e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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For Quarter Ended September 30, 2006
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Commission File Number: 0-10140 |
CVB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
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California
(State or other jurisdiction of incorporation
or organization)
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95-3629339
(I.R.S. Employer Identification No.) |
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701 North Haven Ave, Suite 350, Ontario, California
(Address of Principal Executive Offices)
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91764
(Zip Code) |
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(Registrants 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: 76,570,601 outstanding as of November 2, 2006.
CVB FINANCIAL CORP.
2006 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
Dollar amounts in thousands
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September 30, |
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December 31, |
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2006 |
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2005 |
|
ASSETS |
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Investment securities available-for-sale |
|
$ |
2,643,100 |
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$ |
2,369,892 |
|
Interest-bearing balances due from depository institutions |
|
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|
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|
1,883 |
|
Investment in stock of Federal Home Loan Bank (FHLB) |
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75,399 |
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|
70,770 |
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Loans and lease finance receivables |
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|
2,917,027 |
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2,663,863 |
|
Allowance for credit losses |
|
|
(26,912 |
) |
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|
(23,204 |
) |
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|
|
|
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Total earning assets |
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5,608,614 |
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|
5,083,204 |
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Cash and due from banks |
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127,217 |
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130,141 |
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Premises and equipment, net |
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44,219 |
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40,020 |
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Intangibles |
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10,709 |
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12,474 |
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Goodwill |
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31,531 |
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32,357 |
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Cash value life insurance |
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98,906 |
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71,811 |
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Accrued interest receivable |
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|
30,081 |
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|
24,147 |
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Deferred tax asset |
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15,844 |
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18,420 |
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Other assets |
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7,527 |
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|
10,397 |
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TOTAL ASSETS |
|
$ |
5,974,648 |
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$ |
5,422,971 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities: |
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Deposits: |
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Noninterest-bearing |
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$ |
1,288,569 |
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$ |
1,490,613 |
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Interest-bearing |
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2,234,908 |
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1,933,433 |
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Total deposits |
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3,523,477 |
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3,424,046 |
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Demand Note to U.S. Treasury |
|
|
1,510 |
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|
6,433 |
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Short-term borrowings |
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|
1,454,501 |
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916,000 |
|
Long-term borrowings |
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|
450,000 |
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|
580,000 |
|
Accrued interest payable |
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|
16,253 |
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|
15,047 |
|
Deferred compensation |
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10,186 |
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7,102 |
|
Junior subordinated debentures |
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|
108,250 |
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|
82,476 |
|
Other liabilities |
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|
27,581 |
|
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|
48,990 |
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TOTAL LIABILITIES |
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|
5,591,758 |
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5,080,094 |
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COMMITMENTS AND CONTINGENCIES |
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Stockholders Equity: |
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Preferred stock (authorized, 20,000,000 shares
without par; none issued or outstanding) |
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Common stock (authorized, 122,070,312 shares
without par; issued and outstanding
76,569,847 (2006) and 76,430,206 (2005)) |
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254,152 |
|
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|
252,717 |
|
Retained earnings |
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|
138,448 |
|
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|
103,546 |
|
Accumulated other comprehensive loss, net of tax |
|
|
(9,710 |
) |
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|
(13,386 |
) |
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|
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Total stockholders equity |
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|
382,890 |
|
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|
342,877 |
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|
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|
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
5,974,648 |
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|
$ |
5,422,971 |
|
|
|
|
|
|
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|
See accompanying notes to the consolidated financial statements.
