UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2005

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

For the transition period from                      to                     

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)

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

     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: 61,128,724 outstanding as of November 2, 2005.

 

 

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

TABLE OF CONTENTS

FORM 10-Q

PART I — FINANCIAL INFORMATION (UNAUDITED

ITEM 1. FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

GENERAL

OVERVIEW

CRITICAL ACCOUNTING POLICIES

ANALYSIS OF THE RESULTS OF OPERATIONS

ANALYSIS OF FINANCIAL CONDITION

RISK MANAGEMENT

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS

SIGNATURES

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

Exhibit 32.2

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,
		2005				2004
ASSETS
Investment securities available-for-sale		$	2,255,176			$	2,085,014
Interest-bearing balances due from depository institutions			8,905				—
Investment in stock of Federal Home Loan Bank (FHLB)			69,994				53,565
Loans and lease finance receivables			2,375,226				2,140,074
Allowance for credit losses			(24,237	)			(22,494	)
Total earning assets			4,685,064				4,256,159
Cash and due from banks			132,741				84,400
Premises and equipment, net			39,823				33,508
Intangibles			13,062				6,136
Goodwill			28,735				19,580
Cash value life insurance			71,232				68,233
Accrued interest receivable			22,203				18,391
Deferred tax asset			16,977				4,409
Other assets			10,327				20,195
TOTAL ASSETS		$	5,020,164			$	4,511,011
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	1,424,623			$	1,322,255
Interest-bearing			1,788,715				1,552,784
Total deposits			3,213,338				2,875,039
Demand Note to U.S. Treasury			1,529				6,453
Short-term borrowings			557,000				356,000
Long-term borrowings			755,000				830,000
Accrued interest payable			9,977				8,809
Deferred compensation			7,098				7,685
Junior subordinated debentures			82,476				82,476
Other liabilities			56,571				27,066
TOTAL LIABILITIES			4,682,989				4,193,528
COMMITMENTS AND CONTINGENCIES
Stockholders’ Equity:
Preferred stock (authorized, 20,000,000 shares without par; none issued or outstanding)			—				—
Common stock (authorized, 97,656,250 shares without par; issued and outstanding 61,107,359 (2005) and 60,464,579 (2004))			252,208				236,277
Retained earnings			93,252				72,314
Accumulated other comprehensive income (loss), net of tax			(8,285	)			8,892
Total stockholders’ equity			337,175				317,483
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	5,020,164			$	4,511,011

See accompanying notes to the consolidated financial statements.

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

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2005				2004				2005				2004
Interest income:
Loans, including fees		$	38,777			$	30,061			$	107,089			$	83,447
Investment securities:
Taxable			18,994				17,823				56,594				48,250
Tax-preferred			4,989				3,636				13,874				11,262
Total investment income			23,983				21,459				70,468				59,512
Dividends from FHLB stock			675				500				1,813				1,460
Federal funds sold			—				1				2				3
Interest bearing deposits with other institutions			74				—				207				—
Total interest income			63,509				52,021				179,579				144,422
Interest expense:
Deposits			7,539				3,863				18,848				11,151
Short-term borrowings			8,775				5,006				14,021				7,151
Long-term borrowings			2,828				1,832				16,524				10,671
Junior subordinated debentures			1,347				1,344				3,992				4,004
Total interest expense			20,489				12,045				53,385				32,977
Net interest income before provision for credit losses			43,020				39,976				126,194				111,445
Provision for credit losses			—				—				—				—
Net interest income after provision for credit losses			43,020				39,976				126,194				111,445
Other operating income:
Service charges on deposit accounts			3,477				3,240				9,770				10,544
Financial Advisory services			1,741				1,345				4,929				4,420
Bankcard services			631				525				1,867				1,351
BOLI income			633				539				2,218				1,000
Other			1,379				1,863				3,494				4,077
Gain(loss) on sale of securities, net			—				7				(46	)			5,219
Impairment charge on investment securities			—				—				—				(6,300	)
Total other operating income			7,861				7,519				22,232				20,311
Other operating expenses:
Salaries and employee benefits			13,136				11,970				39,424				35,323
Occupancy			2,091				2,281				6,048				5,961
Equipment			1,727				1,896				5,583				5,607
Stationary and supplies			1,495				1,212				4,035				3,616
Professional services			1,047				907				3,267				3,030
Promotion			1,118				1,064				4,486				3,824
Amortization of intangibles			588				296				1,473				889
Other			1,913				2,126				2,911				6,010
Total other operating expenses			23,115				21,752				67,227				64,260
Earnings before income taxes			27,766				25,743				81,199				67,496
Income taxes			9,499				8,668				27,753				22,898
Net earnings		$	18,267			$	17,075			$	53,446			$	44,598
Basic earnings per common share		$	0.30			$	0.28			$	0.87			$	0.74
Diluted earnings per common share		$	0.30			$	0.28			$	0.87			$	0.73
Cash dividends per common share		$	0.11			$	0.13			$	0.33			$	0.37

See accompanying notes to the consolidated financial statements.

