September 30, 2009, respectively. There were no realized gains or losses during the same periods ended September 30, 2008.

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Composition of the Fair Value and Gross Unrealized Losses of Securities:
                                                 
    September 30, 2009  
    Less than 12 months     12 months or longer     Total  
            Gross             Gross             Gross  
            Unrealized             Unrealized             Unrealized  
            Holding             Holding             Holding  
Description of Securities   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
                    (amounts in thousands)                  
 
                                               
Held-To-Maturity
                                               
CMO (1)
  $     $     $ 4,237     $ 1,618     $ 4,237     $ 1,618  
 
                                   
Available-for-Sale
                                               
Government agency
  $ 25,109     $ 78     $     $     $ 25,109     $ 78  
CMO/REMICs
    46,438       555       31,101       447       77,539       1,002  
Municipal bonds
    4,916       272                   4,916       272  
 
                                   
 
  $ 76,463     $ 905     $ 31,101     $ 447     $ 107,564     $ 1,352  
 
                                   
 
(1)   For the nine months ended September 30, 2009, the Company recorded $1.6 million, on a pre-tax basis, of the non-credit portion of OTTI for this security in other comprehensive income, which is included as gross unrealized losses.
                                                 
    December 31, 2008  
    Less than 12 months     12 months or longer     Total  
            Gross             Gross             Gross  
            Unrealized             Unrealized             Unrealized  
            Holding             Holding             Holding  
Description of Securities   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
                    (amounts in thousands)                  
 
                                               
Held-To-Maturity
                                               
CMO
  $ 4,770     $ 2,097     $     $     $ 4,770     $ 2,097  
 
                                   
Available-for-Sale
                                               
Mortgage-backed securities
  $ 265     $     $ 13,903     $ 1     $ 14,168     $ 1  
CMO/REMICs
    163,036       4,542       1,853       53       164,889       4,595  
Municipal bonds
    159,370       5,341       37,994       1,596       197,364       6,937  
 
                                   
 
  $ 322,671     $ 9,883     $ 53,750     $ 1,650     $ 376,421     $ 11,533  
 
                                   
     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 September 30, 2009 and December 31, 2008. 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 triple 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, $4.2 million, is not significant to our liquidity needs. We acquired this security in February

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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 September 30, 2009, the unrealized loss on this security was $1.8 million and the fair value on the security was 69% 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 September 30, 2009. 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 be credit impaired during the current quarter as opposed to prior quarters due to further 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 of $1.8 million reduced by $1.6 million for the non-credit portion which was reflected in other comprehensive income. The remaining loss of $232,000 was recognized in third quarter earnings.
     The following table provides a roll-forward of credit-related other-than-temporary impairment recognized in earnings for the three and nine months ended September 30, 2009.
         
    Three and Nine Months  
    Ended  
    September 30,  
    2009  
Balance, beginning of the period
  $  
Addition of OTTI that was not previously recognized
    232  
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
  $ 232  
 
     
     Government Agency — The government agency bonds are backed by the full faith and credit of Agencies of the U.S. Government. These securities are bullet securities, that is, they have a defined maturity date on which the principal is paid. The contractual term of these investments provides that the Bank will receive the face value of the bond at maturity which will equal the amortized cost of the bond. Interest is received throughout the life of the security. There was no loss greater than 12 months on these securities at September 30, 2009.
     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 3.8 years. The contractual cash flows of 97.9% of these investments are guaranteed by U.S. government-sponsored agencies. The remaining 2.1% are issued by banks. Accordingly, it is expected the securities would not be settled at a price less than the amortized cost of the bonds. The unrealized loss greater than 12 months on these securities at September 30, 2009 is $447,000. This loss is comprised of bonds issued by non-government sponsored enterprises such as financial institutions with a loss of $326,000 and two FHLMC securities with a loss of $121,000. 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

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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 September 30, 2009.
     Municipal Bonds — Ninety-four percent of our $696.7 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 maturities of approximately 5.1 years. There is no unrealized loss greater than 12 months on these securities at September 30, 2009. The Bank diversifies its holdings by owning selections of securities from different issuers and by holding securities from geographically diversified municipal issuers, thus reducing the Bank’s exposure to any single adverse event.
     We are continually monitoring the quality of our municipal bond portfolio in light of the current financial problems exhibited by certain monoline insurance companies. While most of our securities are insured by these companies, we feel that there is minimal risk of loss due to the problems these insurers are having. 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 September 30, 2009 and December 31, 2008, investment securities having an amortized cost of approximately $2.0 billion and $2.32 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 September 30, 2009, by contractual maturity, are shown below. Although mortgage-backed securities and CMO/REMICs have contractual maturities through 2039, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed securities and CMO/REMICs are included in maturity categories based upon estimated prepayment speeds.
                         
    Available-for-sale  
                    Weighted-  
    Amortized     Fair     Average  
    Cost     Value     Yield  
    (amounts in thousands)  
Due in one year or less
  $ 220,431     $ 222,741       3.98 %
Due after one year through five years
    1,028,218       1,067,139       4.47 %
Due after five years through ten years
    900,220       939,536       4.36 %
Due after ten years
    54,108       56,040       4.04 %
 
                   
 
  $ 2,202,977     $ 2,285,456       4.36 %
 
                   
     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 September 30, 2009.
3. FAIR VALUE INFORMATION
     The following disclosure provides fair value information for financial assets and liabilities as of September 30, 2009. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 3).
    Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.

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    Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
 
    Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flows and similar techniques.
     Determination of Fair Value
     The following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value.
     Cash — The carrying amount of cash and cash equivalents is considered to be a reasonable estimate of fair value.
     Investment securities available-for-sale — Investment securities available-for-sale are valued based upon quotes obtained from a reputable third-party pricing service. The service uses evaluated pricing applications and model processes. Market inputs, such as, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data are considered as part of the evaluation. The inputs are related directly to the security being evaluated, or indirectly to a similarly situated security. Market assumptions and market data are utilized in the valuation models. Accordingly, the Company categorized its investment portfolio as a Level 2 valuation.
     Investment security held-to-maturity — Investment security held-to-maturity is carried at amortized cost-basis on the balance sheet. The fair value is determined using the same process described above for available-for-sale securities. During the third quarter ended, an other-than-temporary impairment loss was recognized and the carrying balance was reduced to fair value.
     Loans — The carrying amount of loans and lease finance receivables is their contractual amounts outstanding, reduced by deferred net loan origination fees and the allocable portion of the allowance for credit losses.
     The fair value of loans, other than loans on non-accrual status, was estimated by discounting the remaining contractual cash flows using the estimated current rate at which similar loans would be made to borrowers with similar credit risk characteristics and for the same remaining maturities, reduced by deferred net loan origination fees and the allocable portion of the allowance for credit losses. Accordingly, in determining the estimated current rate for discounting purposes, no adjustment has been made for any change in borrowers’ credit risks since the origination of such loans. Rather, the allocable portion of the allowance for credit losses is considered to provide for such changes in estimating fair value.
     The fair value of loans on non-accrual status has not been specifically estimated because it is not practicable to reasonably assess the credit risk adjustment that would be applied in the marketplace for such loans. As such, the estimated fair value of total loans at September 30, 2009 includes the carrying amount of non-accrual loans at each respective date, net of allowance for credit losses.
     Impaired loans and OREO are generally measured using the fair value of the underlying collateral, which is determined based on the most recent appraisal information received, less costs to sell. These loans fall within Level 2 of the fair value hierarchy. Appraised values may be adjusted based on factors such as the changes in market conditions from the time of valuation. These loans fall within Level 3 of the fair value hierarchy.

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     The fair value of commitments to extend credit and standby letters of credit were not significant at September 30, 2009 as these instruments predominantly have adjustable terms and are of a short-term nature.
     Swaps — The fair value of the interest rate swap contracts are provided by our counterparty using a system that constructs a yield curve based on cash LIBOR rates, Eurodollar futures contracts, and 3-year through 30-year swap rates. The yield curve determines the valuations of the interest rate swaps. Accordingly, the swap is categorized as a Level 2 valuation.
     Deposits & Borrowings — The amounts payable to depositors for demand, savings, and money market accounts, and the demand note to the U.S. Treasury, and short-term borrowings are considered to be stated at fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of long-term borrowings and junior subordinated debentures is estimated using the rates currently offered for borrowings of similar remaining maturities.
     Accrued Interest Receivable/Payable — The amounts of accrued interest receivable on loans and lease finance receivables and investments and accrued interest payable on deposits and borrowings are considered to be stated at fair value.
     The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.
Assets & Liabilities Measured at Fair Value on a Recurring Basis
                                 
            Quoted Prices in     Significant        
            Active Markets     Other     Significant  
    Carrying Value at     for Identical     Observable     Unobservable  
    September 30,     Assets     Inputs     Inputs  
(in thousands)   2009     (Level 1)     (Level 2)     (Level 3)  
 
Description of Assets
                               
Mortgage-backed securities
  $ 688,784     $     $ 688,784     $  
CMO’s / REMIC’s
    803,366             803,366        
Government agency
    96,561             96,561        
Municipal bonds
    696,745             696,745        
 
                       
Investment Securities-AFS
  $ 2,285,456     $     $ 2,285,456     $  
Interest Rate Swaps
    5,761             5,761        
           
Total Assets
  $ 2,291,217     $     $ 2,291,217     $  
     
 
                               
Description of Liability
                               
           
Interest Rate Swaps
  $ 5,761     $     $ 5,761     $  
     
     We may be required to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at quarter end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at quarter end.

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Assets & Liabilities Measured at Fair Value on a Non-Recurring Basis
                                         
            Quoted Prices in   Significant           For the nine
            Active Markets   Other   Significant   months ended
    Carrying Value at   for Identical   Observable   Unobservable   September 30,
    September 30,   Assets   Inputs   Inputs   2009
(in thousands)   2009   (Level 1)   (Level 2)   (Level 3)   Total Losses
 
Description of Assets
                                       
Investment Security-HTM
  $ 4,237         $ 4,237     $     $ (232 )
Impaired Loans (1)
  $ 44,779         $ 3,319     $ 41,460     $ (18,240 )
OREO
  $ 1,137         $     $ 1,137     $ (848 )
 
(1) Impaired loans of $16.3 million have sufficient collateral value to cover losses and are recorded at carrying value.
     The following table presents estimated fair value of financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could have realized in a current market exchange as of September 30, 2009. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
FAIR VALUE INFORMATION
                 
    September 30, 2009
    Carrying   Estimated
    Amount   Fair Value
    (amounts in thousands)
Assets
               
Cash and cash equivalents
  $ 222,158     $ 222,158  
Federal funds sold and Interest-bearing balances
               
due from depository institutions
    150,285       150,285  
FHLB Stock
    93,240       93,240  
Investment securities available-for-sale
    2,285,456       2,285,456  
Investment securities held-to-maturity
    4,237       4,237  
Loans and lease finance receivables, net
    3,512,771       3,546,141  
Accrued interest receivable
    27,430       27,430  
 
               
Liabilities
               
Deposits:
               
Noninterest-bearing
  $ 1,416,558     $ 1,416,558  
Interest-bearing
    2,623,213       2,626,464  
Demand note to U.S. Treasury
    3,441       3,441  
Borrowings
    1,665,326       1,721,518  
Junior subordinated debentures
    115,055       115,735  
Accrued interest payable
    8,420       8,420  
     The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2009. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.
4. BUSINESS SEGMENTS
     The Company has identified two principal reportable segments: Business Financial and Commercial Banking Centers and the Treasury Department. The Company’s subsidiary bank has 41 Business Financial Centers and 5 Commercial Banking Centers (branches), organized in 6 geographic regions, which are the focal points for customer sales and services. The Company utilizes an internal reporting

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system to measure the performance of various operating segments within the Bank which is the basis for determining the Bank’s reportable segments. The Chief Operating Decision Maker (currently our CEO) regularly reviews the financial information of these segments in deciding how to allocate resources and assessing performance. The Bank’s Business Financial and Commercial Banking Centers are considered one operating segment as their products and services are similar and are sold to similar types of customers, have similar production and distribution processes, have similar economic characteristics, and have similar reporting and organizational structures. The Treasury Department’s primary focus is managing the Bank’s investments, liquidity, and interest rate risk. Information related to the Company’s remaining operating segments which include construction lending, dairy and livestock lending, SBA lending, leasing, and centralized functions have been aggregated and included in “Other.” In addition, the Company allocates internal funds transfer pricing to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in administration.
     The following table represents the selected financial information for these two business segments. Accounting principles generally accepted in the United States of America do not have an authoritative body of knowledge regarding the management accounting used in presenting segment financial information. The accounting policies for each of the business units is the same as those policies identified for the consolidated Company and identified in the footnote on the summary of significant accounting policies. The income numbers represent the actual income and expenses of each business unit. In addition, each segment has allocated income and expenses based on management’s internal reporting system, which allows management to determine the performance of each of its business units. Loan fees, included in the “Business Financial and Commercial Banking Centers” category are the actual loan fees paid to the Company by its customers. These fees are eliminated and deferred in the “Other” category, resulting in deferred loan fees for the consolidated financial statements. All income and expense items not directly associated with the two business segments are grouped in the “Other” category. Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results.
     The following tables present the operating results and other key financial measures for the individual reportable segments for the three and nine months ended September 30, 2009 and 2008:

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    Three Months Ended September 30, 2009  
    Business                          
    Financial                          
    Centers     Treasury     Other     Eliminations     Total  
Interest income, including loan fees
  $ 38,632     $ 25,388     $ 11,899     $     $ 75,919  
Credit for funds provided (1)
    14,877             6,723       (21,600 )      
 
                             
Total interest income
    53,509       25,388       18,622       (21,600 )     75,919  
 
                             
Interest expense
    6,920       13,286       907             21,113  
Charge for funds used (1)
    2,522       8,995       10,083       (21,600 )      
 
                             
Total interest expense
    9,442       22,281       10,990       (21,600 )     21,113  
 
                             
Net interest income
    44,067       3,107       7,632             54,806  
 
                             
Provision for credit losses
                13,000             13,000  
 
                             
Net interest income after provision for credit losses
  $ 44,067     $ 3,107       ($5,368 )   $     $ 41,806  
 
                             
Non-interest income
    5,058       6,667       3,377             15,102  
Non-interest expense
    12,236       383       17,226             29,845  
 
