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 June 30, 2006

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

For the transition period from                      to                     

For Quarter Ended June 30, 2006		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		91764
(Address of Principal Executive Offices)		(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 is a large accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ                      Accelerated filer o                    Non-accelerated filer 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: 76,554,710 outstanding as of August 3, 2006.

 

 

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 1A. RISK FACTORS

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

		June 30,				December 31,
		2006				2005
ASSETS
Investment securities available-for-sale		$	2,675,165			$	2,369,892
Interest-bearing balances due from depository institutions			99				1,883
Investment in stock of Federal Home Loan Bank (FHLB)			74,441				70,770
Loans and lease finance receivables			2,839,145				2,663,863
Allowance for credit losses			(25,620	)			(23,204	)
Total earning assets			5,563,230				5,083,204
Cash and due from banks			143,212				130,141
Premises and equipment, net			43,862				40,020
Intangibles			11,297				12,474
Goodwill			31,531				32,357
Cash value life insurance			73,282				71,811
Accrued interest receivable			27,993				24,147
Deferred tax asset			39,365				18,420
Other assets			18,647				10,397
TOTAL ASSETS		$	5,952,419			$	5,422,971
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	1,367,015			$	1,490,613
Interest-bearing			2,225,838				1,933,433
Total deposits			3,592,853				3,424,046
Demand Note to U.S. Treasury			4,462				6,433
Short-term borrowings			1,276,000				916,000
Long-term borrowings			470,000				580,000
Accrued interest payable			17,716				15,047
Deferred compensation			8,580				7,102
Junior subordinated debentures			108,250				82,476
Other liabilities			136,304				48,990
TOTAL LIABILITIES			5,614,165				5,080,094
COMMITMENTS AND CONTINGENCIES
Stockholders’ Equity:
Preferred stock (authorized, 20,000,000 shares without par; none issued or outstanding)			—				—
Common stock (authorized, 122,070,312 shares without par; issued and outstanding 76,500,896 (2006) and 76,430,206 (2005))			253,681				252,717
Retained earnings			126,883				103,546
Accumulated other comprehensive loss, net of tax			(42,310	)			(13,386	)
Total stockholders’ equity			338,254				342,877
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	5,952,419			$	5,422,971

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 Six Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Interest income:
Loans, including fees		$	47,913			$	35,267			$	92,205			$	67,647
Investment securities:
Taxable			21,163				18,897				41,900				37,600
Tax-preferred			6,807				4,798				13,052				8,885
Total investment income			27,970				23,695				54,952				46,485
Dividends from FHLB stock			990				663				1,790				1,138
Federal funds sold and Interest bearing deposits with other institutions			28				97				86				135
Total interest income			76,901				59,722				149,033				115,405
Interest expense:
Deposits			16,294				6,248				29,495				11,309
Short-term borrowings			13,960				3,282				24,329				5,246
Long-term borrowings			1,767				6,973				4,936				13,697
Junior subordinated debentures			1,719				1,335				3,287				2,645
Total interest expense			33,740				17,838				62,047				32,897
Net interest income before provision for credit losses			43,161				41,884				86,986				82,508
Provision for credit losses			900				—				1,150				—
Net interest income after provision for credit losses			42,261				41,884				85,836				82,508
Other operating income:
Service charges on deposit accounts			3,288				3,251				6,579				6,293
Financial Advisory services			1,815				1,509				3,660				3,187
Bankcard services			602				632				1,160				1,236
BOLI income			649				1,242				1,471				1,584
Other			1,704				704				2,917				2,117
Gain(loss) on sale of securities, net			33				(46	)			33				(46	)
Total other operating income			8,091				7,292				15,820				14,371
Other operating expenses:
Salaries and employee benefits			12,771				12,789				25,491				25,622
Occupancy and Equipment			3,831				4,071				7,605				7,813
Professional services			1,485				1,195				2,758				2,220
Amortization of intangibles			589				589				1,177				885
Other			5,583				4,418				10,698				6,906
Total other operating expenses			24,259				23,062				47,729				43,446
Earnings before income taxes			26,093				26,114				53,927				53,433
Income taxes			7,176				8,636				16,770				18,254
Net earnings		$	18,917			$	17,478			$	37,157			$	35,179
Basic earnings per common share		$	0.25			$	0.23			$	0.49			$	0.46
Diluted earnings per common share		$	0.25			$	0.23			$	0.48			$	0.45
Cash dividends per common share		$	0.09			$	0.11			$	0.18			$	0.22