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

														Accumulated
														Other
		Common												Comprehensive
		Shares				Common				Retained				Income (Loss),				Comprehensive
		Outstanding				Stock				Earnings				Net of Tax				Income (Loss)
										(amounts and shares in thousands)
Balance January 1, 2004			48,289			$	232,959			$	36,482			$	17,280
Issuance of common stock			345				1,281
5-for-4 stock split			12,132
Repurchase of common stock			(100	)			(159	)			(1,833	)
Tax benefit from exercise of stock options							2,196
Cash dividends											(23,821	)
Comprehensive income:
Net earnings											61,486							$	61,486
Other comprehensive income(loss):
Unrealized loss on securities available-for-sale, net of taxes $6,074															(8,388	)			(8,388	)
Comprehensive income																		$	53,098
Balance December 31, 2004			60,666				236,277				72,314				8,892
Issuance of common stock			421				1,601
Repurchase of common stock			(676	)			(863	)			(11,423	)
Shares issued for acquisition of Granite State Bank			696				13,427
Tax benefit from exercise of stock options							1,766
Cash dividends											(21,085	)
Comprehensive income:
Net earnings											53,446							$	53,446
Other comprehensive income(loss):
Unrealized loss on securities available-for-sale, net of taxes $ 12,438															(17,177	)			(17,177	)
Comprehensive income																		$	36,269
Balance September 30, 2005			61,107			$	252,208			$	93,252			$	(8,285	)

     The Company reported net unrealized losses on securities available-for-sale of $1.8 million, net of $1.3 million of tax for the nine months ended September 30, 2004. Accumulated other comprehensive income as of September 30, 2004 was $15.5 million. Comprehensive income for the nine months ended September 30, 2004 was $42.8 million. Comprehensive income for the three months ended September 30, 2005 and 2004 was $6.7 million and $35.4 million, respectively.

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

		For the Nine Months
		Ended September 30,
		2005				2004
		(Dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received		$	179,076			$	150,186
Service charges and other fees received			22,277				20,932
Interest paid			(52,308	)			(32,674	)
Cash paid to suppliers and employees			(64,571	)			(58,535	)
Income taxes paid			(22,100	)			(18,196	)
Net cash provided by operating activities			62,374				61,713
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities trading			—				20,685
Proceeds from sales of investment securities available-for-sale			—				63,756
Proceeds from sales of MBS			126,598				—
Proceeds from repayment of MBS			316,067				334,334
Proceeds from repayment of investment securities available-for-sale			67				—
Proceeds from maturity of investment securities			10,346				25,945
Purchases of investment securities trading			—				(20,678	)
Purchases of investment securities available-for-sale			(90,090	)			(47,517	)
Purchases of MBS			(525,168	)			(564,421	)
Purchases of FHLB stock			(16,428	)			(15,473	)
Net increase in loans			(162,757	)			(245,476	)
Proceeds from sales of premises and equipment			18				4,390
Purchase of premises and equipment			(10,021	)			(3,093	)
Purchase of Granite State Bank			12,232				—
Purchase of Bank Owned Life Insurance			—				(50,000	)
Other investing activities			—				(5,037	)
Net cash used in investing activities			(339,136	)			(502,585	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in transaction deposits			199,058				271,902
Net increase (decrease) in time deposits			36,739				(64,414	)
Advances from Federal Home Loan Bank			370,000				420,000
Repayment of advances from Federal Home Loan Bank			(106,000	)			(67,000	)
Net increase in short-term borrowings			(142,924	)			(96,081	)
Cash dividends on common stock			(21,085	)			(17,948	)
Repurchase of common stock			(12,286	)			(1,992	)
Proceeds from exercise of stock options			1,601				522
Net cash provided by financing activities			325,103				444,989
NET INCREASE IN CASH AND CASH EQUIVALENTS			48,341				4,117
CASH AND CASH EQUIVALENTS, beginning of period			84,400				112,008
CASH AND CASH EQUIVALENTS, end of period		$	132,741			$	116,125

See accompanying notes to the consolidated financial statements.

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

		For the Nine Months
		Ended September 30,
		2005				2004
		(Dollar amounts in thousands)
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net earnings		$	53,446			$	44,598
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain/(loss) on sale of investment securities			46				(5,219	)
Gain on sale of premises and equipment			(1	)			(101	)
Impairment charge on investment securities			—				6,300
Increase in cash value of life insurance			(1,674	)			(1,000	)
Net amortization of premiums on investment securities			6,976				11,143
Depreciation and amortization			6,274				5,433
Change in accrued interest receivable			(3,528	)			(1,598	)
Change in accrued interest payable			1,078				364
Change in other assets and liabilities			(243	)			1,793
Total adjustments			8,928				17,115
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	62,374			$	61,713
Supplemental Schedule of Noncash Investing and Financing Activities
Purchase of Granite State Bank:
Assets acquired		$	85,898
Goodwill			9,155
Intangible assets			8,399
Liabilities assumed			(102,257	)
Stock issued			(13,427	)
Purchase price of acquisition, net of cash received		$	(12,232	)
Securities purchased and not settled		$	33,441			$	—

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the nine months ended September 30, 2005 and 2004

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying condensed consolidated unaudited financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q, 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, 2005 are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 filed with the Securities and Exchange Commission. In the opinion of management, the accompanying condensed consolidated unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.