                             
Segment pretax profit (loss)
  $ 36,889     $ 9,391       ($19,217 )   $     $ 27,063  
 
                             
                                         
    Three Months Ended September 30, 2008  
    Business                          
    Financial                          
    Centers     Treasury     Other     Eliminations     Total  
Interest income, including loan fees
    42,120     $ 30,620     $ 10,767     $     $ 83,507  
Credit for funds provided (1)
    18,306             4,458       (22,764 )      
 
                             
Total interest income
    60,426       30,620       15,225       (22,764 )     83,507  
 
                             
Interest expense
    7,214     $ 24,712       2,569             34,495  
Charge for funds used (1)
    19,360     $ 856       2,548       (22,764 )      
 
                             
Total interest expense
    26,574       25,568       5,117       (22,764 )     34,495  
 
                             
Net interest income
    33,852       5,052       10,108             49,012  
 
                             
Provision for credit losses
                4,000             4,000  
 
                             
Net interest income after provision for credit losses
  $ 33,852     $ 5,052     $ 6,108     $     $ 45,012  
 
                             
Non-interest income
    5,471     $ 1       2,901             8,373  
Non-interest expense
    12,173     $ 342       16,542             29,057  
 
                             
Segment pretax profit (loss)
  $ 27,150     $ 4,711       ($7,533 )   $     $ 24,328  
 
                             

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    Nine Months Ended September 30, 2009  
    Business                          
    Financial                          
    Centers     Treasury     Other     Eliminations     Total  
Interest income, including loan fees
  $ 115,711     $ 80,877     $ 34,068     $     $ 230,656  
Credit for funds provided (1)
    37,526             16,457       (53,983 )      
 
                             
Total interest income
    153,237       80,877       50,525       (53,983 )     230,656  
 
                             
Interest expense
    21,382       41,400       3,681             66,463  
Charge for funds used (1)
    9,325       20,167       24,491       (53,983 )      
 
                             
Total interest expense
    30,707       61,567       28,172       (53,983 )     66,463  
 
                             
Net interest income
    122,530       19,310       22,353             164,193  
 
                             
Provision for credit losses
                55,000               55,000  
 
                             
Net interest income after provision for credit losses
  $ 122,530     $ 19,310       ($32,647 )   $     $ 109,193  
 
                             
Non-interest income
    14,670       28,215       8,283             51,168  
Non-interest expense
    36,939       1,122       56,160             94,221  
 
                             
Segment pretax profit (loss)
  $ 100,261     $ 46,403       ($80,524 )   $     $ 66,140  
 
                             
Segment assets as of September 30, 2009
  $ 4,241,933     $ 2,724,010     $ 738,934     $ (1,158,612 )   $ 6,546,265  
 
                             
                                         
    Nine Months Ended September 30, 2008  
    Business                          
    Financial                          
    Centers     Treasury     Other     Eliminations     Total  
Interest income, including loan fees
  $ 125,280     $ 90,545     $ 33,870     $     $ 249,695  
Credit for funds provided (1)
    39,224             6,421       (45,645 )      
 
                             
Total interest income
    164,504       90,545       40,291       (45,645 )     249,695  
 
                             
Interest expense
    27,569       71,568       8,934             108,071  
Charge for funds used (1)
    27,519       6,596       11,530       (45,645 )      
 
                             
Total interest expense
    55,088       78,164       20,464       (45,645 )     108,071  
 
                             
Net interest income
    109,416       12,381       19,827             141,624  
 
                             
Provision for credit losses
                8,700               8,700  
 
                             
Net interest income after provision for credit losses
  $ 109,416     $ 12,381     $ 11,127     $     $ 132,924  
 
                             
Non-interest income
    16,068       7       9,141             25,216  
Non-interest expense
    36,135       950       50,749             87,834  
 
                             
Segment pretax profit (loss)
  $ 89,349     $ 11,438       ($30,481 )   $     $ 70,306  
 
                             
Segment assets as of September 30, 2008
  $ 3,300,145     $ 2,588,209     $ 609,060     $ (75,628 )   $ 6,421,786  
 
                             
 
(1)   Credit for funds provided and charge for funds used is eliminated in the consolidated presentation.
5. DERIVATIVE FINANCIAL INSTRUMENTS
     The Bank is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are market risk and interest rate risk. As of September 30, 2009, the Bank entered into 28 interest-rate swap agreements with customers and 28 with a counterparty bank. The swaps are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and provide the customer the financial effects of a fixed-rate loan without creating volatility in the bank’s earnings.
     The structure of the swaps is as follows. The Bank enters into a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Bank enters into a swap with the counterparty bank to allow the Bank to pass on the interest-rate risk associated with fixed rate loans. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the market value of the swaps primarily offset each other and therefore do not have a significant impact on the Company’s results of operations.

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     As of September 30, 2009, the total notional amount of the Bank’s swaps was $171.8 million. The following tables present the location of the asset and liability and the amount of gain recognized as of and for the nine months ended September 30, 2009.
Fair Value of Derivative Instruments
                                 
    Asset Derivatives     Liability Derivatives  
    September 30, 2009     September 30, 2009  
    (amounts in thousands)  
Derivatives Not Designated as   Balance Sheet             Balance Sheet        
Hedging Instruments   Location     Fair Value     Location     Fair Value  
Interest Rate Swaps
  Other Assets   $ 5,761     Other Liabilities   $ 5,761  
 
                       
Total Derivatives
          $ 5,761             $ 5,761  
 
                       
The Effect of Derivative Instruments on the Consolidated Statement of Earnings for
the nine months ended September 30, 2009

(amounts in thousands)
                 
            Amount of Gain  
Derivatives Not Designated as   Location of Gain Recognized in     Recognized in Income  
Hedging Instruments   Income on Derivative     on Derivative  
            September 30, 2009  
Interest Rate Swaps
  Other Income   $ 275  
 
             
Total
          $ 275  
 
             
6. SUBSEQUENT EVENTS
     On October 16, 2009, the Bank acquired substantially all of the assets and assumed substantially all of the liabilities of San Joaquin Bank (“SJB”) headquartered in Bakersfield, California from the FDIC as receiver for SJB, including all five SJB branches. Based upon a preliminary closing with the FDIC as of October 16, 2009, the Bank acquired (a) an estimated $690 million in loans, (b) $24 million in investment securities, and (c) $18 million in cash and other assets, and assumed (a) an estimated $530 million in deposits, (b) $121 million in borrowings, and (c) $1 million in other liabilities. The foregoing amounts represent SJB’s book value and do not reflect fair value. These amounts are estimates and, accordingly, are subject to adjustment based upon final settlement with the FDIC. The Company is currently in the process of determining fair value amounts.
     On October 28, 2009, the Company repurchased the warrant issued to the U.S. Treasury as part of the U.S. Treasury’s Capital Purchase Program. The repurchase price of $1,307,000 was recorded in additional paid-in-capital on the balance sheet. The warrant to purchase 1,669,521 shares of the Company’s voting common stock at an exercise price of $11.68 was reduced in half to 834,761 shares, upon completion of the Company’s common stock offering on July 27, 2009.
     The Company has evaluated subsequent events through November 5, 2009, the date that these consolidated financial statements were issued.

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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. For a more complete understanding of the Company and its operations, reference should be made to the financial statements included in this report and this discussion and analysis should be read in conjunction with the Company’s 2008 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, 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 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 and the results of regulatory examinations or reviews. 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 “Item 1A. Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. 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.
OVERVIEW
     We are a bank holding company with one bank subsidiary, Citizens Business Bank. We have three other inactive subsidiaries: CVB Ventures, Inc.; Chino Valley Bancorp and Orange National Bancorp. We are also the common stockholder of CVB Statutory Trust I, CVB Statutory Trust II and CVB Statutory Trust III, statutory trusts which were formed to issue trust preferred securities in order to increase the capital of the Company. Through our acquisition of FCB in June 2007, we acquired FCB Capital Trust II, another statutory trust. We are based in Ontario, California in what is known as the “Inland Empire” of California. Our geographical market area encompasses the City of Stockton (the middle of the Central Valley) in the center of California to the City of Laguna Beach (in Orange County) in the southern

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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, and salaries and benefits. As such our net income is subject to fluctuations in interest rates and their impact on our income statement. We are also subject to competition from other financial institutions, which may affect our pricing of products and services, and the fees and interest rates we can charge on them.
     Economic conditions in our California service area impact our business. We have seen a significant decline in the housing market resulting in slower growth in construction loans. Unemployment is high and the Inland Empire and other areas of our marketplace have been significantly impacted as economic conditions, both nationally and in California, continue to deteriorate. Approximately 22% of our total loan portfolio of $3.6 billion is located in the Inland Empire region of California. The balance of the portfolio is from outside of this region. Our provision for credit losses for the first nine months of 2009, which was significantly higher than our provision for credit losses for the first nine months of 2008, reflects an increase in our classified loans, as we continue to see the impact of deteriorating economic conditions on our loan portfolio. Continued weaknesses in the local and state economy could adversely affect us through diminished loan demand, credit quality deterioration, and increases in loan delinquencies and defaults.
     Over the past few years, we have been active in acquisitions and we will continue to consider acquisition targets, including FDIC-assisted acquisitions, which will enable us to meet our business objectives and enhance shareholder value along with organic growth. Since 2000, we have acquired four banks and a leasing company, and we have opened four de novo branches: Bakersfield, Fresno, Madera, and Stockton, California. We also have five Commercial Banking Centers. Although able to take deposits, these centers operate primarily as sales offices and focus on business clients and their principals, professionals, and high net-worth individuals. One of these centers is located in the San Fernando Valley. The other four centers are located within a Business Financial Center in San Bernardino, Los Angeles and Orange counties. For a discussion of our recent acquisition of San Joaquin Bank, see “Recent Developments” below.
     The full impact of the decreases in interest rates on deposits during 2008 was realized during the first nine months of 2009. Our net interest income before provision for credit losses of $164.2 million, increased by $22.6 million or 15.93%, compared to net interest income before provision for credit losses of $141.6 million for the same period in 2008. The Bank has always had an excellent base of interest free deposits primarily due to our specialization in businesses and professionals as customers. As of September 30, 2009, 35.07% of our deposits are interest-free. This has allowed us to have a low cost of deposits, currently 0.66% for the first nine months of 2009, which contributed to a substantial reduction in interest expense for the first nine months of 2009 compared to the same period last year.
     Our net income decreased to $48.4 million for the first nine months of 2009 compared with $50.8 million for the first nine months of 2008, a decrease of $2.4 million or 4.82%. The decrease of $2.4 million is primarily the result of the increase in provision for credit losses of $46.3 million and an increase in non-interest expense of $6.4 million, offset by an increase in net interest income before provision for credit losses of $22.6 million and gain on sale of securities of $28.4 million. Diluted earnings per common share decreased to $0.40 per share for 2009, from $0.61 per share in 2008. A substantial portion of the decrease in diluted earnings per share is associated with dividends paid and amortization of the discount on our preferred stock which was repaid in the current quarter.
     Our net income increased to $19.3 million for the quarter ended September 30, 2009 compared with $17.5 million for the same period in 2008, an increase of $1.8 million or 10.66%. The increase of $1.8 million is primarily the result of the gain of sale of securities of $6.9 million and an increase in net interest income of $5.8 million, offset by an increase in provision for credit losses of $9.0 million.

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Diluted earnings per common share decreased to $0.10 per share for the third quarter of 2009 from $0.21 per share for the third quarter of 2008. Due to the repurchase of preferred stock, current-quarter diluted earnings per common share reflected a one-time, non-cash reduction in net income applicable to common stockholders of $7.6 million, or $.07 per share.
RECENT DEVELOPMENTS
     On October 16, 2009, the Bank acquired substantially all of the assets and assumed substantially all of the liabilities of San Joaquin Bank (“SJB”) headquartered in Bakersfield, California from the FDIC as receiver for SJB, including all five SJB branches. Based upon a preliminary closing with the FDIC as of October 16, 2009, the Bank acquired (a) an estimated $690 million in loans, (b) $24 million in investment securities, and (c) $18 million in cash and other assets, and assumed (a) an estimated $530 million in deposits, (b) $121 million in borrowings, and (c) $1 million in other liabilities. The foregoing amounts represent SJB’s book value and do not reflect fair value. These amounts are estimates and, accordingly, are subject to adjustment based upon final settlement with the FDIC. The Company is currently in the process of determining fair value amounts.
     On October 28, 2009, the Company repurchased the warrant issued to the U.S. Treasury as part of the U.S. Treasury’s Capital Purchase Program. The repurchase price of $1,307,000 was recorded in additional paid-in-capital on the balance sheet. The warrant to purchase 1,669,521 shares of the Company’s voting common stock at an exercise price of $11.68 was reduced in half to 834,761 shares, upon completion of the Company’s common stock offering on July 27, 2009.
CRITICAL ACCOUNTING ESTIMATES
     Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting estimates upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments are as follows:
     Allowance for Credit Losses: Arriving at an appropriate level of allowance for credit losses involves a high degree of judgment. Our allowance for credit losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. The determination of the balance in the allowance for credit losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in our judgment, is adequate to provide for probable credit losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience, and such other factors as deserve current recognition in estimating inherent credit losses. The provision for credit losses is charged to expense. For a full discussion of our methodology of assessing the adequacy of the allowance for credit losses, see the “Risk Management” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
     Investment Portfolio: The investment portfolio is an integral part of the Company’s financial performance. We invest primarily in fixed income securities. Accounting estimates are used in the valuation of the investment portfolio and these estimates do impact the presentation of our financial condition and results of operations. We classify as held-to-maturity those debt securities that we have the positive intent and ability to hold to maturity. Securities classified as trading are those securities that are bought and held principally for the purpose of selling them in the near term. All other debt and equity securities are classified as available-for-sale. Securities held-to-maturity are accounted for at cost and adjusted for amortization of premiums and accretion of discounts. Trading securities are accounted for at fair value with the unrealized holding gains and losses being included in current earnings. Securities available-for-sale are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate component of stockholders’ equity. Realized gains and losses on sales