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 December 31, 2004			60,666			$	236,277			$	72,314			$	8,892
Issuance of common stock			460				1,789
5-for-4 stock split			15,284
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							2,087
Cash dividends ($0.42 per share)											(27,963	)
Comprehensive income:
Net earnings											70,618							$	70,618
Other comprehensive loss:
Unrealized loss on securities available-for-sale, net															(22,278	)			(22,278	)
Comprehensive income																		$	48,340
Balance December 31, 2005			76,430				252,717				103,546				(13,386	)
Issuance of common stock			71				578
Tax benefit from exercise of stock options							86
Stock-based Compensation Expense							300
Cash dividends ($0.18 per share)											(13,820	)
Comprehensive income:
Net earnings											37,157							$	37,157
Other comprehensive loss:
Unrealized loss on securities available-for-sale, net of taxes $20,945															(28,924	)			(28,924	)
Comprehensive income																		$	8,233
Balance June 30, 2006			76,501			$	253,681			$	126,883			$	(42,310	)

														Accumulated
														Other
		Common												Comprehensive
		Shares				Common				Retained				Income (Loss),				Comprehensive
		Outstanding				Stock				Earnings				Net of Tax				Income (Loss)
						(amounts and shares in thousands)
Balance December 31, 2004			60,666				236,277				72,314				8,892
Issuance of common stock			383				1,483
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							1,514
Cash dividends ($0.22 per share)											(14,356	)
Comprehensive income:
Net earnings											35,179							$	35,179
Other comprehensive income(loss):
Unrealized loss on securities available-for-sale, net of taxes $4,047															(5,589	)			(5,589	)
Comprehensive income																		$	29,590
Balance June 30, 2005			61,069			$	251,838			$	81,714			$	3,303

		At June 30,
		2006				2005
		(amounts in thousands)
Disclosure of reclassification amount
Unrealized losses on securities arising during the period		$	(49,869	)		$	(9,636	)
Tax benefit			20,945				4,047
Net unrealized loss on securities		$	(28,924	)		$	(5,589	)

     See accompanying notes to the consolidated financial statements.

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

		For the Six Months
		Ended June 30,
		2006				2005
		(Dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received		$	146,678			$	118,732
Service charges and other fees received			15,255				14,417
Interest paid			(59,378	)			(31,132	)
Cash paid to suppliers and employees			(53,900	)			(43,024	)
Income taxes paid			(12,550	)			(10,600	)
Net cash provided by operating activities			36,105				48,393
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of MBS			9,084				126,598
Proceeds from repayment of MBS			174,914				199,965
Proceeds from repayment of investment securities available-for-sale			—				68
Proceeds from maturity of investment securities			4,269				7,471
Purchases of investment securities available-for-sale			(305,198	)			(71,018	)
Purchases of MBS			(154,101	)			(328,058	)
Purchases of FHLB stock			(3,670	)			(11,874	)
Net (increase) decrease in loans			(170,278	)			(85,859	)
Proceeds from sales of premises and equipment			755				13
Purchase of premises and equipment			(7,490	)			(8,217	)
Cash acquired from purchase of Granite State Bank, net of cash paid			—				12,232
Investment in common stock of CVB Statutory Trust III			(774	)			—
Net cash used in investing activities			(452,489	)			(158,679	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in transaction deposits			(64,377	)			5,130
Net increase in time deposits			233,186				9,866
Advances from Federal Home Loan Bank			250,000				120,000
Repayment of advances from Federal Home Loan Bank			(100,000	)			(36,000	)
Net increase in short-term borrowings			98,028				80,626
Cash dividends on common stock			(13,820	)			(14,356	)
Repurchase of common stock			—				(12,286	)
Issuance of junior subordinated debentures			25,774				—
Proceeds from exercise of stock options			578				1,483
Tax benefit related to exercise of stock options			86				—
Net cash provided by financing activities			429,455				154,463
NET INCREASE IN CASH AND CASH EQUIVALENTS			13,071				44,177
CASH AND CASH EQUIVALENTS, beginning of period			130,141				84,400
CASH AND CASH EQUIVALENTS, end of period		$	143,212			$	128,577

See accompanying notes to the consolidated financial statements.