     Principles of Consolidation - The consolidated financial statements include the accounts of CVB Financial Corp. (the “Company”) and its wholly owned subsidiaries: Citizens Business Bank (the “Bank”) and the Bank’s wholly owned subsidiary, Golden West Enterprises, Inc.; Community Trust Deed Services; CVB Ventures, Inc.; Chino Valley Bancorp; and ONB Bancorp after elimination of all intercompany transactions and balances. The Company is also the common stockholder of CVB Statutory Trust I and CVB Statutory Trust II, which were created in December 2003 to issue trust preferred securities in order to raise capital for the Company. In accordance with Financial Accounting Standards Board Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN No. 46R”), these trusts are not included in the consolidated financial statements.

     Nature of Operations - The Company’s primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank has one subsidiary, Golden West Enterprises, Inc., located in Costa Mesa, California, which provides automobile and equipment leasing, dealer financing, and brokers mortgage loans. The Bank also provides trust services to customers through its Financial Advisory Services Division and Business Financial Centers (branch offices). The Bank’s customers consist primarily of small to mid-sized businesses and professionals located in the Inland Empire, San Gabriel Valley, Orange County, Madera County, Fresno County, Tulare County, and Kern County areas of California. The Bank operates 40 Business Financial Centers with its headquarters located in the city of Ontario. Segment reporting is not presented since the Company’s revenue is attributed to a single reportable segment.

     Investment Securities - The Company classifies as held-to-maturity those debt securities that the Company has the positive intent and ability to hold to maturity. Securities classified as trading are those securities that are bought and held principally for the purpose of selling them in the near term. All other debt and equity securities are classified as available-for-sale. Securities held-to-maturity are accounted for at cost and adjusted for amortization of premiums and accretion of discounts. Trading securities are accounted for at fair value with the unrealized holding gains and losses being included in current earnings. Available-for-sale securities are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate component of stockholders’ equity. At each reporting date, available-for-sale securities are assessed to determine whether there is an other-than

temporary impairment. Such impairment, if any, is required to be recognized in current earnings rather than as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the interest method over the life of the security. For mortgage-related securities (i.e., securities that are collateralized and payments received from underlying mortgage) the amortization or accretion is based on the estimated average lives of the securities. The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost. At September 30, 2005, all of the Company’s investment securities are classified as available-for-sale.

     Loans and Lease Finance Receivables - Loans and lease finance receivables are reported at the principal amount outstanding, less deferred net loan origination fees and the allowance for credit losses. 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, 2005, the Company had entered into commitments with certain customers amounting to $880.6 million compared to $762.9 million at December 31, 2004. In addition, letters of credit at September 30, 2005, and December 31, 2004, were $77.3 million and $71.5 million, respectively.

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

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

     Provision and Allowance for Credit Losses - The determination of the balance in the allowance for credit losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in management’s judgment, is adequate to provide for probable credit losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience, and other such factors that deserve current recognition in estimating inherent credit losses. The estimate is reviewed periodically by management and various regulatory entities and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. The provision for credit losses is charged to expense. The allowance for loan and lease losses was $24.2 million as of September 30, 2005. This represents an increase of $1.7 million when compared with an allowance for loan and lease losses of $22.5 million as of December 31, 2004. The increase was primarily due to the allowance for loan and lease losses acquired from Granite State Bank, in February 2005, of $756,000 and loan recoveries of $1.2 million, offset by $191,000 of charged-off loans as of September 30, 2005.

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

     As of September 30, 2005, the Company has one impaired loan totaling $2,000. This loan was supported by collateral with a fair value of $500. The Company has adequate reserve for this impaired loan.

     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 their 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 impairment is calculated as the difference between the expected undiscounted future cash flows of a long-lived asset, if lower, and its carrying value. The impairment loss, if any, would be recorded in noninterest expense. The Company has no impaired long-lived assets as of September 30, 2005.

     Other Real Estate Owned - Other real estate owned represents real estate acquired through foreclosure in satisfaction of commercial and real estate loans and is stated at fair value, minus estimated costs to sell (fair value at time of foreclosure). Loan balances in excess of fair value of the real estate acquired at the date of acquisition are charged against the allowance for credit losses. Any subsequent operating expenses or income, reduction in estimated values, and gains or losses on disposition of such properties are charged to current operations. There is no other real estate owned at September 30, 2005 and December 31, 2004.

     Business Combinations and Intangible Assets - The Company has engaged in the acquisition of financial institutions and the assumption of deposits and purchase of assets from other financial institutions in its market area. The Company has paid premiums on certain transactions, and such premiums are recorded as intangible assets, in the form of goodwill or other intangible assets. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, goodwill is not being amortized whereas identifiable intangible assets with finite lives are amortized over their useful lives. On an annual basis, the Company tests goodwill and intangible assets for impairment.