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of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the effective-yield method over the terms of the securities. Our investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost.
     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 basis and its fair value would be included in other comprehensive income.
     Income Taxes: We account for income taxes using the asset and liability method by deferring income taxes based on estimated future tax effects of differences between the tax and book basis of assets and liabilities considering the provisions of enacted tax laws. These differences result in deferred tax assets and liabilities, which are included in our balance sheets. We must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and establish a valuation allowance for those assets determined to not likely be recoverable. Our judgment is required in determining the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income. Although we have determined a valuation allowance is not required for any of our deferred tax assets, there is no guarantee that these assets are recoverable.
     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 determined through the use of internal and external valuation techniques. The purchase price is allocated to assets and liabilities, including identified intangibles. The identified intangibles are amortized over the estimated lives of the assets or liabilities. 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 $48.4 million for the nine months ended September 30, 2009. This represented a decrease of $2.4 million or 4.82%, from net earnings of $50.8 million for the nine months ended September 30, 2008 primarily due to an increase in loan loss provision of $46.3 million and an increase in non-interest expense of $6.4 million, offset by gains on sales of securities of $28.4 million and an increase in our net interest income of $22.6 million year over year. Basic and diluted earnings per common share for the nine-month period decreased to $0.40 per share for 2009, compared to $0.61 earnings per common share for 2008. The annualized return on average assets was 0.99% for the nine months of 2009 compared to an annualized return on average assets of 1.07% for the nine months of 2008. The annualized return on average equity was 10.01% for the nine months ended September 30, 2009, compared to an annualized return of 15.10% for the nine months ended September 30, 2008. The decrease in annualized return on average equity for the nine-month period is attributed to an increase in our average equity balance as a result of the preferred stock we issued to the U.S. Treasury in December 2008 as a result of our participation in the Treasury’s Capital Purchase Program. During the third quarter, we raised $132.5 million in gross proceeds from common stock issuance and repurchased all of the preferred stock issued to the U.S. Treasury.
     For the quarter ended September 30, 2009, our net earnings were $19.3 million. This represented an increase of $1.8 million or 10.66%, from net earnings of $17.5 million, for the third quarter of 2008. Basic and diluted earnings per common share decreased to $0.10 per share for the third quarter of 2009

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compared to $0.21 per share for the third quarter of 2008. The annualized return on average assets was 1.17% and 1.08% for the third quarter of 2009 and 2008, respectively. The annualized return on average equity was 11.33% and 15.55% for the third quarter of 2009 and 2008, respectively.
Net Interest Income
     The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is the taxable-equivalent of net interest income as a percentage of average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average earning assets minus the cost of average interest-bearing liabilities. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the economy, in general, and the local economies in which we conduct business. Our ability to manage the net interest income during changing interest rate environments will have a significant impact on our overall performance. Our balance sheet is currently liability-sensitive; meaning interest-bearing liabilities will generally reprice more quickly than earning assets. Therefore, our net interest margin is likely to decrease in sustained periods of rising interest rates and increase in sustained periods of declining interest rates. We manage net interest income by affecting changes in the mix of earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to earning assets, and in the growth of earning assets.
     Our net interest income, before the provision for credit losses, totaled $164.2 million for the nine months ended September 30, 2009. This represented an increase of $22.6 million, or 15.93%, over net interest income, before provision for credit losses, of $141.6 million for the same period in 2008. The increase in net interest income of $22.6 million resulted from a $41.6 million decrease in interest expense, offset by an $19.0 million decrease in interest income.
     Interest income totaled $230.7 million for the first nine months of 2009. This represented a decrease of $19.0 million, or 7.63%, compared to total interest income of $249.7 million for the same period last year. The decrease in interest income was primarily the result of the decrease in average yield on earning assets to 5.18% for the nine months of 2009 from 5.75% for the same period of 2008, or 57 basis points. Average earning assets increased by $164.9 million, or 2.74%, from $6.01 billion to $6.18 billion.
     Interest expense totaled $66.5 million for the first nine months of 2009. This represented a decrease of $41.6 million, or 38.50%, from total interest expense of $108.1 million for the same period last year. The decrease in interest expense was primarily the result of a decrease in the average rate paid on interest-bearing liabilities to 1.98% for the first nine months of 2009 from 3.10% for the same period in 2008, or 112 basis points. The decrease in rates paid on deposits and borrowings was offset by an increase in average interest-bearing deposits of $460.6 million, or 23.09%, from $1.99 billion to $2.46 billion.
     For the third quarter ended September 30, 2009, our net interest income, before provision for credit losses, totaled $54.8 million. This represented an increase of $5.8 million, or 11.82%, over net interest income of $49.0 million for the same period in 2008. The increase in net interest income of $5.8 million resulted from a decrease of $13.4 million in interest expense, offset by a $7.6 million decrease in interest income.
     Interest income totaled $75.9 million for the third quarter of 2009. This represented a decrease of $7.6 million, or 9.09%, compared to total interest income of $83.5 million for the same period last year. The decrease in interest income for the third quarter ending September 30, 2009 as compared to the third quarter ending September 30, 2008 was primarily the result of the decrease in average yield on earning assets to 5.11% for the third quarter of 2009 from 5.65% for the same period of 2008, or 54 basis points. Average earning assets increased by $54.6 million, or 0.90%, from $6.09 billion to $6.14 billion.

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     Interest expense totaled $21.1 million for the third quarter of 2009. This represented a decrease of $13.4 million or 38.79%, from total interest expense of $34.5 million for the same period last year. The decrease in interest expense was primarily the result of a decrease in the average rate paid on interest-bearing liabilities to 1.89% for the third quarter ending September 30, 2009 from 2.91% for the same period in 2008, or 102 basis points. The decrease in yields was offset by an increase in average interest-bearing deposits of $658.8 million, or 34.03%, from $1.94 billion to $2.59 billion.
     Table 1 shows the average balances of assets, liabilities, and stockholders’ equity and the related interest income, expense, and yields/rates for the nine -month and three-month period ended September 30, 2009 and 2008. Yields for tax-preferenced investments are shown on a taxable equivalent basis using a 35% tax rate.
TABLE 1 — Distribution of Average Assets, Liabilities, and Stockholders’ Equity; Interest Rates and Interest Differentials
                                                 
    Nine-month period ended September 30,  
    2009     2008  
    Average             Average     Average             Average  
    Balance     Interest     Yield/Rate     Balance     Interest     Yield/Rate  
    (amounts in thousands)  
ASSETS
                                               
 
                                               
Investment Securities
                                               
Taxable
  $ 1,699,786     $ 59,848       4.73 %   $ 1,778,551     $ 65,448       4.95 %
Tax preferenced (1)
    669,615       20,560       5.78 %     685,113       21,336       5.84 %
Investment in FHLB stock
    93,240       195       0.28 %     88,508       3,666       5.52 %
Federal Funds Sold & Interest Bearing
                                               
Deposits with other institutions
    68,786       195       0.38 %     1,334       34       3.40 %
Loans (2) (3)
    3,646,862       149,858       5.49 %     3,459,916       159,211       6.15 %
 
                                       
Total Earning Assets
    6,178,289       230,656       5.18 %     6,013,422       249,695       5.75 %
Total Non Earning Assets
    356,180                       357,204                  
 
                                           
Total Assets
  $ 6,534,469                     $ 6,370,626                  
 
                                           
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
 
                                               
Savings Deposits (4)
  $ 1,286,477     $ 7,469       0.78 %   $ 1,260,483     $ 13,255       1.40 %
Time Deposits
    1,168,682       11,494       1.31 %     734,050       14,978       2.73 %
 
                                       
Total Deposits
    2,455,159       18,963       1.03 %     1,994,533       28,233       1.89 %
Other Borrowings
    1,984,526       47,500       3.16 %     2,605,543       79,838       4.03 %
 
                                       
Interest Bearing Liabilities
    4,439,685       66,463       1.98 %     4,600,076       108,071       3.10 %
 
                                       
Non-interest bearing deposits
    1,380,349                       1,257,843                  
Other Liabilities
    68,597                       63,389                  
Stockholders’ Equity
    645,838                       449,318                  
 
                                           
Total Liabilities and Stockholders’ Equity
  $ 6,534,469                     $ 6,370,626                  
 
                                           
 
                                               
Net interest income
          $ 164,193                     $ 141,624          
 
                                           
 
                                               
Net interest spread — tax equivalent
                    3.20 %                     2.65 %
Net interest margin
                    3.57 %                     3.18 %
Net interest margin — tax equivalent
                    3.75 %                     3.37 %
Net interest margin excluding loan fees
                    3.52 %                     3.09 %
Net interest margin excluding loan fees — tax equivalent
                    3.70 %                     3.28 %
 
(1)   Non tax-equivalent rate was 4.11% for 2009 and 4.15% for 2008.
 
(2)   Loan fees are included in total interest income as follows, (000)s omitted: 2009, $2,279; 2008, $4,193
 
(3)   Non performing loans are included in net loans as follows: 2009, $58.1 million; 2008, $16.6 million
 
(4)   Includes interest bearing demand and money market accounts

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TABLE 1 — Distribution of Average Assets, Liabilities, and Stockholders’ Equity; Interest Rates and Interest Differentials
                                                 
    Three Months Ended September 30,  
    2009     2008  
    Average             Average     Average             Average  
    Balance     Interest     Rate     Balance     Interest     Rate  
    (amounts in thousands)  
ASSETS
                                               
 
                                               
Investment Securities
                                               
Taxable
  $ 1,635,607     $ 18,278       4.49 %   $ 1,767,850     $ 22,142       5.01 %
Tax preferenced (1)
    665,405       6,749       5.76 %     672,765       7,036       5.88 %
Investment in FHLB stock
    93,240       195       0.84 %     91,729       1,367       5.96 %
Federal Funds Sold & Interest Bearing
                                               
Deposits with other institutions
    143,220       136       0.38 %     752       8       4.26 %
Loans (2) (3)
    3,606,945       50,561       5.56 %     3,556,724       52,954       5.92 %
 
                                       
Total Earning Assets
    6,144,417       75,919       5.11 %     6,089,820       83,507       5.65 %
Total Non Earning Assets
    413,697                       354,801                  
 
                                           
Total Assets
  $ 6,558,114                     $ 6,444,621                  
 
                                           
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
 
                                               
Savings Deposits (4)
  $ 1,380,686     $ 2,466       0.71 %   $ 1,215,066     $ 3,477       1.14 %
Time Deposits
    1,214,205       3,468       1.13 %     721,035       3,940       2.17 %
 
                                       
Total Deposits
    2,594,891       5,934       0.91 %     1,936,101       7,417       1.52 %
Other Borrowings
    1,796,234       15,179       3.31 %     2,715,548       27,078       3.90 %
 
                                       
Interest Bearing Liabilities
    4,391,125       21,113       1.89 %     4,651,650       34,495       2.91 %
 
                                       
Non-interest bearing deposits
    1,427,916                       1,299,630                  
Other Liabilities
    62,538                       46,619                  
Stockholders’ Equity
    676,535                       446,722                  
 
                                           
Total Liabilities and Stockholders’ Equity
  $ 6,558,114                     $ 6,444,621                  
 
                                           
 
                                               
Net interest income
          $ 54,806                     $ 49,012          
 
                                           
 
                                               
Net interest spread — tax equivalent
                    3.22 %                     2.74 %
Net interest margin
                    3.57 %                     3.24 %
Net interest margin — tax equivalent
                    3.75 %                     3.43 %
Net interest margin excluding loan fees
                    3.52 %                     3.16 %
Net interest margin excluding loan fees — tax equivalent
                    3.70 %                     3.35 %
 
(1)   Non tax equivalent rate was 4.08% for 2009 and 4.18% for 2008.
 
(2)   Loan fees are included in total interest income as follows, (000)s omitted: 2009, $886; 2008, $1,190
 
(3)   Non performing loans are included in net loans as follows, (000)s omitted: 2009, $58.1 million; 2008, $16.6 million
 
(4)   Includes interest bearing demand and money market accounts
     As stated above, the net interest margin measures net interest income as a percentage of average earning assets. Our tax effected (TE) net interest margin was 3.75% for the nine months of 2009, compared to 3.37% for the first nine months of 2008. Our tax effected (TE) net interest margin for the third quarter of 2009 was 3.75%, compared to 3.43% for the third quarter of 2008. The increase in the net interest margin over the same period last year is primarily the result of the decreasing interest rate environment, which impacted interest earned and interest paid as a percent of earning assets. This was partially offset by changes in the mix of assets and liabilities as discussed in the following paragraphs. Generally, our net interest margin improves in a decreasing interest rate environment as our deposits and borrowings reprice much faster than our loans and securities.
     The net interest spread is the difference between the yield on average earning assets and the cost of average interest-bearing liabilities. The net interest spread is an indication of our ability to manage rates received on loans and investments and rates paid on deposits and borrowings in a competitive and changing interest rate environment. Our net interest spread (TE) was 3.20% for the nine months of 2009 and 2.65% for the same period last year. The increase in the net interest spread for the nine months ended September 30, 2009 resulted from a 112 basis point decrease in the cost of interest-bearing liabilities, offset by a 57 basis point decrease in the yield on earning assets, thus generating a 55 basis point increase in the net interest spread from the same period last year.
     For the third quarter of 2009, the Company’s net interest spread (TE) was 3.22% as compared to 2.74% for the same period last year. The increase in net interest spread for the third quarter ended September 30, 2009 resulted from a 102 basis point decrease in the cost of interest-bearing liabilities,

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offset by a 54 basis point decrease in the yield on earning assets, thus generating a 48 basis point increase in the net interest spread from the same period last year.
     The yield (TE) on earning assets decreased to 5.18% for the nine months of 2009, from 5.75% for the same period last year, and reflects a decreasing interest rate environment and a change in the mix of earning assets. Average loans as a percent of earning assets increased to 59.03% in the nine months of 2009 from 57.54% for the same period in 2008. Average investments as a percent of earning assets decreased to 38.35% in the nine months of 2009 from 40.97% for the same period in 2008. The yield on loans for the first nine months of 2009 decreased to 5.49% as compared to 6.15% for the same period in 2008 as a result of the decreasing interest rate environment. The yield on loans declined at a slower rate than general interest rates as approximately 63% of the Company’s loans are fixed-rate loans or hybrid adjustable loans with interest rates that are typically fixed for the first five or ten years of the loans and reset at fixed rates for the remaining term. The yield (TE) on investments for the first nine months of 2009 decreased to 5.03% compared to 5.20% for the same period in 2008. The decrease in rates, offset by an increase in average loan balances, resulted in a decrease in our interest income.
     The cost of average interest-bearing liabilities decreased to 1.98% for the first nine months of 2009 as compared to 3.10% for the same period in 2008, reflecting the decrease in interest rates and a change in the mix of interest-bearing liabilities. The fact that the cost of interest-bearing liabilities dropped more than the yield on earning assets is due to the liability-sensitive nature of our balance sheet. Average borrowings as a percent of average interest-bearing liabilities decreased to 44.70% during the first nine months of 2009 as compared to 56.64% for the same period in 2008. The cost of borrowings for the first nine months of 2009 decreased to 3.16% as compared to 4.03% for the same period in 2008, reflecting the decrease in interest rates. Borrowings typically have a higher cost than interest-bearing deposits. The cost of interest-bearing deposits for the first nine months of 2009 decreased to 1.03% as compared to 1.89% for the same period in 2008, also reflecting the declining interest rate environment. 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. The overall decrease in interest rates and decrease in average borrowings, offset by an increase in average deposits, resulted in a decrease in our interest expense.
     For the third quarter of 2009, the yield (TE) on earning assets decreased to 5.11%, from 5.65% for the same period last year. The cost of average interest-bearing liabilities decreased to 1.89% for the third quarter of 2009 as compared to 2.91% for the same period in 2008. The changes reflect the decreasing interest rate environment and change in mix of earning assets and interest-bearing liabilities, reflecting similar trends as described above.
     Table 2 presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to both interest rate and volume changes are calculated by multiplying the change in rate times the change in volume.