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

		For the Six Months
		Ended June 30,
		2006				2005
		(Dollar amounts in thousands)
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net earnings		$	37,157			$	35,179
Adjustments to reconcile net earnings to net cash provided by operating activities:
(Gain)/loss on sale of investment securities			(33	)			46
Gain on sale of premises and equipment			(297	)			(1	)
Increase in cash value of life insurance			(1,471	)			(1,040	)
Net amortization of premiums on investment securities			4,712				6,976
Provisions for credit losses			1,150				—
Stock-based compensation			300				—
Depreciation and amortization			4,039				4,114
Change in accrued interest receivable			(4,669	)			(1,957	)
Change in accrued interest payable			2,669				1,763
Change in other assets and liabilities			(7,452	)			3,313
Total adjustments			(1,052	)			13,214
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	36,105			$	48,393
Supplemental Schedule of Noncash Investing and Financing Activities
Purchase of Granite State Bank:
Assets acquired						$	85,898
Goodwill							12,777
Intangible assets							8,399
Liabilities assumed							(105,879	)
Stock issued							(13,427	)
Purchase price of acquisition, net of cash received						$	(12,232	)
Securities purchased and not settled		$	112,959			$	1,393

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the six months ended June 30, 2006 and 2005

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 six months ended June 30, 2006 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, 2005 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”); 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, CVB Statutory Trust II and CVB Statutory Trust III. 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. In accordance with Financial Accounting Standards Board Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN No. 46R”), 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, and brokers mortgage loans to customers through its Golden West Financial Division and 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 individuals located in San Bernardino County, Riverside County, Orange County, Madera County, Fresno County, Tulare County, Kern County, and the eastern portion of Los Angeles County in Southern California. The Bank operates 39 Business Financial Centers with its headquarters located in the city of Ontario.

     The Company’s operating business units have been combined into two main segments: Business Financial Centers and Treasury. Business Financial Centers (branches) comprise the loans, deposits, products and services the Bank offers to the majority of its customers. The other segment is Treasury Department, 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.

     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 June 30, 2006, all of the Company’s investment securities are classified as available-for-sale.

     Loans and Lease Finance Receivables — Loans and lease finance receivables are reported at the principal amount outstanding, less deferred net loan origination fees. Interest on loans and lease finance receivables is credited to income based on the principal amount outstanding. Interest income is not recognized on loans and lease finance receivables when collection of interest is deemed by management to be doubtful. In the ordinary course of business, the Company enters into commitments to extend credit to its customers. These commitments are not reflected in the accompanying consolidated financial statements. As of June 30, 2006, the Company had entered into commitments with certain customers amounting to $885.0 million compared to $895.8 million at December 31, 2005. Letters of credit at June 30, 2006, and December 31, 2005, were $68.2 million and $68.9 million, respectively.

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

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

     Provision and Allowance for Credit Losses — The determination of the balance in the allowance for credit losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in management’s judgment, is adequate to provide for probable credit losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience, and such other factors as deserve current recognition in estimating inherent credit losses. The estimate is reviewed periodically by management and various regulatory entities and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. The provision for credit losses is charged to expense. During the first six months of 2006, the Company recorded $1.2 million provision for credit losses. The allowance for credit losses was $25.6 million as of June 30, 2006. This represents an increase of $2.4 million when compared with an allowance for credit losses of $23.2 million as of December 31, 2005. The increase was primarily due to the provision for credit losses of $1.2 million to compensate for the growth of the loan portfolio and the loan recoveries of $1.3 million, offset by the loans charged off of $64,000 during the first six months of 2006.

     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 on the liabilities section of the balance

sheet. Provision to this reserve was expensed in other expense. For the six months ended June 30, 2006, there were no provisions to this reserve. As of June 30, 2006, the balance in this reserve was $1.7 million.

     A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts (contractual interest and principal) according to the contractual terms of the loan agreement. 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 June 30, 2006, the Company has one impaired loan totaling $885,000. This loan was supported by collateral with a fair value of $3.1 million. The Company has adequate reserve for this impaired loan. There were no loans classified as impaired at December 31, 2005.

     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 impairment is calculated as the difference between the expected undiscounted future cash flows of a long-lived asset, if lower, and its carrying value. The impairment loss, if any, would be recorded in noninterest expense.