     Additionally, as required by SFAS No. 142, the Company completed its annual impairment test as of June 30, 2005 and did not record any impairment of goodwill. At September 30, 2005, goodwill was $28.7 million (net of amortization of $5.4 million recorded prior to the adoption of SFAS No. 142). As of September 30, 2005, intangible assets that continue to be subject to amortization include core deposits of $13.1 million (net of $6.6 million of accumulated amortization). Amortization expense for such intangible assets was $1.5 million for the nine months ended September 30, 2005. Estimated amortization expense, for the remainder of 2005 is expected to be $588,000. Estimated amortization expense, for the succeeding five fiscal years is $2.4 million for years one to three, $1.8 million for year four, and $1.7 million for the year five. The weighted average remaining life of intangible assets is approximately 6.2 years.

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

     Earnings per Common Share - Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of shares issuable upon the assumed exercise of outstanding common stock options. Share and per share amounts have been retroactively restated to give effect to all stock splits and dividends. The actual number of shares outstanding at September 30, 2005 was 61,107,359. The tables below present 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 September 30,
		2005												2004
						Weighted												Weighted
		Income				Average Shares				Per Share				Income				Average Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
BASIC EPS
Income available to common stockholders		$	53,446				61,200			$	0.87			$	44,598				60,493			$	0.74
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of outstanding options							580				(0.00	)							735				(0.01	)
DILUTED EPS
Income available to common stockholders		$	53,446				61,780			$	0.87			$	44,598				61,228			$	0.73

		Earnings Per Share Reconciliation
		(Dollars and shares in thousands, except per share amounts)
		For the Three Months
		Ended September 30,
		2005												2004
						Weighted												Weighted
		Income				Average Shares				Per Share				Income				Average Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
BASIC EPS
Income available to common stockholders		$	18,267				61,095			$	0.30			$	17,075				60,507			$	0.28
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of outstanding options							551				(0.00	)							723				0.00
DILUTED EPS
Income available to common stockholders		$	18,267				61,646			$	0.30			$	17,075				61,230			$	0.28

     Stock-Based Compensation - At September 30, 2005, the Company has three stock-based employee compensation plans, which are described more fully in Note 15 in the Company’s Annual Report on Form 10-K. The Company applies the intrinsic value method as described in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its plans. Accordingly, compensation cost is not recognized when the exercise price of an employee stock option equals or exceeds the fair market value of the stock on the date the option is granted. The following table presents the pro forma effects on net income and related earnings per share if compensation costs related to the stock option plans were measured using the fair value method as prescribed under SFAS No. 123, “Accounting for Stock-Based Compensation”:

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2005				2004				2005				2004
		(Dollars in thousands)								(Dollars in thousands)
Net income, as reported		$	18,267			$	17,075			$	53,446			$	44,598
Deduct: Total stock-based employee			247				336				836				790
compensation expense determined under fair value based method for all awards, net of related tax effects
Pro forma net income		$	18,020			$	16,739			$	52,610			$	43,808
Earnings per share:
Basic — as reported		$	0.30			$	0.28			$	0.87			$	0.74
Basic — pro forma		$	0.29			$	0.28			$	0.86			$	0.72
Diluted — as reported		$	0.30			$	0.28			$	0.87			$	0.73
Diluted — pro forma		$	0.29			$	0.27			$	0.85			$	0.72

     The Black-Scholes option-pricing model requires the use of subjective assumptions, which can materially affect fair value estimates. Therefore, this model does not necessarily provide a reliable single measure of the fair value of the Company’s stock options. The fair value of each stock option granted in 2005 was estimated on the date of the grant using the following weighted-average assumptions as of September 30, 2005: (1) expected dividend yield of 2.3%; (2) risk-free interest rate of 4.1%; (3) expected volatility of 40.4%; and (4) expected lives of options of 7.2 years. The assumptions as of September 30, 2004 are as follows: (1) expected dividend yield of 2.3%; (2) risk-free interest rate of 3.4%; (3) expected volatility of 36.2%; and (4) expected lives of options of 7.3 years. There were 103,000 and 370,550 options granted during the first nine months in 2005 and 2004, respectively.

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

     Trust Services - The Company maintains funds in trust for customers. The amount of these funds and the related liability have not been recorded in the accompanying consolidated balance sheets because they are not assets or liabilities of the Bank or Company, with the exception of any funds held on deposit with the Bank.

     Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     Recent Accounting Pronouncements - In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement No. 154, “Accounting Changes and Error Corrections. A replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. It also requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in an income statement. The statement will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154 to have a material effect on the Company’s consolidated financial position or results of operations.

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

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

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

     Other Contingencies - In the ordinary course of business, the Company becomes involved in litigation. Based upon the Company’s internal records and discussions with legal counsel, the Company records reserves for estimates of the probable outcome of all cases brought against them.