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TABLE 2 — Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income
                                 
    Comparison of nine months ended September 30,  
    2009 Compared to 2008  
    Increase (Decrease) Due to  
                    Rate/        
    Volume     Rate     Volume     Total  
            ( amounts in thousands )          
Interest Income:
                               
Taxable investment securities
  $ (2,756 )   $ (2,906 )   $ 62     $ (5,600 )
Tax-advantaged securities
    (768 )     (38 )     30       (776 )
Fed funds sold & interest-bearing deposits with other institutions
    1,720       (30 )     (1,529 )     161  
Investment in FHLB stock
    196       (3,478 )     (189 )     (3,471 )
Loans
    8,576       (17,033 )     (896 )     (9,353 )
 
                       
Total interest on earning assets
    6,968       (23,485 )     (2,522 )     (19,039 )
 
                       
 
                               
Interest Expense:
                               
Savings deposits
    271       (5,829 )     (183 )     (5,741 )
Time deposits
    8,850       (7,775 )     (4,604 )     (3,529 )
Other borrowings
    (18,979 )     (17,190 )     3,831       (32,338 )
 
                       
Total interest on interest-bearing liabilities
    (9,858 )     (30,794 )     (956 )     (41,608 )
 
                       
Net Interest Income
  $ 16,826     $ 7,309     $ (1,566 )   $ 22,569  
 
                       
                                 
    Comparison of quarters ended September 30,  
    2009 Compared to 2008  
    Increase (Decrease) Due to  
                    Rate/        
    Volume     Rate     Volume     Total  
    ( amounts in thousands )  
Interest Income:
                               
Taxable investment securities
  $ (1,764 )   $ (2,298 )   $ 198     $ (3,864 )
Tax-advantaged securities
    (175 )     (101 )     (11 )     (287 )
Fed funds sold & interest-bearing deposits with other institutions
    1,517       (7 )     (1,382 )     128  
Investment in FHLB stock
    23       (1,174 )     (21 )     (1,172 )
Loans
    747       (3,219 )     79       (2,393 )
 
                       
Total interest on earning assets
    348       (6,799 )     (1,137 )     (7,588 )
 
                       
 
                               
Interest Expense:
                               
Savings deposits
    475       (1,313 )     (161 )     (999 )
Time deposits
    2,690       (1,885 )     (1,289 )     (484 )
Other borrowings
    (9,162 )     (4,094 )     1,357       (11,899 )
 
                       
Total interest on interest-bearing liabilities
    (5,997 )     (7,292 )     (93 )     (13,382 )
 
                       
Net Interest Income
  $ 6,345     $ 493     $ (1,044 )   $ 5,794  
 
                       
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 $149.9 million for the first nine months of 2009. This represented a decrease of $9.3 million, or 5.88%, from interest and fees on loans of $159.2 million for the same period in 2008. The decrease in interest and fees on loans for the first nine months of 2009 reflects the decrease in rates between periods, offset by increases in the average balance of loans. The yield on loans decreased to 5.18% for the first nine months of 2009, compared to 5.75% for the same period in 2008.

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Average loans increased $186.9 million, or 5.40%, from $3.46 billion for the first nine months of 2008 to $3.65 billion for the first nine months of 2009.
     Interest and fees on loans totaled $50.6 million for the third quarter of 2009. This represented a decrease of $2.4 million, or 4.52%, from interest and fees on loans of $53.0 million for the same period in 2008. The decrease was primarily due to the decrease in yields on loans, offset by increases in average loan balances.
     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 September 30, 2009 and 2008.
     Fees collected on loans are an integral part of the loan pricing decision. Loan fees and the direct costs associated with the origination of loans are deferred and deducted from the loan balance. Deferred net loan fees are recognized in interest income over the term of the loan using the effective-yield method. We recognized loan fee income of $2.3 million for the first nine months of 2009, as compared to $4.2 million for the same period in 2008, a decrease of $1.9 million or 45.65%. This was due to a decrease in loan demand during the first nine months of 2009.
Interest on Investments
     The second most important component of interest income is interest on investments, which totaled $80.4 million for the first nine months of 2009. This represented a decrease of $6.4 million, or 7.35%, from interest on investments of $86.8 million for the same period in 2008. The decrease in interest on investments for the nine months of 2009 from the same period last year was primarily the result of a decrease in yield on investments and a decrease in average investments. The interest rate environment and the investment strategies we employ directly affect the yield on the investment portfolio. We continually adjust our investment strategies in response to the changing interest rate environment in order to maximize the rate of total return consistent within prudent risk parameters, and to minimize the overall interest rate risk of the Company. The total yield (TE) on investments decreased to 5.03% for the first nine months of 2009 compared to 5.20% for the first nine months of 2008. Average investment balances for the first nine months for 2009 decreased $94.3 million, or 3.83% from the same period last year.
     For the third quarter of 2009, interest income on investments totaled $25.0 million. This represented a decrease of $4.2 million or 14.23%, from interest on investments of $29.2 million for the same period in 2008. The decrease in interest on investments for the third quarter of 2009 from the same period last year reflected decreases in the average balance of investments and in the interest rates. The total yield (TE) on investments decreased to 4.86% for the third quarter of 2009, compared to 5.25% for the same period in 2008 as a result of the decreasing interest rate environment.
Interest on Deposits
     Interest on deposits totaled $19.0 million for the first nine months of 2009. This represented a decrease of $9.2 million, or 32.83%, from interest on deposits of $28.2 million for the first nine months of 2008. The decrease is due to the decrease in interest rates on deposits offset by increases in average interest-bearing deposit balances. The cost of interest-bearing deposits decreased to 1.03% for the first nine months of 2009 from 1.89% for the first nine months of 2008. Average interest-bearing deposits increased $460.6 million, or 23.09%, over the same period last year.
     For the third quarter of 2009, interest on deposits totaled $5.9 million. This represented a decrease of $1.5 million, or 20.00%, from interest on deposits of $7.4 million for the same period in 2008. The decrease is due to the decrease in interest rates on deposit offset by increases in average interest-bearing deposit balances. The cost of interest-bearing deposits decreased to 0.91% for the third quarter of 2009

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from 1.52% for the third quarter of 2008. Average interest-bearing deposits increased $658.8 million, or 34.03%, over the same period last year.
Interest on Borrowings
     Interest on borrowings totaled $44.4 million for the first nine months of 2009. This represented a decrease of $30.2 million, or 40.49%, from interest on borrowings of $74.6 million for the same period of 2008. The decrease is due to the decrease in interest rates paid on borrowings and a decrease in average borrowings. Interest rates on borrowings decreased 80 basis points, from 3.93% for the first nine months of 2008 to 3.13% for the first nine months of 2009. Average borrowings decreased $621.0 million, or 24.94%, over the same period last year.
     For the third quarter of 2009, interest on borrowings totaled $14.3 million. This represented a decrease of $11.1 million, or 43.76%, from interest on borrowings of $25.4 million for the same period of 2008. The decrease is due to the decrease in interest rates paid on borrowings and a decrease in average borrowings. Interest rates on borrowings decreased 50 basis points, from 3.82% for the third quarter of 2008 to 3.32% for the third quarter of 2009. Average borrowings decreased $919.3 million, or 35.35%, over the same period last year.
Provision for Credit Losses
     We maintain an allowance for inherent credit losses that is increased by a provision for credit losses charged against operating results. The provision for credit losses is determined by management as the amount to be added to the allowance for probable credit losses after net charge-offs have been deducted to bring the allowance to an adequate level which, in management’s best estimate, is necessary to absorb probable credit losses within the existing loan portfolio.
     We made a provision for credit losses of $55.0 million during the first nine months of 2009 and $8.7 million during the same period in 2008. The increase in allowance during the first nine months of 2009 was primarily due to the increase in classified loans. We continue to make greater provisions for credit losses in order to build our reserves based on historical losses and current economic indicators. We believe the allowance is appropriate as of the end of the period covered by this report. We continually assess the quality of our portfolio to determine whether additional provision for credit losses is necessary. The ratio of the allowance for credit losses to total loans as of September 30, 2009 and 2008 was 2.43% and 1.11%, respectively.
     No assurance can be given that economic conditions which adversely affect the Company’s service areas, past credit loss experience, the characteristics of our loan portfolio or other circumstances will not be reflected in increased provisions for credit losses in the future. The nature of this process requires considerable judgment. Net charge-offs totaled $21.6 million for the first nine months of 2009 and $1.7 million during the same period of 2008. See “Risk Management — Credit Risk” herein.
Other Operating Income
     Other operating income for the Company includes income derived from special services offered by the Bank, such as CitizensTrust, merchant card, international banking, and other business services. Also included in other operating income are service charges and fees, primarily from deposit accounts; gains (net of losses) from the sale of investment securities, other real estate owned, and fixed assets; and other revenues not included as interest on earning assets.
     Other operating income totaled $51.2 million for the first nine months of 2009. This represents an increase of $26.0 million, or 102.92%, over other operating income of $25.2 million for the same period in 2008. The increase is due to the gain on sale of securities of $28.4 million during the first nine months

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of 2009. This was partially offset by decreases in trust and investment services income of $958,000, or 16.23% and BOLI income of $1.07 million, or 33.95%.
     Other operating income totaled $15.1 million for the quarter ended September 30, 2009. This represents an increase of $6.7 million or 80.35% over total other operating income of $8.4 million for the quarter ended September 30, 2008. This increase was primarily due to the gain on sale of securities of $6.9 million during the quarter ended September 30, 2009.
     Other operating income as a percent of net revenues (net interest income before loan loss provision plus other operating income) was 23.76% for the first nine months of 2009, as compared to 15.11% for the same period in 2008.
Other Operating Expenses
     Other operating expenses for the Company include expenses for salaries and benefits, occupancy, equipment, stationary and supplies, professional services, amortization of intangibles, and other expenses. Other operating expenses totaled $94.2 million for the first nine months of 2009. This represents an increase of $6.4 million, or 7.27% over other operating expenses of $87.8 million for the same period in 2008. The increase was primarily due to $6.1 million in charges for FDIC special assessments and increases in insurance premiums.
     For the third quarter of 2009, other operating expenses totaled $29.8 million. This represents an increase of $788,000, or 2.71%, over other operating expenses of $29.1 million for the same period last year.
     At September 30, 2009, we employed 679 full time equivalent employees, compared to 695 full time equivalent employees at September 30, 2008.
     For the most part, other operating expenses reflect the direct expenses and related administrative expenses associated with staffing, maintaining, promoting, and operating branch facilities. Our ability to control other operating expenses in relation to asset growth can be measured in terms of other operating expenses as a percentage of average assets. Operating expenses measured as a percentage of average assets was 1.93% and 1.84% for the first nine months of 2009 and 2008, respectively.
     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 nine months of 2009, the efficiency ratio was 58.76%, compared to a ratio of 55.54% for the same period in 2008.
Income Taxes
     The Company’s effective tax rate for the three and nine months of 2009 was 28.61% and 26.90%, compared to 28.23% and 27.75% for the same period in 2008. The effective tax rates are below the nominal combined Federal and State tax rates as a result of the increase in tax-preferenced income from certain investments and municipal loans/leases as a percentage of total income for each period. The majority of tax preferenced income is derived from municipal securities.

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RESULTS BY BUSINESS SEGMENTS
     We have two reportable business segments: Business Financial and Commercial Banking Centers, and Treasury. The results of these two segments are included in the reconciliation between business segment totals and our consolidated total. Our business segments do not include the results of administration units that do not meet the definition of an operating segment.
Business Financial and Commercial Banking Centers
     Key measures we use to evaluate the Business Financial and Commercial Banking Center’s performance are included in the following table for the three and nine months ended September 30, 2009 and 2008. The table also provides additional significant segment measures useful to understanding the performance of this segment.
                                 
    Nine months ended     Three months ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Key Measures:   (amounts in thousands)  
Statement of Operations
                               
Interest income
  $ 153,237     $ 164,504     $ 53,509     $ 60,426  
Interest expense
    30,707       55,088       9,442       26,574  
 
                       
Net Interest Income
  $ 122,530     $ 109,416     $ 44,067     $ 33,852  
 
                       
Non-interest income
    14,670       16,068       5,058       5,471  
Non-interest expense
    36,939       36,135       12,236       12,173  
 
                       
Segment pretax profit (loss)
  $ 100,261     $ 89,349     $ 36,889     $ 27,150  
 
                       
Balance Sheet
                               
Average loans
  $ 3,646,862     $ 3,459,916     $ 3,606,945     $ 3,556,724  
Average non-interest bearing deposits
  $ 1,380,349     $ 1,257,843     $ 1,427,916     $ 1,299,630  
Average interest-bearing deposits
  $ 2,455,159     $ 1,994,533     $ 2,594,891     $ 1,936,101  
Yield on loans
    5.49 %     6.15 %     5.56 %     5.92 %
Rate paid on deposits
    1.03 %     1.89 %     0.91 %     1.52 %
     For the nine months ended September 30, 2009, segment profit increased by $10.9 million, or 12.21%, compared to the same period last year. This was primarily due to the decrease in interest expense which overshadowed the decrease in interest income. Rates paid on deposits decreased 86 basis points while yields on loans decreased 66 basis points. The decreases in interest rates were offset by increases in average balances. Average interest-bearing deposits increased $460.6 million, or 23.09%; while average loans increased $186.9 million, or 5.40%. Non-interest income decreased by $1.4 million, or 8.70%, compared to the first nine months of 2008. Non-interest expense increased $804,000, or 2.22%, compared to the same period last year.
     For the quarter ended September 30, 2009, segment profit increased by $9.7 million, or 35.87%, compared to the same period last year. This was primarily due to the increase in net interest income. Non-interest income decreased by $413,000, or 7.55%, compared to the quarter ended September 30, 2008. Non-interest expense increased $63,000, or 0.52%, compared to the same period last year.
Treasury
     Key measures we use to evaluate the Treasury’s performance are included in the following table for the three and nine months ended September 30, 2009 and 2008. The table also provides additional significant segment measures useful to understanding the performance of this segment.