     Other Real Estate Owned — Other real estate owned represents real estate acquired through foreclosure in satisfaction of commercial and real estate loans and is stated at fair value, minus estimated costs to sell (fair value at time of foreclosure). Loan balances in excess of fair value of the real estate acquired at the date of acquisition are charged against the allowance for credit losses. Any subsequent operating expenses or income, reduction in estimated values, and gains or losses on disposition of such properties are charged to current operations. There was no other real estate owned at June 30, 2006 and December 31, 2005.

     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.

     At June 30, 2006 goodwill was $31.5 million (net of amortization of $5.4 million recorded prior to the adoption of SFAS No. 142). As of June 30, 2006, intangible assets that continue to be subject to amortization include core deposits of $11.3 million (net of $8.3 million of accumulated amortization). During the first quarter of 2006, the Company finalized the goodwill analysis for the Granite State Bank acquisition and adjusted goodwill in the amount of $826,000 to record an additional purchase price adjustment related to the acquisition. Amortization expense for such intangible assets was $1.2 million for the six months ended June 30, 2006. Estimated amortization expense, for the remainder of 2006 is expected to be $1.18 million. Estimated amortization expense, for the succeeding five fiscal years is $2.35 million for year one and year two, $1.75 million for year three, $1.70 million for year four and $1.60 million for year five. The weighted average remaining life of intangible assets is approximately 4.6 years.

     Income Taxes — Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each

year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.

     Earnings per Common Share — Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of shares issuable upon the assumed exercise of outstanding common stock options. Share and per share amounts have been retroactively restated to give effect to all stock dividends and splits. The actual number of shares outstanding at June 30, 2006 was 76,500,896. The table 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 Six Months
		Ended June 30,
		2006												2005
						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		$	37,157				76,477			$	0.49			$	35,179				76,554			$	0.46
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of outstanding options							699				(0.01	)							900				(0.01	)
DILUTED EPS
Income available to common stockholders		$	37,157				77,176			$	0.48			$	35,179				77,454			$	0.45

		Earnings Per Share Reconciliation
		(Dollars and shares in thousands, except per share amounts)
		For the Three Months
		Ended June 30,
		2006												2005
						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		$	18,917				76,493			$	0.25			$	17,478				76,687			$	0.23
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of outstanding options							692				0.00								800				0.00
DILUTED EPS
Income available to common stockholders		$	18,917				77,185			$	0.25			$	17,478				77,487			$	0.23

     Stock-Based Compensation — At June 30, 2006, 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 adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), using the “modified prospective” method. Under this method, awards that are granted, modified, or settled after December 31, 2005, are measured and accounted for in accordance with SFAS No. 123R. Also under this method, unvested stock awards as of December 31, 2005 are recognized over the remaining service period with no change in historical reported earnings. Prior to the adoption of SFAS No. 123R, the Company accounted for stock compensation under the

intrinsic value method permitted by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”) and related interpretations. Accordingly, the Company previously recognized no compensation cost for employee stock options that were granted with an exercise price equal to the market value of the underlying common stock on the date of grant. The Company provided pro forma disclosure amounts in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (SFAS No. 148), as if the fair value method defined by SFAS No. 123 had been applied to its stock-based compensation.

     As a result of adopting SFAS 123R on January 1, 2006, the Company expensed $300,000 for the six months and $164,000 for the three months ended June 30, 2006. This had the effect of reducing net income by $261,000 and $143,000 for the six months and three months, respectively, compared with the income that would have been recorded had the Company continued to account for stock-based compensation under APB Opinion No. 25. There was no impact on earnings per share for either of the periods.

     Prior to the adoption of SFAS 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123R requires the tax benefits resulting from deductions in excess of the compensation cost recognized for those options (“excess tax benefits”) to be classified as financing cash flows. The Company has $86,000 of excess tax benefit resulting from disqualified disposition classified as financing activities in the Consolidated Statements of Cash Flows for the six months ended June 30, 2006.