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

GENERAL

     Management’s discussion and analysis is written to provide greater insight into the results of operations and the financial condition of CVB Financial Corp. and its subsidiaries. Throughout this discussion, “Company” refers to CVB Financial Corp. and its subsidiaries as a consolidated entity. “CVB” refers to CVB Financial Corp. as the unconsolidated parent company and “Bank” refers to Citizens Business Bank and its wholly owned subsidiary, Golden West Enterprises, Inc. For a more complete understanding of the Company and its operations, reference should be made to the financial statements included in this report and in the Company’s 2004 Annual Report on Form 10-K. Certain statements in this Report on Form 10-Q constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which we conduct operations, natural disasters, fluctuations in interest rates, credit quality, exams or reviews by our regulators, and government regulations. For additional information concerning these factors, see the Company’s periodic filings with the Securities and Exchange Commission, and in particular “Item 1. Business — Factors That May Affect Results” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. We do not undertake, and specifically disclaim, any obligation to update any forward looking statements to reflect the occurrence of events or circumstances after the date of such statements. Additionally, our financial results and operations may be affected by competition which has manifested itself with increased pricing pressures for loans and deposits, thus compressing our net interest margin. Because of the pressure on the net interest margin, other operating income has become a more important element in the total revenue of the Company.

OVERVIEW

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

     Our primary source of income is from the interest earned on our loans and investments and our primary area of expense is the interest paid on deposits, borrowings, salaries and benefits. As such, our net income is subject to fluctuations in interest rates and their impact on our income statement. We believe the recent rise in interest rates may relieve some of the pressure on our net interest margin. Increased pricing pressure on our loans and deposits has compressed our net interest margin, resulting in an increase in the importance of other operating income to the Company’s total revenue.

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

construction loans to builders. Southern California is experiencing growth in construction on single-family residences and commercial buildings, and our balance sheet at September 30, 2005 reflects growth in construction loans of $13.9 million since December 31, 2004. We are also subject to competition from other financial institutions, which affects our pricing of products and services, and the fees and interest rates we can charge on them.

     Our growth in loans and investments compared with the third quarter of 2004 has allowed our interest income to grow. The Bank has always had an excellent base of interest free deposits due primarily to the fact that we specialize in businesses and professionals as customers. This has allowed us to have a low cost of deposits, currently 0.84% for the third quarter of 2005.

     On February 25, 2005, we acquired Granite State Bank (“Granite”). The Company issued 696,049 common shares and $13.3 million in cash to Granite shareholders in connection with the acquisition. The total purchase price in cash and stock was $26.7 million. Granite had total assets of $111.4 million, total loans of $62.8 million and total deposits of $103.1 million as of the acquisition date, February 25, 2005. Granite also had two offices, one in Monrovia and one in South Pasadena. These two offices now operate as business financial centers of the Bank.

     In 2001 we implemented our “Central Valley Initiative” which is intended to grow our presence in the southern Central Valley of California. This area has a large agribusiness economy and fits in well with the agribusiness lending we already have in the Bank. As part of this initiative, we opened our 40th business financial center in Madera, California in May 2005. In the Central Valley and in other markets in which we intend to enter or expand our business, we will continue to consider acquisition opportunities and the opening of de novo offices.

CRITICAL ACCOUNTING POLICIES

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

     Allowance for Credit Losses: Arriving at an appropriate level of allowance for credit losses involves a high degree of judgment. The Company’s 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 management’s judgment, is adequate to provide for probable credit losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience, and such other factors as deserve current recognition in estimating inherent credit losses. The provision for credit losses is charged to expense. For a full discussion of our methodology of assessing the adequacy of the allowance for credit losses, see the “Risk Management” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     Investment Portfolio: The investment portfolio is an integral part of the Company’s financial performance. We invest primarily in fixed income securities. Accounting estimates are used in the presentation of the investment portfolio and these estimates do impact the presentation of the Company’s financial condition and results of operations. Many of the securities included in the investment portfolio are purchased at a premium or discount. The premiums or discounts are amortized or accreted over the life of the security. For mortgage-related securities (i.e., securities that are collateralized and payments received from underlying mortgages), the amortization or accretion is based on estimated average lives of the securities. The lives of these securities can fluctuate based on the amount of prepayments received on

the underlying collateral of the securities. The amount of prepayments varies from time to time based on the interest rate environment (i.e., lower interest rates increase the likelihood of refinances) and the rate of turnover of the mortgages (i.e., how often the underlying properties are sold and mortgages paid-off). We use estimates for the average lives of these mortgage-related securities based on information received from third parties whose business it is to compile mortgage related data and develop a consensus of that data. We adjust the rate of amortization or accretion regularly to reflect changes in the estimated average lives of these securities.

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

     Income Taxes: We account for income taxes by deferring income taxes based on estimated future tax effects of differences between the tax and book basis of assets and liabilities considering the provisions of enacted tax laws. These differences result in deferred tax assets and liabilities, which are included in the Company’s 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. Management judgment is required in determining the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income. Although we have determined a valuation allowance is not required for all deferred tax assets, there is no guarantee that these assets are recognizable.

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

ANALYSIS OF THE RESULTS OF OPERATIONS

Earnings

     Our net earnings for the nine months ended September 30, 2005 were $53.4 million. This represented an increase of $8.8 million or 19.83%, over net earnings of $44.6 million, for the nine months ended September 30, 2004. Basic earnings per share for the nine-month period increased to $0.87 per share for 2005, compared to $0.74 per share for 2004. Diluted earnings per share increased to $0.87 per share for the first nine months of 2005, compared to $0.73 per share for the same period last year. The annualized return on average assets was 1.50% for the first nine months of 2005 compared to an annualized return on average assets of 1.45% for the nine months ended September 30, 2004. The annualized return on

average equity was 21.29% for the first nine months ended September 30, 2005, compared to an annualized return of 20.10% for the nine months ended September 30, 2004.