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    Nine months ended     Three months ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Key Measures:     (amounts in thousands)  
Statement of Operations
                               
Interest income
  $ 80,877     $ 90,545     $ 25,388     $ 30,620  
Interest expense
    61,567       78,164       22,281       25,568  
 
                       
Net Interest Income
  $ 19,310     $ 12,381     $ 3,107     $ 5,052  
 
                       
Non-interest income
    28,215       7       6,667       1  
Non-interest expense
    1,122       950       383       342  
 
                       
Segment pretax profit (loss)
  $ 46,403     $ 11,438     $ 9,391     $ 4,711  
 
                       
Balance Sheet
                               
Average investments
  $ 2,531,427     $ 2,553,506     $ 2,537,472     $ 2,533,096  
Average borrowings
  $ 1,869,471     $ 2,490,488     $ 1,681,179     $ 2,600,493  
Yield on investments-TE
    5.03 %     5.20 %     4.86 %     5.25 %
Non-tax equivalent yield
    4.11 %     4.15 %     4.08 %     4.18 %
Rate paid on borrowings
    3.13 %     3.93 %     3.32 %     3.82 %
     For the nine months ended September 30, 2009, segment profit increased by $35.0 million over the same period last year. The increase is primarily due to the $28.4 million gain on sale of securities recognized during the first nine months of 2008 and the increase in net interest income of $6.9 million year over year. The increase in net interest income is due to the fact that a substantial portion of our securities portfolio is fixed rate while our rate on borrowings decreased 80 basis points from 3.93% in the first nine months of 2008 to 3.13% for the same period in 2009.
     For the quarter ended September 30, 2009, segment profit increased by $4.7 million over the same period last year. The increase is due to the $6.9 million gain on sale of securities recognized during the three months ended September 30, 2009.
     There are no provisions for credit losses or taxes in the segments as these are accounted for at the corporate level.
Other
                                 
    Nine months ended     Three months ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Key Measures:     (amounts in thousands)  
Statement of Operations
                               
Interest income
  $ 50,525     $ 40,291     $ 18,622     $ 15,225  
Interest expense
    28,172       20,464       10,990       5,117  
 
                       
Net interest income
  $ 22,353     $ 19,827     $ 7,632     $ 10,108  
 
                       
Provision for Credit Losses
    55,000       8,700       13,000       4,000  
Non-interest income
    8,283       9,141       3,377       2,901  
Non-interest expense
    56,160       50,749       17,226       16,542  
 
                       
Pre-tax loss
  $ (80,524 )   $ (30,481 )   $ (19,217 )   $ (7,533 )
 
                       
     The Company’s administration and other operating departments reported pre-tax loss of $80.5 million for the first nine months of 2009. This represents an increase of $50.0 million or 164.18%, from a pre-tax loss of $30.5 million for the same period in 2008. The increase in pre-tax loss is primarily attributed to the increase in provision for credit losses of $46.3 million and increase in non-interest expense of $5.4 million, offset by increase in net interest income of $2.5 million.
     For the quarter ended September 30, 2009, the company’s administration and other operating departments reported pre-tax loss of $19.2 million. This represents an increase of $11.7 million or 155.10%, from a pre-tax loss of $7.5 million for the same period in 2008. The increase in pre-tax loss is primarily attributed to the increase in provision for credit losses of $9.0 million.

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ANALYSIS OF FINANCIAL CONDITION
     The Company reported total assets of $6.55 billion at September 30, 2009. This represented a decrease of $103.4 million, or 1.55%, from total assets of $6.65 billion at December 31, 2008 primarily due to a decrease in investment securities of $210.7 million and net loans of $170.1 million, offset by an increase in cash of $126.9 million and increase in federal funds sold of $150.0 million. Earning assets totaled $6.05 billion at September 30, 2009. This represented a decrease of $230.8 million, or 3.68%, from total earning assets of $6.28 billion at December 31, 2008. Total liabilities were $5.89 billion at September 30, 2009, down $140.0 million, or 2.32%, from total liabilities of $6.03 billion at December 31, 2008. Total equity increased $36.6 million, or 5.96%, to $651.5 million at September 30, 2009, compared with total equity of $614.9 million at December 31, 2008.
Investment Securities
     The Company reported total investment securities of $2.29 billion at September 30, 2009. This represented a decrease of $210.6 million, or 8.42%, from total investment securities of $2.50 billion at December 31, 2008. During the first nine months of 2009, we sold certain securities with relatively short maturities. Investment securities comprise 37.87% of the Company’s total earning assets at September 30, 2009.
     Securities held as “available-for-sale” are reported at fair value for financial reporting purposes. The related unrealized gains or losses, net of income taxes, are recorded in stockholders’ equity. At September 30, 2009, securities held as available-for-sale had a fair value of $2.29 billion, representing 99.8% of total investment securities, with an amortized cost of $2.20 billion. At September 30, 2009, the net unrealized holding gain on securities available-for-sale was $82.5 million and that resulted in accumulated other comprehensive income of $47.8 million (net of $34.7 million in deferred taxes). At December 31, 2008, the Company reported net unrealized gain on investment securities available-for-sale of $49.5 million and accumulated other comprehensive income of $28.7 million (net of deferred taxes of $20.8 million).
Table 3 sets forth investment securities available-for-sale at September 30, 2009 and December 31, 2008.
Table 3 — Composition of Investment Securities
(amounts in thousands)
                                 
    September 30, 2009     December 31, 2008  
                            Total  
    Fair Value     Total Percent     Fair Value     Percent  
Investment Securities Available-for-Sale:
                               
Mortgage-backed securities
  $ 688,784       30.13 %   $ 1,184,485       47.50 %
CMO’s / REMIC’s
    803,366       35.15 %     596,791       23.94 %
Government agency
    96,561       4.23 %     27,778       1.11 %
Municipal bonds
    696,745       30.49 %     684,422       27.45 %
 
                       
Total Investment Securities
  $ 2,285,456       100.00 %   $ 2,493,476       100.00 %
 
                       
     The weighted-average yield (TE) on the investment portfolio at September 30, 2009 was 4.36% with a weighted-average life of 4.4 years. This compares to a yield of 4.70% at December 31, 2008 with a weighted-average life of 4.9 years and a yield of 4.68% at September 30, 2008 with a weighted-average life of 5.1 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.

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     Approximately 68% of the available-for-sale portfolio represents securities issued by the U.S government or U.S. government-sponsored enterprises, which guarantee payment of principal and interest.
     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 September 30, 2009 and December 31, 2008.
Composition of the Fair Value and Gross Unrealized Losses of Securities:
                                                 
    September 30, 2009  
    Less than 12 months     12 months or longer     Total  
            Gross             Gross             Gross  
            Unrealized             Unrealized             Unrealized  
            Holding             Holding             Holding  
Description of Securities   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (amounts in thousands)  
 
                                               
Held-To-Maturity
                                               
CMO (1)
  $     $     $ 4,237     $ 1,618     $ 4,237     $ 1,618  
 
                                   
Available-for-Sale
                                               
Government agency
  $ 25,109     $ 78     $     $     $ 25,109     $ 78  
CMO/REMICs
    46,438       555       31,101       447       77,539       1,002  
Municipal bonds
    4,916       272                   4,916       272  
 
                                   
 
  $ 76,463     $ 905     $ 31,101     $ 447     $ 107,564     $ 1,352  
 
                                   
 
(1)   For the nine months ended September 30, 2009, the Company recorded $1.6 million, on a pre-tax basis, of the non-credit portion of OTTI for this security in other comprehensive income, which is included as gross unrealized losses.
                                                 
    December 31, 2008  
    Less than 12 months     12 months or longer     Total  
            Gross             Gross             Gross  
            Unrealized             Unrealized             Unrealized  
            Holding             Holding             Holding  
Description of Securities   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (amounts in thousands)  
 
                                               
Held-To-Maturity
                                               
CMO
  $ 4,770     $ 2,097     $     $     $ 4,770     $ 2,097  
 
                                   
Available-for-Sale
                                               
Mortgage-backed securities
  $ 265     $     $ 13,903     $ 1     $ 14,168     $ 1  
CMO/REMICs
    163,036       4,542       1,853       53       164,889       4,595  
Municipal bonds
    159,370       5,341       37,994       1,596       197,364       6,937  
 
                                   
 
  $ 322,671     $ 9,883     $ 53,750     $ 1,650     $ 376,421     $ 11,533  
 
                                   
     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 September 30, 2009 and December 31, 2008. The Company has reviewed the individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. A summary of our analysis of these securities and the unrealized losses is described more fully in Note 2 — Investment Securities in the notes to the consolidated financial statements. Economic trends may adversely affect the value of the portfolio of investment securities that we hold.
     During the third quarter of 2009, the Company recognized an other-than-temporary impairment on the held-to-maturity investment security. The total impairment of $1.8 million was reduced by $1.6 million for the non-credit portion which was reflected in other comprehensive income. The remaining $232,000 was recognized in third quarter earnings.

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Loans
     At September 30, 2009, we reported total loans, net of deferred loan fees, of $3.60 billion. This represents a decrease of $136.8 million, or 3.66%, from total loans, net of deferred loan fees, of $3.74 billion at December 31, 2008. Total loans, net of deferred loan fees, comprise 59.55% of our total earning assets.
Table 4 — Distribution of Loan Portfolio by Type (Dollar amounts in thousands)
                                 
    September 30,                    
    2009           December 31, 2008        
Commercial and Industrial
  $ 385,274       10.7 %   $ 370,829       9.9 %
Real Estate:
                               
Construction
    295,315       8.2 %     351,543       9.4 %
Commercial Real Estate
    1,959,725       54.3 %     1,945,706       51.9 %
SFR Mortgage
    290,831       8.1 %     333,931       8.9 %
Consumer
    67,317       1.9 %     66,255       1.8 %
Municipal lease finance receivables
    162,962       4.5 %     172,973       4.6 %
Auto and equipment leases, net of unearned discount
    34,072       0.9 %     45,465       1.2 %
Dairy and Livestock
    411,574       11.4 %     459,329       12.3 %
 
                       
Gross Loans
    3,607,070       100.0 %     3,746,031       100.0 %
 
                               
Less: Deferred net loan fees
    (6,983 )             (9,193 )        
 
                           
Gross loans, net of deferred loan fees
  $ 3,600,087             $ 3,736,838          
Less: Allowance for credit losses
    (87,316 )             (53,960 )        
 
                           
Net Loans
  $ 3,512,771             $ 3,682,878          
 
                           
     Commercial and industrial loans are loans and leases to commercial entities to finance capital purchases or improvements, or to provide cash flow for operations. Real estate loans are loans secured by trust deeds on real property, including property under construction, commercial property and single family and multifamily residences. Consumer loans include installment loans to consumers as well as home equity loans and other loans secured by junior liens on real property. Municipal lease finance receivables provide financing to municipalities, school districts, and other special districts. Auto and equipment leases provide financing to both commercial entities as well as consumers. Dairy and livestock loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers, and farmers.
     Our loan portfolio is from a variety of areas throughout our marketplace. The following is the breakdown of our total loans and commercial real estate loans by region.
                                 
    September 30, 2009
                    Commercial
Loans by County   Total Loans       Real Estate Loans
    (amounts in thousands)
Los Angeles
  $ 1,185,471       32.8 %   $ 702,327       35.8 %
Inland Empire
    788,770       21.9 %     617,454       31.5 %
Central Valley
    619,352       17.2 %     277,954       14.2 %
Orange
    525,939       14.6 %     204,037       10.4 %
Other Areas
    487,538       13.5 %     157,953       8.1 %
     
 
  $ 3,607,070       100.0 %   $ 1,959,725       100.0 %
     
     Of particular concern in the current credit and economic environments is our real estate and real estate construction loans. Our real estate loans are comprised of single-family residences, multifamily residences, industrial, office and retail. We strive to have a maximum loan-to-value ratio of 65-75%.

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This table breaks down our real estate portfolio, with the exception of construction loans, which are discussed in greater detail below.
                                 
    September 30, 2009
                    Percent   Average
Real Estate Loans                   Owner-   Loan
(amounts in thousands)   Loan Balance   Percent   Occupied (1)   Balance
Single Family-Direct
  $ 63,788       2.8 %     100.0 %   $ 443  
Single Family-Mortgage Pools
    227,043       10.1 %     100.0 %     394  
Multifamily
    109,064       4.8 %     0.0 %     859  
Industrial
    664,735       29.6 %     36.5 %     869  
Office
    380,823       16.9 %     25.0 %     994  
Retail
    219,989       9.8 %     14.3 %     1,000  
Medical
    128,951       5.7 %     43.9 %     1,816  
Secured by Farmland
    155,119       6.9 %     100.0 %     2,216  
Other
    301,044       13.4 %     53.2 %     1,149  
     
 
  $ 2,250,556       100.0 %     45.9 %   $ 1,027  
     
 
(1)   Represents percentage of owner-occupied in each real estate loan category
     In the table above, Single Family-Direct represents those single-family residence loans that we have made directly to our customers. These loans total $63.8 million. In addition, we have purchased pools of owner-occupied single-family loans from real estate lenders, Single Family-Mortgage Pools, totaling $227.0 million. These loans were purchased with FICO scores predominantly ranging from 700 to over 800 and original loan-to-value ratios of 60% to 80%. These pools were purchased to diversify our loan portfolio since we make few single-family loans. Due to market conditions, we have not purchased any mortgage pools since August 2007.
     As of September 30, 2009, the Company had $295.3 million in construction loans. This represents 8.2% of total loans outstanding of $3.6 billion. Of this $295.3 million in construction loans, approximately 26%, or $76.7 million, were for single-family residences, residential land loans, and multi-family land development loans. The remaining construction loans, totaling $218.7 million, were related to commercial construction. The average balance of any single construction loan is approximately $4.0 million. Our construction loans are located throughout our marketplace as can be seen in the following table.