     The following table illustrates the effect on net income and earnings per share had the Company accounted for stock-based compensation in accordance with SFAS 123R for the six months and three months ended June 30, 2005:

		For the Three Months				For the Six Months
		Ended June 30,				Ended June 30,
		2005				2005
		(Dollars in thousands)
Net income, as reported		$	17,478			$	35,179
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			254				589
Pro forma net income		$	17,224			$	34,590
Earnings per share:
Basic — as reported		$	0.23			$	0.46
Basic — pro forma		$	0.22			$	0.45
Diluted — as reported		$	0.23			$	0.45
Diluted — pro forma		$	0.22			$	0.45

     The estimated fair value of the options granted during 2006 and prior years was calculated using the Black-Scholes options pricing model. There were 474,950 and 16,875 options granted during the first six months in 2006 and 2005, respectively. The fair value of each stock option granted in 2006 was estimated on the date of grant using the following weighted-average assumptions:

		June 30, 2006
Dividend Yield			2.2	%
Volatility			40.0	%
Risk-Free Interest Rate			5.1	%
Expected Life		7.4 years

     Option activity under the Company’s stock option plan as of June 30, 2006 and changes during the six months ended June 30, 2006 and 2005 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, 2006			1,869			$	9.35
Granted			478			$	15.55
Exercised			(71	)		$	8.17
Forfeited or expired			(101	)		$	12.07
Outstanding at June 30, 2006			2,175			$	10.62				6.46			$	10,973
Unvested shares at June 30, 2006			979			$	14.46				8.87			$	1,172
Exercisable at June 30, 2006			1,197			$	7.47				4.49			$	9,801

		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, 2005			2,416			$	7.74
Granted			17			$	15.12
Exercised			(504	)		$	3.76
Forfeited or expired			(17	)		$	10.79
Outstanding at June 30, 2005			1,912			$	8.82				5.73			$	13,224
Unvested shares at June 30, 2005			787			$	11.49				6.99			$	3,347
Exercisable at June 30, 2005			1,124			$	6.95				4.89			$	9,878

     The weighted-average grant-date fair value of options granted during the six months ended June 30, 2006 and 2005 was $6.32 and $5.82, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was $592,000 and $5.81 million, respectively. SFAS 123R requires an estimate of forfeitures be used in the calculation. The Company estimates its forfeiture rates based on its historical experience.

     A summary of the status of the Company’s nonvested shares as of June 30, 2006 and 2005, and changes during the six months ended June 30, 2006 and 2005, is presented below:

			2006								2005
						Weighted								Weighted
		Shares				Average Fair				Shares				Average Fair
Nonvested Shares		(000)				Value				(000)				Value
Nonvested at January 1,			764			$	4.55				1,013			$	3.86
Granted			478			$	6.32				17			$	5.82
Vested			(162	)		$	2.44				(226	)		$	2.72
Forfeited			(101	)		$	4.23				(17	)		$	4.21
Nonvested at June 30,			979			$	5.51				787			$	3.95

     As of June 30, 2006, there was $3.92 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of approximately 4.3 years. The total fair value of shares vested during the six months ended June 30, 2006 and 2005 was $395,000 and $707,000, respectively.

     As of June 30, 2006 and 2005, the Company had 3,683,342 and 4,159,568 shares of common stock, respectively, available for granting of future options under the May 2000 Plan.

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

     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 April 2006, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) on FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)” which requires the variability of an entity to be analyzed based on the design of the entity. The nature and risks in the entity, as well as the purpose for the entity’s creation are examined to determine the variability in applying FIN 46(R). The variability is used in applying FIN46(R) to determine whether an entity is a variable interest entity, which interests are variable interests in the entity, and who is the primary beneficiary of the variable interest entity. This statement is effective for all reporting periods after June 15, 2006. The Company does not expect the adoption of FIN46(R)-6 to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently assessing the impact of the Interpretation on its financial statements.

     In July 2006, the Financial Accounting Standard Board (“FASB”) issued Staff Position (“FSP”) on FAS 13, FSP FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction.” FSP FAS 13-2 addresses how a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects the accounting by a lessor for that lease and amends FAS 13, “Accounting for Leases.” This Staff Position is effective for fiscal years beginning after December 15, 2006, with earlier application permitted. The Company does not expect the adoption of FSP FAS 13-2 to have a material impact on the Company’s consolidated financial position, 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.

     A reclassification has been made to the consolidated statement of earnings for the three months and six months ended June 30, 2005 to reclassify amounts from “Interest Income on Loans, including fees” to “ Salaries and employee benefits” to be in accordance with the requirements Statement of Financial Accounting Standard No. 91 (as amended), Accounting for Nonrefundable Loan Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases” and to be consistent with prior periods. The reclassification did not have any impact on net earnings, however, it reduced net interest income by $351,000 and $665,000 and increased salaries and employee benefits by $351,000 and $661,000 for the three months and six months ended June 30, 2005, respectively. In addition, “net interest margin — tax equivalent” for the three months and six months ended June 30, 2005 declined from 3.95% and 3.96% to 3.92% and 3.94%, respectively, from amounts previously reported as a result of the reclassification.