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

     At the end of 2004, it became apparent that the insurance company may deny coverage of our claims. Therefore, the Company reserved an additional $2.2 million as an estimate of claims yet to be paid as of December 2004. During the first quarter of 2005, the insurance company expressed its interest in settling these claims. The Company settled with the insurance company in April 2005 agreeing to reimburse the Company for all of the claims paid. This allowed the Company to reverse the $2.6 million estimated robbery loss in the first quarter of 2005. This amount is included in other operating expenses for the nine months ended September 30, 2005.

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

     For the quarter ended September 30, 2005, our net earnings were $18.3 million. This represented an increase of $1.2 million or 6.98%, over net earnings of $17.1 million, for the third quarter of 2004. Basic earnings per share increased to $0.30 per share for the third quarter of 2005 compared to $0.28 per share for the third quarter of 2004. Diluted earnings per share increased to $0.30 per share for the third quarter of 2005 compared to $0.28 per share for the same three-month period last year. The annualized return on average assets was 1.46% for the third quarter of 2005 compared to an annualized return on average assets of 1.57% for the same period last year. The annualized return on average equity was 20.75% for the third quarter of 2005 compared to an annualized return on average equity of 23.34% for the third quarter of 2004.

     Net earnings, excluding the impact of the settlement of the robbery loss and net losses on sale of investment securities, totaled $51.8 million for the nine months ended September 30, 2005. This represented an increase of $6.7 million, or 14.94%, compared to net earnings, excluding the other-than-temporary impairment write-down on investment securities, net gains on sale of investment securities, and net gain on sale of real estate of $45.0 million for the same period in 2004.

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

		Net Earnings Reconciliation
		For the Nine Months
		Ended September 30,
		2005												2004
														Before
		Before				Income				Net				Income				Income				Net
		Income Taxes				Taxes				Earnings				Taxes				Taxes				Earnings
		( amounts in thousands )
Net earnings without the settlement of the robbery loss, other-than-temporary impairment write-down, net gain/(loss) on sale of securities, net gain on sale of real estate		$	78,645			$	26,878			$	51,767			$	68,158			$	23,123			$	45,035
Settlement of robbery loss		$	2,600			$	890				1,710				—				—				—
Other-than-temporary impairment write-down			—				—				—				(6,300	)			(2,137	)			(4,163	)
Net gain/(loss) on sale of securities			(46	)			(15	)			(31	)			5,219				1,770				3,449
Net gain on sale of real estate			—				—				—				419				142				277
Net Earnings as reported		$	81,199			$	27,753			$	53,446			$	67,496			$	22,898			$	44,598

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

Net Interest Income

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

     The Company’s net interest income (before provision for credit losses) totaled $126.2 million for the nine months ended September 30, 2005. This represented an increase of $14.7 million, or 13.23%, over net interest income (before provision for credit losses) of $111.4 million for the same period in 2004. The increase in net interest income of $14.7 million resulted from a $35.2 million increase in interest income, offset by a $20.4 million increase in interest expense. The $35.2 million increase in interest income resulted from a $610.3 million increase in average earning assets and an increase in the average yield on earning assets to 5.52% for the first nine months of 2005 from 5.14% for the same period in 2004. The $20.4 million increase in interest expense resulted from a $427.9 million increase in average interest-bearing liabilities and the increase in the average rate paid on interest-bearing liabilities to 2.34% for the first nine months of 2005 from 1.68% for the same period in 2004.

     Interest income totaled $179.6 million for the first nine months of 2005. This represented an increase of $35.2 million, or 24.34%, compared to the total interest income of $144.4 million for the same period last year. The increase in interest income was primarily the result of the increase in average earnings assets from $3.84 billion in the first nine months of 2004 to $4.46 billion in the same period in 2005.

This represents a 15.87% increase for the first nine months of 2005 over the same period last year and an increase in the average yield on earning assets of 38 basis points.

     Interest expense totaled $53.4 million for the first nine months of 2005. This represented an increase of $20.4 million, or 61.89%, over total interest expense of $33.0 million for the same period last year. The increase in interest expense was primarily the result of an increase in average interest-bearing liabilities and an increase in the cost of these liabilities of 66 basis points.

     For the third quarter ended September 30, 2005, the Company’s net interest income (before provision for credit losses) totaled $43.0 million. This represented an increase of $3.0 million, or 7.62%, over net interest income (before provision for credit losses) of $40.0 million for the same period in 2004. The increase in net interest income of $3.0 million for the third quarter of 2005 resulted from an increase of $11.5 million in interest income and an $8.4 million increase in interest expense. The increase in interest income of $11.5 million resulted from the increase in average earning assets of $600.4 million and an increase in the average yield on earning assets to 5.60% for the third quarter of 2005 from 5.27% the same period in 2004. The increase of $8.4 million in interest expense resulted from the increase in the average rate paid on interest-bearing liabilities to 2.55% for the third quarter of 2005 from 1.73% the same period in 2004 and a $421.1 million increase in average interest-bearing liabilities.