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Construction Loans   September 30, 2009  
(amounts in thousands)   SFR & Multifamily  
    Land                                      
    Development             Construction             Total          
Inland Empire
  $ 3,486       15.3 %   $ 18,632       34.6 %   $ 22,118       28.8 %
Orange
    5,196       22.8 %           0.0 %     5,196       6.8 %
Los Angeles
          0.0 %     17,687       32.8 %     17,687       23.1 %
Central Valley
    14,100       61.9 %           0.0 %     14,100       18.4 %
San Diego
          0.0 %     6,303       11.7 %     6,303       8.2 %
Other (includes out-of-state)
          0.0 %     11,256       20.9 %     11,256       14.7 %
     
 
  $ 22,782       100.0 %   $ 53,878       100.0 %   $ 76,660       100.0 %
     
                                                 
    Commercial  
    Land                                      
    Development             Construction             Total          
Inland Empire
  $ 17,794       39.7 %   $ 61,412       35.3 %   $ 79,206       36.3 %
Orange
          0.0 %     23,624       13.6 %     23,624       10.8 %
Los Angeles
    4,700       10.5 %     41,905       24.1 %     46,605       21.3 %
Central Valley
    15,413       34.3 %     17,682       10.2 %     33,095       15.1 %
Other (includes out-of-state)
    6,977       15.5 %     29,148       16.8 %     36,125       16.5 %
     
 
  $ 44,884       100.0 %   $ 173,771       100.0 %   $ 218,655       100.0 %
     
     Of the total SFR and multifamily loans, $32.4 million are for multifamily and the remainder represents single-family loans.
Allowance for Credit Losses
     The allowance for credit losses was $87.3 million as of September 30, 2009. This represents an increase of $33.4 million, or 61.82%, compared to allowance for credit losses of $54.0 million as of December 31, 2008. Activity in the allowance for credit losses was as follows for the first nine months of 2009.
                 
    September 30,     December 31,  
    2009     2008  
    (amounts in thousands)  
 
               
Balance, beginning of year
  $ 53,960     $ 33,049  
Provision charged to operations
    55,000       26,600  
Loans charged-off
    (22,362 )     (6,037 )
Recoveries on loans previously charged-off
    718       348  
 
           
Balance, end of the period
  $ 87,316     $ 53,960  
 
           
Non-performing Assets
     We had non-performing assets of $59.3 million at September 30, 2009. Non-performing assets represent 1.65% of total loans and OREO and 0.91% of total assets at September 30, 2009. We had non-performing assets of $24.2 million at December 31, 2008. Non-performing assets include non-accrual loans plus other real estate owned (foreclosed property).

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    September 30,     December 31,  
    2009     2008  
    (amounts in thousands)  
Non-accrual loans
  $ 58,134     $ 17,684  
Other real estate owned (OREO)
    1,137       6,565  
 
           
Total nonperforming assets
  $ 59,271     $ 24,249  
 
           
 
               
Restructured loans
  $ 3,017     $ 2,500  
 
           
Percentage of nonperforming assets to total loans outstanding & OREO
    1.65 %     0.65 %
 
           
Percentage of nonperforming assets to total assets
    0.91 %     0.36 %
 
           
     We had loans with a balance of $61.1 million classified as impaired at September 30, 2009. This balance includes the non-performing loans of $58.1 million and loans which were restructured in a troubled debt restructuring with a balance of $3.0 million as of September 30, 2009. At December 31, 2008, we had impaired loans with a balance of $20.2 million. Impaired loans measured 1.70% of total loans as of September 30, 2009.
     As of September 30, 2009, we had $1.1 million in OREO compared to $6.6 million as of December 31, 2008, a decrease of $5.4 million. This was primarily due to the sales of existing OREO properties of $12.3 million and $848,000 in OREO write-downs, offset by the transfer of $7.6 million from non-performing loans during the first nine months of 2009. During the first nine months of 2009, the Bank incurred expenses of $1.2 million related to the holding of OREO.
     The table below provides trends in our non-performing assets and delinquencies over the past year.

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Non-Performing Assets & Delinquency Trends
                                         
    September 30,     June 30,     March 31,     December 31,     September 30,  
    2009     2009     2009     2008     2008  
Non-Performing Loans
                                       
Residential Construction and Land
  $ 15,729     $ 17,348     $ 20,943     $ 7,524     $ 8,020  
Commercial Construction
    19,636       21,270       22,102              
Residential Mortgage
    8,102       4,632       2,203       3,116       2,062  
Commercial Real Estate
    13,522       7,041       1,661       4,658       4,995  
Commercial and Industrial
    1,045       859       792       2,074       1,248  
Consumer
    100       115       336       312       312  
 
                             
Total
  $ 58,134     $ 51,265     $ 48,037     $ 17,684     $ 16,637  
 
                             
 
                                       
% of Total Loans
    1.61 %     1.42 %     1.31 %     0.47 %     0.46 %
 
                                       
Past Due 30-89 Days
                                       
Commercial Construction
  $     $     $     $     $ 2,500  
Residential Mortgage
    1,510       2,069       3,814       1,931       481  
Commercial Real Estate
    190       1,074       8,341       2,402       19  
Commercial and Industrial
    5,094       590       1,720       592       1,852  
Dairy & Livestock
          3,551                    
Consumer
    87       8       62       231       55  
 
                             
Total
  $ 6,881     $ 7,292     $ 13,937     $ 5,156     $ 4,907  
 
                             
 
                                       
% of Total Loans
    0.19 %     0.20 %     0.38 %     0.14 %     0.14 %
 
                                       
OREO
                                       
Residential Construction and Land
  $ 1,137     $ 1,789     $ 2,416     $ 6,158     $ 1,612  
Commercial Real Estate
          1,187       4,612       87        
Commercial and Industrial
          893       893              
Residential Mortgage
                745       320       315  
Consumer
          166                    
 
                             
Total
  $ 1,137     $ 4,035     $ 8,666     $ 6,565     $ 1,927  
 
                             
Total Non-Performing, Past Due & OREO
  $ 66,152     $ 62,592     $ 70,640     $ 29,405     $ 23,471  
 
                             
 
                                       
% of Total Loans
    1.84 %     1.73 %     1.93 %     0.79 %     0.65 %
     We had $58.1 million in non-performing loans at September 30, 2009, or 1.61% of total loans. This compares to $51.3 million in non-performing loans at June 30, 2009, $48.0 million in non-performing loans at March 31, 2009, $17.7 million in non-performing loans at December 31, 2008 and $16.6 million at September 30, 2008. Non-performing loans consist of $15.7 million in residential real estate construction and land loans, $19.6 million in commercial construction loans, $8.1 million in single-family mortgage loans, $13.5 million in commercial real estate loans, $1.1 million in other commercial loans and $0.1 million in consumer loans.
     The economic downturn has had an impact on our market area and on our loan portfolio. With the exception of assets discussed above, we are not aware of any other loans as of September 30, 2009 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in the loan being designated as non-performing at some future date. We can anticipate that there will be some losses in the loan portfolio given the current state of the economy. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, increase in general rates of interest, change in the financial conditions or business of a borrower may adversely affect a borrower’s ability to pay. See “Risk Management — Credit Risk” herein.
Deposits
     The primary source of funds to support earning assets (loans and investments) is the generation of deposits from our customer base. The ability to grow the customer base and subsequently deposits is a crucial element in the performance of the Company.
     At September 30, 2009, total deposits were $4.0 billion, representing an increase of $531.6 million, or 15.15%, over total deposits of $3.51 billion at December 31, 2008. The composition of deposits is as follows:

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    September 30, 2009     December 31, 2008  
    (Amounts in thousands)  
Non-interest bearing deposits
                               
Demand deposits
  $ 1,416,558       35.0 %   $ 1,334,248       38.0 %
Interest bearing deposits
                               
Savings Deposits
    1,399,838       34.7 %     1,143,779       32.6 %
Time deposits
    1,223,375       30.3 %     1,030,129       29.4 %
 
                       
Total deposits
  $ 4,039,771       100.0 %   $ 3,508,156       100.0 %
 
                       
     The amount of non-interest-bearing demand deposits in relation to total deposits is an integral element in achieving a low cost of funds. Demand deposits totaled $1.42 billion at September 30, 2009, representing an increase of $82.3 million, or 6.17%, over total demand deposits of $1.33 billion at December 31, 2008. Non-interest-bearing demand deposits represented 35.0% of total deposits as of September 30, 2009 and 38.0% of total deposits as of December 31, 2008.
     Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $1.40 billion at September 30, 2009, representing an increase of $256.0 million, or 22.39%, over savings deposits of $1.14 billion at December 31, 2008.
     Time deposits totaled $1.22 billion at September 30, 2009. This represented an increase of $193.2 million, or 18.76%, over total time deposits of $1.03 billion at December 31, 2008.
Other Borrowed Funds
     To achieve the desired growth in earning assets and to fully utilize our capital, we fund this growth through generating sources of funds other than deposits. The first source of funds we pursue is non-interest-bearing deposits (the lowest cost of funds to the Company). Next we pursue the growth in interest-bearing deposits and finally we supplement the growth in deposits with borrowed funds. Average borrowed funds, as a percent of average total funding (total deposits plus demand notes plus borrowed funds) was 32.77% as of September 30, 2009, as compared to 40.12% as of December 31, 2008.
     During 2009 and 2008, we entered into short-term borrowing agreements (borrowings with original maturities of one year or less) with the Federal Home Loan Bank (FHLB) and other institutions. The Bank had no outstanding balances under these agreements at September 30, 2009 and $776.5 million at December 31, 2008. The decrease is due to the repayment of short-term borrowings as a result of the increases in deposits and customer repurchase agreements during 2009. We also sold investment securities and used the proceeds from the sale to repay short-term borrowings. The weighted average annual interest rate on short-term borrowings was 1.39% at December 31, 2008. The FHLB holds certain investment securities and loans of the Bank as collateral for these borrowings.
     In June 2006, the Company purchased securities totaling $250.0 million. This purchase was funded by a repurchase agreement of $250.0 million with a double cap embedded in the repurchase agreement. The interest rate on this agreement is fixed at 4.95% and the maturity is September 30, 2012. In November 2006, we began a repurchase agreement product with our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day. These repurchase agreements are with customers who have other banking relationships with us. As of September 30, 2009 and December 31, 2008, total customer repurchases were $460.3 million and $357.8 million, respectively, with weighted average annual interest rates of 0.97% and 1.29%. As of September 30, 2009 and December 31, 2008, total funds borrowed under these agreements were $710.3 million and $607.8 million, respectively.

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     We also entered into long-term borrowing agreements (borrowings with original maturities of one year or longer) with the FHLB. We had outstanding balances of $950.0 million under these agreements at both September 30, 2009 and December 31, 2008. The weighted average annual interest rate was 4.09% at both September 30, 2009 and December 31, 2008, respectively. The FHLB holds certain investment securities and loans of the Bank as collateral for these borrowings.
     The Bank has an agreement, known as the Treasury Tax & Loan (“TT&L”) Note Option Program, with the Federal Reserve Bank and the U.S. Department of Treasury in which federal tax deposits made by depositors can be held by the bank until called (withdrawn) by the U.S. Department of Treasury. The maximum amount of accumulated federal tax deposits allowable to be held by the Bank, as set forth in the agreement, is $15.0 million. On September 30, 2009 and December 31, 2008 the amounts held by the Bank in the TT&L Note Option Program were $3.4 million and $5.4 million, collateralized by securities, respectively. Amounts are payable on demand.
     At September 30, 2009, borrowed funds totaled $1.67 billion, representing a decrease of $682.1 million, or 29.01%, from total borrowed funds of $2.35 billion at December 31, 2008.
Aggregate Contractual Obligations
     The following table summarizes our contractual commitments as of September 30, 2009:
                                         
            Maturity by Period  
            Less Than     One Year     Four Year     After  
            One     to Three     to Five     Five  
    Total     Year     Years     Years     Years  
            (amounts in thousands)  
Deposits
  $ 4,039,771     $ 4,026,737     $ 9,473     $ 448     $ 3,113  
Repurchase Agreements
    710,326       460,326       250,000              
FHLB and Other Borrowings
    958,441       403,441       100,000       450,000       5,000  
Junior Subordinated Debentures
    115,055                         115,055  
Deferred Compensation
    9,136       847       1,624       1,594       5,071  
Operating Leases
    25,286       4,697       7,386       4,352       8,851  
 
                             
Total
  $ 5,858,015     $ 4,896,048     $ 368,483     $ 456,394     $ 137,090  
 
                             
     Deposits represent non-interest bearing, money market, savings, NOW, certificates of deposits, brokered and all other deposits.
     Repurchase agreements represent amounts due to customers, in addition to, the repurchase agreement with J.P. Morgan.
     FHLB borrowings represent the amounts that are due to the Federal Home Loan Bank. These borrowings have fixed maturity dates. Other borrowings represent the amounts on FCB subordinated debt and TT&L.
     Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust I, CVB Statutory Trust II & CVB Statutory Trust III. The debentures have the same maturity as the Trust Preferred Securities. CVB Statutory Trust I, which matures in 2033, became callable in whole or in part in December 2008. CVB Statutory Trust II, which matures in 2034, became callable in whole or in part in January 2009. CVB Statutory Trust III, which matures in 2036, will become callable in whole or in part in 2011. It also represents FCB Capital Trust II which matures in 2033 and became callable in 2008. We have not called any of our debentures as of September 30, 2009.
     Deferred compensation primarily represents the amounts that are due to former employees’ salary continuation agreements as a result of acquisitions.