     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, 2005.

     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.

     Business Segments — The Company is a community bank with Business Financial Centers (branches) being the focal points for customer sales and services. As such, these Business Financial Centers comprise the biggest segment of the Company. The next largest business unit is the Treasury Department. This department manages all of the investments for the Company.

     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 these numbers. 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 are the actual loan fees paid to the Company by its customers and these fees are not deferred as they are 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 operating segments for the three months and six months ended June 30, 2006 and 2005:

		For The Six Months Ended June 30, 2006
		Business
		Financial
		Centers				Treasury				Other				Total
Interest income		$	70,458			$	56,852			$	21,723			$	149,033
Credit for funds provided			33,210				—				4,327				37,537
Total interest income			103,668				56,852				26,050				186,570
Interest expense			21,902				35,985				4,160				62,047
Charge for funds used			3,476				13,852				20,209				37,537
Total interest expense			25,378				49,837				24,369				99,584
Net interest income			78,290				7,015				1,681				86,986
Provision for credit losses			—				—				1,150				1,150
Net interest income after provision for credit losses		$	78,290			$	7,015			$	531			$	85,836
Non-interest income			7,391				34				8,395				15,820
Non-interest expense			19,631				509				27,589				47,729
Segment pretax profit		$	66,050			$	6,540			$	(18,663	)		$	53,927
Segment assets as of June 30, 2006		$	3,275,676			$	2,201,247			$	475,496			$	5,952,419

		For The Six Months Ended June 30, 2005
		Business
		Financial
		Centers				Treasury				Other				Total
Interest income		$	52,829			$	47,791			$	14,785			$	115,405
Credit for funds provided			17,073				—				5,720				22,793
Total interest income			69,902				47,791				20,505				138,198
Interest expense			8,527				21,685				2,685				32,897
Charge for funds used			1,607				11,409				9,777				22,793
Total interest expense			10,134				33,094				12,462				55,690
Net interest income			59,768				14,697				8,043				82,508
Provision for credit losses			—				—				—				—
Net interest income after provision for credit losses		$	59,768			$	14,697			$	8,043			$	82,508
Non-interest income			5,593				(45	)			8,823				14,371
Non-interest expense			18,286				575				24,585				43,446
Segment pretax profit		$	47,075			$	14,077			$	(7,719	)		$	53,433
Segment assets as of June 30, 2005		$	2,852,121			$	1,582,825			$	376,908			$	4,811,854

		For The Three Months Ended June 30, 2006
		Business
		Financial
		Centers				Treasury				Other				Total
Interest income		$	36,906			$	29,012			$	10,983			$	76,901
Credit for funds provided			16,678				—				3,181				19,859
Total interest income			53,584				29,012				14,164				96,760
Interest expense			12,181				19,421				2,138				33,740
Charge for funds used			1,886				6,787				11,186				19,859
Total interest expense			14,067				26,208				13,324				53,599
Net interest income			39,517				2,804				840				43,161
Provision for credit losses			—				—				900				900
Net interest income after provision for credit losses		$	39,517			$	2,804			$	(60	)		$	42,261
Non-interest income			3,691				22				4,378				8,091
Non-interest expense			9,619				265				14,375				24,259
Segment pretax profit		$	33,589			$	2,561			$	(10,057	)		$	26,093

		For The Three Months Ended June 30, 2005
		Business
		Financial
		Centers				Treasury				Other				Total
Interest income		$	27,311			$	24,488			$	7,923			$	59,722
Credit for funds provided			9,616				0				5,486				15,102
Total interest income			36,927				24,488				13,409				74,824
Interest expense			4,704				11,720				1,414				17,838
Charge for funds used			922				6,380				7,800				15,102
Total interest expense			5,626				18,100				9,214				32,940
Net interest income			31,301				6,388				4,195				41,884
Provision for credit losses			—				—				—				—
Net interest income after provision for credit losses		$	31,301			$	6,388			$	4,195			$	41,884
Non-interest income			2,908				-62				4,446				7,292
Non-interest expense			9,397				278				13,387				23,062
Segment pretax profit		$	24,812			$	6,048			-$	4,746			$	26,114