     The increase in interest income for the third quarter ending September 30, 2005 as compared to the third quarter ending September 30, 2004 was primarily the result of the increase in average earning assets and an increase in the average yield on earning assets of 33 basis points between the third quarter of 2005 and the third quarter of 2004. Interest income totaled $63.5 million for the third quarter of 2005. This represented an increase of $11.5 million, or 22.09%, compared to total interest income of $52.0 million for the same period last year.

     The increase in interest expense was primarily the result of the increase in the rate paid on interest-bearing liabilities. Interest expense totaled $20.5 million for the third quarter of 2005. This represented an increase of $8.4 million or 70.11%, over total interest expense of $12.0 million for the same period last year. Both the increase in the yield on earning assets and the rate paid on interest-bearing liabilities reflects the increasing interest rate environment between the third quarters of 2005 and 2004.

     Table 1 shows the average balances of assets, liabilities, and stockholders’ equity and the related interest income, expense, and rates for the nine-month and three-month periods ended September 30, 2005 and 2004. 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,
		2005												2004
		Average								Average				Average								Average
		Balance				Interest				Rate (6)				Balance				Interest				Rate (6)
		(amounts in thousands)
ASSETS
Investment Securities
Taxable (1)		$	1,761,106			$	56,594				4.29	%		$	1,596,061			$	48,250				4.04	%
Tax preferenced (2)			413,794				13,874				5.96	%			345,147				11,262				5.75	%
Investment in FHLB stock			62,078				1,813				3.89	%			44,117				1,460				4.41	%
Federal Funds Sold & Interest Bearing
Deposits with other institutions			9,949				209				2.80	%			416				3				0.96	%
Loans (3) (4)			2,208,258				107,089				6.48	%			1,859,140				83,447				6.00	%
Total Earning Assets			4,455,185				179,579				5.52	%			3,844,881				144,422				5.14	%
Total Non Earning Assets			310,640												275,200
Total Assets		$	4,765,825											$	4,120,081
LIABILITIES AND STOCKHOLDERS’ EQUITY
Savings Deposits (5)		$	1,121,659			$	9,217				1.10	%		$	1,033,604			$	5,494				0.71	%
Time Deposits			504,269				9,631				2.55	%			512,326				5,657				1.47	%
Total Deposits			1,625,928				18,848				1.55	%			1,545,930				11,151				0.96	%
Other Borrowings			1,397,571				34,537				3.26	%			1,049,628				21,826				2.74	%
Interest Bearing Liabilities			3,023,499				53,385				2.34	%			2,595,558				32,977				1.68	%
Non-interest bearing deposits			1,373,174												1,184,086
Other Liabilities			33,511												44,078
Stockholders’ Equity			335,641												296,359
Total Liabilities and Stockholders’ Equity		$	4,765,825											$	4,120,081
Net interest income						$	126,194											$	111,445
Net interest spread — tax equivalent											3.18	%											3.46	%
Net interest margin											3.82	%											3.91	%
Net interest margin — tax equivalent											3.92	%											4.01	%
Net interest margin excluding loan fees											3.63	%											3.71	%
Net interest margin excluding loan fees — tax equivalent											3.73	%											3.80	%

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

		Three-month period ended September 30,
		2005												2004
		Average								Average				Average								Average
		Balance				Interest				Rate (6)				Balance				Interest				Rate (6)
		(amounts in thousands)
ASSETS
Investment Securities
Taxable (1)		$	1,787,757			$	18,994				4.25	%		$	1,679,270			$	17,823				4.25	%
Tax preferenced (2)			438,938				4,989				6.02	%			334,421				3,636				5.74	%
Investment in FHLB stock			67,277				675				3.93	%			49,609				500				3.94	%
Federal Funds Sold & Interest Bearing
Deposits with other institutions			9,924				74				2.92	%			109				1				3.59	%
Loans (3) (4)			2,320,733				38,777				6.63	%			1,960,836				30,061				6.10	%
Total Earning Assets			4,624,629				63,509				5.60	%			4,024,245				52,021				5.27	%
Total Non Earning Assets			333,045												307,273
Total Assets		$	4,957,674											$	4,331,518
LIABILITIES AND STOCKHOLDERS’ EQUITY
Savings Deposits (5)		$	1,165,077			$	3,812				1.30	%		$	1,073,629			$	1,964				0.73	%
Time Deposits			512,551				3,727				2.88	%			499,270				1,899				1.51	%
Total Deposits			1,677,628				7,539				1.78	%			1,572,899				3,863				0.98	%
Other Borrowings			1,483,728				12,950				3.42	%			1,167,330				8,182				2.75	%
Interest Bearing Liabilities			3,161,356				20,489				2.55	%			2,740,229				12,045				1.73	%
Non-interest bearing deposits			1,406,223												1,256,509
Other Liabilities			40,889												43,802
Stockholders’ Equity			349,206												290,978
Total Liabilities and Stockholders’ Equity		$	4,957,674											$	4,331,518
Net interest income						$	43,020											$	39,976
Net interest spread — tax equivalent											3.05	%											3.54	%
Net interest margin											3.82	%											4.06	%
Net interest margin — tax equivalent											3.85	%											4.09	%
Net interest margin excluding loan fees											3.62	%											3.84	%
Net interest margin excluding loan fees — tax equivalent											3.65	%											3.87	%