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     Operating leases represent the total minimum lease payments under noncancelable operating leases.
Off-Balance Sheet Arrangements
     At September 30, 2009, we had commitments to extend credit of approximately $559.5 million and obligations under letters of credit of $69.8 million and available lines of credit totaling $1.07 billion from certain institutions. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. The Bank uses the same credit underwriting policies in granting or accepting such commitments or contingent obligations as it does for on-balance-sheet instruments, which consist of evaluating customers’ creditworthiness individually. The Company has a reserve for undisbursed commitments of $6.0 million as of September 30, 2009 and $4.2 million as of December 31, 2008.
     Standby letters of credit written are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, the Bank holds appropriate collateral supporting those commitments.
     The following table summarizes the off-balance sheet arrangements at September 30, 2009:
                                         
            Maturity by Period  
            Less Than     One Year     Four Year     After  
            One     to Three     to Five     Five  
    Total     Year     Years     Years     Years  
2009         (Amounts in thousands)  
Commitment to extend credit
    559,537       184,353       48,096       45,920       281,168  
Obligations under letters of credit
    69,830       51,344       12,600       5,886        
 
                             
Total
  $ 629,367     $ 235,697     $ 60,696     $ 51,806     $ 281,168  
 
                             
Liquidity and Cash Flow
     Since the primary sources and uses of funds for the Bank are deposits and loans, the relationship between gross loans and total deposits provides a useful measure of the Bank’s liquidity. Typically, the closer the ratio of loans to deposits is to 100%, the more reliant the Bank is on its loan portfolio to provide for short-term liquidity needs. Since repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan to deposit ratio the less liquid are the Bank’s assets. For the first nine months of 2009, the Bank’s loan to deposit ratio averaged 95.08%, compared to an average ratio of 106.38% for the same period in 2008. The Bank’s ratio of loans to deposits and customer repurchases averaged 85.49% for the first nine months of 2009 and 95.69% for the same period in 2008.
     CVB is a company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations. Substantially all of CVB’s revenues are obtained from dividends declared and paid by the Bank. The remaining cash flow is from rents paid by third parties on office space in the Company’s corporate headquarters. CVB has demonstrated its own ability to raise additional funds in the capital markets. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. In addition, our regulators could limit the ability of the Bank or the Company to pay dividends or make other distributions. At September 30, 2009, approximately $106.0 million of the Bank’s equity was unrestricted and available to be paid as dividends to CVB. Management of CVB

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believes that such restrictions will not have an impact on the ability of CVB to meet its ongoing cash obligations.
     For the Bank, sources of funds normally include principal payments on loans and investments, other borrowed funds, and growth in deposits. Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and other operating expenses.
     Net cash provided by operating activities totaled $69.4 million for the first nine months of 2009, compared to $66.3 million for the same period last year. The increase in cash provided by operating activities is primarily attributed to a decrease in interest paid on deposits.
     Net cash provided by investing activities totaled $239.0 million for the first nine months of 2009, compared to net cash used in investing activities of $154.4 million for the same period in 2008. The increase in cash provided by investing activities was primarily the result of the sales and repayments of mortgage-backed securities and decrease in loans during the first nine months of 2009.
     Net cash used in financing activities totaled $181.5 million for the first nine months of 2009, compared to net cash provided by financing activities of $91.0 million for the same period last year. The increase in cash used was primarily due to repayment of FHLB advances and decrease in other borrowings, offset by increases in deposits. In addition, we raised $126.1 million in net proceeds from the issuance of common stock through an underwritten public offering. The proceeds, along with other funds were used to repurchase all of the preferred stock issued to the U.S. Treasury.
     At September 30, 2009, cash and cash equivalents totaled $222.2 million. This represented an increase of $129.7 million, or 140.38%, over a total of $92.4 million at September 30, 2008 and an increase of $126.9 million, or 133.12%, over a total of $95.3 million at December 31, 2008.
Capital Resources
     Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of capital. Although we are not one of the 19 large financial institutions required to conduct a forward-looking capital assessment, or “stress test,” pursuant to the U.S. Treasury’s Capital Assistance Program (CAP), the stress assessment requirements under the CAP or similar requirements could be extended or otherwise impact financial institutions beyond the 19 participating institutions, including us. As a result, we could determine independently or, our regulators could require us, to raise additional capital.
     During the third quarter we raised $132.5 million in gross proceeds ($126.1 million in net proceeds) from the issuance of common stock in an underwritten public offering. The net proceeds were used, along with other funds, to repurchase the preferred stock issued to the United States Treasury as part of our participation in the Capital Purchase Program.
     The Bank and the Company are required to meet risk-based capital standards set by their respective regulatory authorities. The risk-based capital standards require the achievement of a minimum ratio of total capital to risk-weighted assets of 8.0% (of which at least 4.0% must be Tier 1 capital). In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered “well-capitalized” for bank regulatory purposes, the Bank and the Company are required to have a Tier 1 risk-based capital ratio equal to or greater than 6%, a total risk-based capital ratio equal to or greater than 10% and a Tier 1 leverage ratio equal to or greater than 5%. At September 30, 2009, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes.

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     The Company’s equity capital was $651.5 million at September 30, 2009. This represented an increase of $36.6 million, or 5.96%, over equity capital of $614.9 million at December 31, 2008. The increase was due primarily to the net earnings for the first nine months of 2009 in the amount of $48.3 million and the increase in unrealized gain on securities available-for-sale, net of tax, of $18.2 million, offset by total common and preferred dividends of $27.5 million. The Company’s 2008 Annual Report on Form 10-K (Management’s Discussion and Analysis and Note 16 of the accompanying financial statements) describes the regulatory capital requirements of the Company and the Bank. Common stock holders are entitled to receive dividends declared by the Board of Directors out of funds legally available for such payment. Although we have historically paid cash dividends on our common stock, we are not required to do so and our Board of Directors could reduce or eliminate our common stock dividend in the future.
     The table below presents the Company’s and the Bank’s risk-based and leverage capital ratios as of September 30, 2009, and December 31, 2008.
                                         
    Required        
    Minimum   September 30, 2009   December 31, 2008
Capital Ratios   Ratios   Company   Bank   Company   Bank
Risk-based capital ratios:
                                       
Tier I
    4.00 %     15.3 %     15.2 %     14.2 %     13.9 %
Total
    8.00 %     16.6 %     16.5 %     15.5 %     15.2 %
Leverage ratio
    4.00 %     10.1 %     10.1 %     9.8 %     9.7 %
Tangible Capital Ratio
            9.1 %     10.8 %     8.5 %     10.1 %
RISK MANAGEMENT
     We have adopted a Risk Management Plan to ensure the proper control and management of all risk factors inherent in the operation of the Company and the Bank. Specifically, credit risk, interest rate risk, liquidity risk, transaction risk, compliance risk, strategic risk, reputation risk, price risk and foreign exchange risk, can all affect the market risk exposure of the Company. These specific risk factors are not mutually exclusive. It is recognized that any product or service offered by us may expose the Bank to one or more of these risks. Our Risk Management Committee and Risk Management Department monitors these risks to minimize exposure to the Company.
Credit Risk
     Credit risk is defined as the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counter party, issuer, or borrower performance. Credit risk arises through the extension of loans and leases, certain securities, and letters of credit.
     Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Bank’s policy statements. In addition, certain securities carry insurance to enhance credit quality of the bond. Limitations on industry concentration, aggregate customer borrowings, geographic boundaries and standards on loan quality also are designed to reduce loan credit risk. Senior Management, Directors’ Committees, and the Board of Directors are provided with information to appropriately identify, measure, control and monitor the credit risk of the Bank.
     Implicit in lending activities is the risk that losses will occur and that the amount of such losses will vary over time. Consequently, we maintain an allowance for credit losses by charging a provision for credit losses to earnings. Loans determined to be losses are charged against the allowance for credit losses. Our allowance for credit losses is maintained at a level considered by us to be adequate to provide for estimated probable losses inherent in the existing portfolio.

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     The allowance for credit losses is based upon estimates of probable losses inherent in the loan and lease portfolio. The nature of the process by which we determine the appropriate allowance for credit losses requires the exercise of considerable judgment. The amount actually observed in respect of these losses can vary significantly from the estimated amounts. We employ a systematic methodology that is intended to reduce the differences between estimated and actual losses.
     Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers all loans. The systematic methodology consists of two major elements.
     The first major element includes a detailed analysis of the loan portfolio in two phases. In the first phase, individual loans are reviewed to identify loans for impairment. A loan is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan. Impairment is measured as either the expected future cash flows discounted at each loan’s effective interest rate, the fair value of the loan’s collateral if the loan is collateral dependent, or an observable market price of the loan (if one exists). Upon measuring the impairment, we will ensure an appropriate level of allowance is present or established.
     Central to the first phase of our credit risk management is its loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is reviewed and possibly changed by Credit Management. The risk rating is based primarily on a thorough analysis of each borrower’s financial capacity in conjunction with industry and economic trends. Credit approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and Credit Management personnel. Credits are monitored by line and Credit Management personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.
     Loans are risk rated into the following categories: Pass, Special Mention, Substandard, Doubtful, and Loss. Each of these groups is assessed and appropriate amounts used in determining the adequacy of our allowance for losses. The Impaired and Doubtful loans are analyzed on an individual basis for allowance amounts. The other categories have formulae used to determine the needed allowance amount.
     The Bank obtains a quarterly independent credit review by engaging an outside party to review our loans. The primary purpose of this review is to evaluate our existing loan ratings and provide an assessment as to the effectiveness of our allowance process.
     Based on the risk rating system, specific allowances are established in cases where we have identified significant conditions or circumstances related to a credit that we believe indicates the probability that a loss has been incurred. We perform a detailed analysis of these loans, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. We then determine the inherent loss potential and allocate a portion of the allowance for losses as a specific allowance for each of these credits.
     The second phase is conducted by evaluating or segmenting the remainder of the loan portfolio into groups or pools of loans with similar characteristics in accordance with SFAS No. 5, “Accounting for Contingencies.” In this second phase, groups or pools of homogeneous loans are reviewed to determine a portfolio formula allowance. In the case of the portfolio formula allowance, homogeneous portfolios, such as small business loans, consumer loans, agricultural loans, and real estate loans, are aggregated or pooled in determining the appropriate allowance. The risk assessment process in this case emphasizes trends in the different portfolios for delinquency, loss, and other-behavioral characteristics of the subject portfolios.
     The second major element in our methodology for assessing the appropriateness of the allowance consists of our considerations of all known relevant internal and external factors that may affect a loan’s collectability. This includes our estimates of the amounts necessary for concentrations, economic

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uncertainties, the volatility of the market value of collateral, and other relevant factors. The relationship of the two major elements of the allowance to the total allowance may fluctuate from period to period.
     In the second major element of the analysis which considers all known relevant internal and external factors that may affect a loan’s collectability, we perform an evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed as of the balance sheet date:
    then-existing general economic and business conditions affecting the key lending areas of the Company,
 
    then-existing economic and business conditions of areas outside the lending areas, such as other sections of the United States, Asia and Latin America,
 
    credit quality trends (including trends in non-performing loans expected to result from existing conditions),
 
    collateral values
 
    loan volumes and concentrations,
 
    seasoning of the loan portfolio,
 
    specific industry conditions within portfolio segments,
 
    recent loss experience in particular segments of the portfolio,
 
    duration of the current business cycle,
 
    bank regulatory examination results and
 
    findings of the Company’s external credit examiners.
     We review these conditions in discussion with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, our estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, our evaluation of the inherent loss related to such condition is reflected in the second major element of the allowance. Although we have allocated a portion of the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety.
     Table 7 presents a comparison of net credit losses, the provision for credit losses (including adjustments incidental to mergers), and the resulting allowance for credit losses for the nine months ended September 30, 2009 and 2008.

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TABLE 7 — Summary of Credit Loss Experience
                 
    Nine months ended September 30,  
    2009     2008  
    (amounts in thousands)  
Amount of Total Loans at End of Period (1)
  $ 3,600,087     $ 3,595,337  
 
           
Average Total Loans Outstanding (1)
  $ 3,646,862     $ 3,459,916  
 
           
Allowance for Credit Losses:
               
Beginning of Period
  $ 53,960     $ 33,049  
Loans Charged-Off:
               
Construction Loans
    18,769        
Real Estate Loans
    817       888  
Commercial and Industrial
    2,315       546  
Lease Financing Receivables
    294       318  
Consumer Loans
    167       240  
 
           
Total Loans Charged-Off
    22,362       1,992  
 
           
 
               
Recoveries:
               
Real Estate Loans
    471       192  
Commercial and Industrial
    40       20  
Lease Financing Receivables
    189       10  
Consumer Loans
    18       79  
 
           
Total Loans Recovered
    718       301  
Net Loans Charged-Off
    21,644       1,691  
 
           
Provision Charged to Operating Expense
    55,000       8,700  
 
           
Allowance for Credit Losses at End of period
  $ 87,316     $ 40,058  
 
           
 
(1)   Net of deferred loan fees
                 
Net Loans Charged-Off to Average Total Loans
    0.59 %     0.05 %
Net Loans Charged-Off to Total Loans at End of Period
    0.60 %     0.05 %
Allowance for Credit Losses to Average Total Loans
    2.39 %     1.16 %
Allowance for Credit Losses to Total Loans at End of Period
    2.43 %     1.11 %
Net Loans Charged-Off to Allowance for Credit Losses
    24.79 %     4.22 %
Net Loans Charged-Off to Provision for Credit Losses
    39.35 %     19.44 %
     While we believe that the allowance at September 30, 2009, was adequate to absorb losses from any known or inherent risks in the portfolio, no assurance can be given that economic conditions or natural disasters which adversely affect the Company’s service areas or other circumstances or conditions, including those identified above, will not be reflected in increased provisions or credit losses in the future.

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
     In the normal course of our business activities, we are exposed to market risks, including price and liquidity risk. Market risk is the potential of loss from adverse changes in market rates and prices, such as interest rates (interest rate risk). Liquidity risk arises from the possibility that we may not be able to satisfy current or future commitments or that we may be more reliant on alternative funding sources such as long-term debt. Financial products that expose us to market risk include securities, loans, deposits, debts and derivative financial instruments.
Counterparty Risk
     Recent developments in the financial markets have placed an increased awareness of Counterparty Risks. These risks occur when a financial institution has an indebtedness or potential for indebtedness to another financial institution. We have assessed our Counterparty Risk at the end of the third quarter with the following results:
    We have $250 million in a repurchase agreement with an embedded double cap. We entered into this transaction in September 2006 to protect against rising interest rates. The repurchase agreement is with JP Morgan. The Moody’s public debt rating for this institution is Aa3.
 
    We do not have any investments in the preferred stock of any other company.
 
    We do not have in our investment portfolio any trust preferred securities of any other company.
 
    All of our investment securities are either municipal securities or securities backed by mortgages, FNMA, FHLMC or FHLB.
 
    All of our commercial line insurance policies are with companies with the highest AM Best ratings of AXII or above.
 
    We have no significant counterparty exposure related to derivatives such as interest rate swaps.
 
    We have no significant exposure to our Cash Surrender Value of Life insurance since most of the insurance companies carry an AM Best rating of A or greater.
 
    We have $280.0 million in Fed Funds lines of credit with other banks. All of these banks are major U.S. banks, with over $15.0 billion in assets. We rely on these funds for overnight borrowings. We currently have no outstanding Fed Funds balances.
Interest Rate Risk
     During periods of changing interest rates, the ability to reprice interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in the Bank’s service area. Short-term repricing risk is minimized by controlling the level of floating rate loans and maintaining a downward sloping ladder of bond payments and maturities. Basis risk is managed by the timing and magnitude of changes to interest-bearing deposit rates. Yield curve risk is reduced by keeping the duration of the loan and bond portfolios balanced to attempt to minimize the risks of rising or falling yields. Options risk in the bond portfolio is monitored monthly and actions are recommended when appropriate.
     We monitor the interest rate “sensitivity” risk to earnings from potential changes in interest rates using various methods, including a maturity/repricing gap analysis. This analysis measures, at specific time intervals, the differences between earning assets and interest-bearing liabilities for which repricing opportunities will occur. A positive difference, or gap, indicates that earning assets will reprice faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates, and a lower net interest margin during periods of declining interest rates. Conversely,

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a negative gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates.
     The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans. In addition, the magnitude of changes in the rates charged on loans is not always proportionate to the magnitude of changes in the rates paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest-bearing liabilities. In general, whether we report a positive gap in the short-term period or negative gap in the long-term period does not necessarily indicate that, if interest rates decreased, net interest income would increase, or if interest rates increased, net interest income would decrease.
     Approximately $1.5 billion, or 65%, of the total investment portfolio at September 30, 2009 consisted of securities backed by mortgages. The final maturity of these securities can be affected by the speed at which the underlying mortgages repay. Mortgages tend to repay faster as interest rates fall, and slower as interest rates rise. As a result, we may be subject to a “prepayment risk” resulting from greater funds available for reinvestment at a time when available yields are lower. Conversely, we may be subject to “extension risk” resulting from lesser amounts available for reinvestment at a time when available yields are higher. Prepayment risk includes the risk associated with the payment of an investment’s principal faster than originally intended. Extension risk is the risk associated with the payment of an investment’s principal over a longer time period than originally anticipated. In addition, there can be greater risk of price volatility for mortgage-backed securities as a result of anticipated prepayment or extension risk.
     We also utilize the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of our net interest income is measured over a rolling two-year horizon.
     The simulation model estimates the impact of changing interest rates on the interest income from all interest-earning assets and the interest expense paid on all interest-bearing liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and 100 basis point downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed.
     The following depicts the Company’s net interest income sensitivity analysis as of September 30, 2009:
     
    Estimated Net
Simulated   Interest Income
Rate Changes   Sensitivity
+ 200 basis points
  ( 3.76% )
- 100 basis points
  0.11%
     The Company is currently more liability sensitive. The estimated sensitivity does not necessarily represent our forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.
Liquidity Risk

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     Liquidity risk is the risk to earnings or capital resulting from our inability to meet our obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect our ability to liquidate assets quickly and with minimum loss of value. Factors considered in liquidity risk management are stability of the deposit base; marketability, maturity, and pledging of investments; and the demand for credit.
     In general, liquidity risk is managed daily by controlling the level of fed funds and the use of funds provided by the cash flow from the investment portfolio. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal Reserve Bank. The sale of bonds maturing in the near future can also serve as a contingent source of funds. Increases in deposit rates are considered a last resort as a means of raising funds to increase liquidity.
Transaction Risk
     Transaction risk is the risk to earnings or capital arising from problems in service or product delivery. This risk is significant within any bank and is interconnected with other risk categories in most activities throughout the Bank. Transaction risk is a function of internal controls, information systems, associate integrity, and operating processes. It arises daily throughout the Bank as transactions are processed. It pervades all divisions, departments and branches and is inherent in all products and services we offer.
     In general, transaction risk is defined as high, medium or low by the internal auditors during the audit process. The audit plan ensures that high-risk areas are reviewed at least annually. We utilize a third party audit firm to provide internal audit services.
     The key to monitoring transaction risk is in the design, documentation and implementation of well-defined procedures. All transaction related procedures include steps to report events that might increase transaction risk. Dual controls are also a form of monitoring.
Compliance Risk
     Compliance risk is the risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain Bank products or activities of the Bank’s customers may be ambiguous or untested. Compliance risk exposes us to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk can also lead to a diminished reputation, reduced business value, limited business opportunities, lessened expansion potential, and lack of contract enforceability.
     There is no single or primary source of compliance risk. It is inherent in every Bank activity. Frequently, it blends into operational risk and transaction processing. A portion of this risk is sometimes referred to as legal risk. This is not limited solely to risk from failure to comply with consumer protection laws; it encompasses all laws, as well as prudent ethical standards and contractual obligations. It also includes the exposure to litigation from all aspects of banking, traditional and non-traditional.
     Our Risk Management Policy and Program and the Code of Ethical Conduct are the cornerstone for controlling compliance risk. An integral part of controlling this risk is the proper training of associates. The Chief Risk Officer is responsible for developing and executing a comprehensive compliance training program. The Chief Risk Officer will ensure that each associate receives adequate training with regard to their position to ensure that laws and regulations are not violated. All associates who deal in compliance high risk areas are trained to be knowledgeable about the level and severity of exposure in those areas and the policies and procedures in place to control such exposure.
     Our Risk Management Policy and Program includes an audit program aimed at identifying problems and ensuring that problems are corrected. The audit program includes two levels of review. One is in-

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depth audits performed by an external firm and the other is periodic monitoring performed by the Risk Management Division.
     The Bank utilizes an external firm to conduct compliance audits as a means of identifying weaknesses in the compliance program itself. The external firm’s audit plan includes a periodic review of each branch and department of the Bank.
     The branch or department that is the subject of an audit is required to respond to the audit and correct any violations noted. The Chief Risk Officer will review audit findings and the response provided by the branch or department to identify areas which pose a significant compliance risk.
     The Risk Management Division conducts periodic monitoring of our compliance efforts with a special focus on those areas that expose us to compliance risk. The purpose of the periodic monitoring is to ensure that our associates are adhering to established policies and procedures adopted by the Bank. The Chief Risk Officer will notify the appropriate department head and the Management Compliance Committee, the Audit Committee and the Risk Management Committee of any violations noted. The branch or department that is the subject of the review will be required to respond to the findings and correct any noted violations.
     The Bank recognizes that customer complaints can often identify weaknesses in our compliance program which could expose the Bank to risk. Therefore, all complaints are given prompt attention. Our Risk Management Policy and Program includes provisions on how customer complaints are to be addressed. The Chief Risk Officer reviews all complaints to determine if a significant compliance risk exists and communicates those findings to the Risk Management Committee.
Strategic Risk
     Strategic risk is the risk to earnings or capital arising from adverse decisions or improper implementation of strategic decisions. This risk is a function of the compatibility between an organization’s goals, the resources deployed against those goals and the quality of implementation.
     Strategic risks are identified as part of the strategic planning process. Offsite strategic planning sessions are held annually. The strategic review consists of an economic assessment, competitive analysis, industry outlook and legislative and regulatory review.
     A primary measurement of strategic risk is peer group analysis. Key performance ratios are compared to three separate peer groups to identify any sign of weakness and potential opportunities. The peer group consists of:
  1.   All banks of comparable size
 
  2.   High performing banks
 
  3.   A list of specific banks
     Another measure is the comparison of the actual results of previous strategic initiatives against the expected results established prior to implementation of each strategy.
     The corporate strategic plan is formally presented to all branch managers and department managers at an annual leadership conference.
Reputation Risk
     Reputation risk is the risk to capital and earnings arising from negative public opinion. This affects our ability to establish new relationships or services, or continue servicing existing relationships. It can expose us to litigation and, in some instances, financial loss.

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Price and Foreign Exchange Risk
     Price risk arises from changes in market factors that affect the value of traded instruments. Foreign exchange risk is the risk to earnings or capital arising from movements in foreign exchange rates.
     Our current exposure to price risk is nominal. We do not have trading accounts. Consequently, the level of price risk within the investment portfolio is limited to the need to sell securities for reasons other than trading. The section of this policy pertaining to liquidity risk addresses this risk.
     We maintain deposit accounts with various foreign banks. Our Interbank Liability Policy limits the balance in any of these accounts to an amount that does not present a significant risk to our earnings from changes in the value of foreign currencies.
     Our asset liability model calculates the market value of the Bank’s equity. In addition, management prepares on a monthly basis a Capital Volatility report that compares changes in the market value of the investment portfolio.
     The Balance Sheet Management Policy requires the submission of a Fair Value Matrix Report to the Balance Sheet Management Committee on a quarterly basis. The report calculates the economic value of equity under different interest rate scenarios, revealing the level or price risk of the Bank’s interest sensitive asset and liability portfolios.
ITEM 4. CONTROLS AND PROCEDURES
     As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
     During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     Not Applicable
ITEM 1A. RISK FACTORS
     We may be required to make additional provisions for loan losses and charge off additional loans in the future, which could adversely affect our results of operations.
     For the nine months ended September 30, 2009, we recorded a $55.0 million provision for credit losses and charged-off $22.4 million in loans, net of $718,000 of recoveries. There has been a significant slowdown in the real estate markets in portions of Los Angeles, Riverside, San Bernardino and Orange counties and the Central Valley area of California where a majority of our loan customers, including our largest borrowing relationships, are based. This slowdown reflects declining prices in real estate, excess inventories of homes and increasing vacancies in commercial and industrial properties, all of which have contributed to financial strain on real estate developers and suppliers. As of September 30, 2009, we had $2.3 billion in real estate loans and $295.3 million in construction loans. Continuing deterioration in the real estate market could affect the ability of our loan customers, including our largest borrowing relationships, to service their debt, which could result in loan charge-offs and provisions for credit losses in the future, which could have a material adverse effect on our financial condition, net income and capital.
     We may engage in FDIC-assisted transactions, which could present additional risks to our business.
     On October 16, 2009, we acquired substantially all of the assets and assumed substantially all of the liabilities of San Joaquin Bank from the FDIC. We may have opportunities to acquire the assets and liabilities of additional failed banks in FDIC-assisted transactions. Although these FDIC-assisted transactions typically provide for FDIC assistance to an acquiror to mitigate certain risks, such as sharing exposure to loan losses and providing indemnification against certain liabilities of the failed institution, we are (and would be in future transactions) subject to many of the same risks we would face in acquiring another bank in a negotiated transaction, including risks associated with maintaining customer relationships and failure to realize the anticipated acquisition benefits in the amounts and within the timeframes we expect. In addition, because these acquisitions are structured in a manner that would not allow us the time and access to information normally associated with preparing for and evaluating a negotiated acquisition, we may face additional risks in FDIC-assisted transactions, including additional strain on management resources, management of problem loans, problems related to integration of personnel and operating systems and impact to our capital resources requiring us to raise additional capital. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with FDIC-assisted transactions. Our inability to overcome these risks could have a material adverse effect on our business, financial condition and net income.
     Except as described above, there are no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008. The materialization of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form 10-K and any subsequent Form 10-Q or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General” in this Quarterly Report on Form 10-Q.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     We did not repurchase any common stock during the nine months ended September 30, 2009. Our Board of Directors has authorized the repurchase of up to 10,000,000 shares of our common stock, all of which remain to be repurchased at September 30, 2009. In September 2009, we repurchased 130,000 shares of our Series B Preferred Stock which we issued to the United States government as part of our participation in the TARP program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     Not Applicable
ITEM 5. OTHER INFORMATION
     Not Applicable

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ITEM 6. EXHIBITS
     
Exhibit No.   Description of Exhibits
 
   
10.1
  Employment Agreement, dated September 16, 2009, by and between CVB Financial Corp., Citizens Business Bank and Mr. Christopher D. Myers (1)
 
   
10.2
  Amendment No. 1 to 2008 Equity Incentive Plan (1)
 
   
10.3
  (a) Letter Agreement between the Company and the U.S. Treasury, dated September 2, 2009 (2)
 
   
10.3
  (b) Letter Agreement between the Company and the U.S. Treasury, dated August 26, 2009 (3)
 
   
31.1
  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
(1)   Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on September 22, 2009.
 
(2)   Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on September 3, 2009.
 
(3)   Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on September 1, 2009.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  CVB FINANCIAL CORP.
(Registrant)
 
 
Date: November 5, 2009  /s/ Edward J. Biebrich Jr.    
  Edward J. Biebrich Jr.   
  Chief Financial Officer   
 

63

exv31w1
Exhibit 31.1
CERTIFICATION
     I, Christopher D. Myers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CVB Financial Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: November 5, 2009  /s/ Christopher D. Myers    
  Christopher D. Myers   
  Chief Executive Officer   

 

exv31w2
         
Exhibit 31.2
CERTIFICATION
     I, Edward J. Biebrich, Jr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CVB Financial Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: November 5, 2009  /s/ Edward J. Biebrich, Jr.    
  Edward J. Biebrich, Jr.   
  Chief Financial Officer   

2

exv32w1
         
Exhibit 32.1
CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the Quarterly Report of CVB Financial Corp. (the “Company”) on Form 10-Q for the period ended September 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher D. Myers, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:
  (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
Date: November 5, 2009  /s/ Christopher D. Myers    
  Christopher D. Myers   
  Chief Executive Officer   

3

exv32w2
         
Exhibit 32.2
CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the Quarterly Report of CVB Financial Corp. (the “Company”) on Form 10-Q for the period ended September 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edward J. Biebrich, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:
  (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
Date: November 5, 2009  /s/ Edward J. Biebrich Jr.    
  Edward J. Biebrich Jr.   
  Chief Financial Officer   
 

4