     As stated above, the net interest margin measures net interest income as a percentage of average earning assets. The net interest margin is an indication of how effectively we generate our source of funds and employ our earning assets. Our taxable equivalent (TE) net interest margin for the first nine months of 2005 was 3.92% as compared to 4.01% for the same period last year. Our taxable equivalent (TE) net interest margin for the third quarter 2005 was 3.85% as compared to 4.09% for the third quarter of 2004. These decreases in the net interest margin from the same period last year are the result of the increasing interest rate environment, which impacted interest earned and interest paid as a percent of earning assets. Although the yield on earning assets increased, this was offset by higher interest paid on interest-bearing liabilities.

     The net interest spread is the difference between the yield on average earning assets less the cost of average interest-bearing liabilities. The net interest spread is an indication of our ability to manage interest rates received on loans and investments and paid on deposits and borrowings in a competitive and changing interest rate environment. Our net interest spread (TE) was 3.18% for the first nine months of 2005 and 3.46% for the same period last year. The decrease in the net interest spread for the nine months ended September 30, 2005 resulted from a 66 basis point increase in the cost of interest-bearing liabilities offset by a 38 basis point increase in the yield on earning assets, thus generating a 28 basis point decrease in the net interest spread from the same period last year.

     For the third quarter of 2005 the Company’s net interest spread (TE) was 3.05% as compared to 3.54% for the same period last year. The decrease in the net interest spread for the third quarter ended September 30, 2005 resulted from a 82 basis point increase in the cost of interest-bearing liabilities offset by a 33 basis point increase in the yield on earning assets, thus generating a 49 basis point decrease in the net interest spread from the same period last year.

     The yield (TE) on earning assets increased to 5.52% for the first nine months of 2005, from 5.14% for the same period last year, and reflects an increasing interest rate environment and a change in the mix of earning assets. Average loans as a percent of earning assets increased to 49.57% in the first nine months of 2005 from 48.35% for the same period in 2004. Average investments as a percent of earning assets decreased to 48.82% in the first nine months of 2005 from 50.49% for the same period in 2004. Average investment in FHLB stock, federal funds sold and interest-bearing deposits with other institutions as a percent of earning assets increased to 1.62% in the first nine months of 2005 from 1.16% for the same period in 2004. Investments and federal funds sold typically have a lower yield than loans. The yield on loans for the first nine months of 2005 increased to 6.48% as compared to 6.00% for the same period in 2004 as a result of the increasing interest rate environment and competition for quality loans. The yield (TE) on investments for the first nine months of 2005 increased to 4.60% compared to 4.35% for the same period in 2004 as a result of the increasing interest rate environment. The increase in the yield on earning assets for the first nine months of 2005 was the result of higher yields on both loans and investments as a result of the increasing interest rate environment.

     The cost of average interest-bearing liabilities increased to 2.34% for the first nine months of 2005 as compared to 1.68% for the same period in 2004, reflecting an increasing interest rate environment and a change in the mix of interest-bearing liabilities. Average borrowings as a percent of average interest-bearing liabilities increased to 43.50% during the first nine months of 2005 as compared to 37.26% for the same period in 2004. Borrowings typically have a higher cost than interest-bearing deposits. The cost of interest-bearing deposits for the first nine months of 2005 increased to 1.55% as compared to 0.96% for the same period in 2004, reflecting the increasing interest rate environment offset by competition for interest-bearing deposits. The cost of borrowings for the first nine months of 2005 increased to 3.26% as compared to 2.74% for the same period in 2004, also reflecting the increasing 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 the FDIC require interest on all demand deposits. Currently, we pay interest on NOW and Money Market Accounts.

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

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

Expense and Net Interest Income

		Comparison of nine-month period ended
		September 30, 2005 and 2004
		Increase (Decrease) Due to
										Rate/
		Volume				Rate				Volume				Total
						(amounts in thousands)
Interest Income:
Taxable investment securities		$	5,001			$	2,993			$	350			$	8,344
Tax-advantaged securities		$	2,960			$	544			$	(892	)			2,612
Fed funds sold & interest-bearing deposits with other institutions		$	69			$	6			$	131				206
Investment in FHLB stock		$	594			$	(172	)		$	(69	)			353
Loans		$	15,667			$	6,675			$	1,300				23,642
Total interest on earning assets			24,291				10,046				820				35,157
Interest Expense:
Savings deposits		$	468			$	3,015			$	240				3,723
Time deposits		$	(89	)		$	4,138			$	(75	)			3,974
Other borrowings		$	7,230			$	4,139			$	1,342				12,711
Total interest on interest-bearing liabilities			7,609				11,292				1,507				20,408
Net Interest Income		$	16,682			$	(1,246	)		$	(687	)		$	14,749