3
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
Dollar amounts in thousands, except per share
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For the Three Months |
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For the Nine Months |
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Ended September 30, |
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Ended September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
|
Interest income: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Loans, including fees |
|
$ |
50,564 |
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|
$ |
38,341 |
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|
$ |
142,769 |
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$ |
105,989 |
|
Investment securities: |
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|
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Taxable |
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|
24,725 |
|
|
|
18,994 |
|
|
|
66,625 |
|
|
|
56,594 |
|
Tax-preferred |
|
|
6,510 |
|
|
|
4,989 |
|
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|
19,563 |
|
|
|
13,873 |
|
|
|
|
|
|
|
|
|
|
|
|
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Total investment income |
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|
31,235 |
|
|
|
23,983 |
|
|
|
86,188 |
|
|
|
70,467 |
|
Dividends from FHLB stock |
|
|
1,200 |
|
|
|
675 |
|
|
|
2,990 |
|
|
|
1,813 |
|
Federal funds sold and Interest bearing deposits
with other institutions |
|
|
6 |
|
|
|
74 |
|
|
|
92 |
|
|
|
209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
83,005 |
|
|
|
63,073 |
|
|
|
232,039 |
|
|
|
178,478 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
18,903 |
|
|
|
7,539 |
|
|
|
48,398 |
|
|
|
18,848 |
|
Short-term borrowings |
|
|
17,081 |
|
|
|
8,775 |
|
|
|
41,411 |
|
|
|
14,022 |
|
Long-term borrowings |
|
|
3,312 |
|
|
|
2,827 |
|
|
|
8,247 |
|
|
|
16,524 |
|
Junior subordinated debentures |
|
|
1,737 |
|
|
|
1,348 |
|
|
|
5,024 |
|
|
|
3,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
41,033 |
|
|
|
20,489 |
|
|
|
103,080 |
|
|
|
53,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for credit losses |
|
|
41,972 |
|
|
|
42,584 |
|
|
|
128,959 |
|
|
|
125,093 |
|
Provision for credit losses |
|
|
1,250 |
|
|
|
|
|
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for credit losses |
|
|
40,722 |
|
|
|
42,584 |
|
|
|
126,559 |
|
|
|
125,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
3,253 |
|
|
|
3,477 |
|
|
|
9,833 |
|
|
|
9,770 |
|
Financial Advisory services |
|
|
1,807 |
|
|
|
1,741 |
|
|
|
5,467 |
|
|
|
4,929 |
|
Bankcard services |
|
|
697 |
|
|
|
631 |
|
|
|
1,857 |
|
|
|
1,867 |
|
BOLI income |
|
|
624 |
|
|
|
633 |
|
|
|
2,095 |
|
|
|
2,218 |
|
Other |
|
|
1,461 |
|
|
|
1,379 |
|
|
|
4,377 |
|
|
|
3,494 |
|
Gain(loss) on sale of securities, net |
|
|
1,029 |
|
|
|
|
|
|
|
1,062 |
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income |
|
|
8,871 |
|
|
|
7,861 |
|
|
|
24,691 |
|
|
|
22,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
11,541 |
|
|
|
12,700 |
|
|
|
37,031 |
|
|
|
38,324 |
|
Occupancy and Equipment |
|
|
3,986 |
|
|
|
3,818 |
|
|
|
11,591 |
|
|
|
11,631 |
|
Professional services |
|
|
1,237 |
|
|
|
1,047 |
|
|
|
3,995 |
|
|
|
3,267 |
|
Amortization of intangibles |
|
|
588 |
|
|
|
588 |
|
|
|
1,765 |
|
|
|
1,473 |
|
Other |
|
|
5,278 |
|
|
|
4,526 |
|
|
|
15,977 |
|
|
|
11,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses |
|
|
22,630 |
|
|
|
22,679 |
|
|
|
70,359 |
|
|
|
66,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
26,963 |
|
|
|
27,766 |
|
|
|
80,891 |
|
|
|
81,199 |
|
Income taxes |
|
|
8,508 |
|
|
|
9,499 |
|
|
|
25,279 |
|
|
|
27,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
18,455 |
|
|
$ |
18,267 |
|
|
$ |
55,612 |
|
|
$ |
53,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
51,055 |
|
|
$ |
6,679 |
|
|
$ |
59,288 |
|
|
$ |
36,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.24 |
|
|
$ |
0.24 |
|
|
$ |
0.73 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.24 |
|
|
$ |
0.24 |
|
|
$ |
0.72 |
|
|
$ |
0.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
0.09 |
|
|
$ |
0.11 |
|
|
$ |
0.27 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
4
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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 of taxes $16,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,278 |
) |
|
|
(22,278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005 |
|
|
76,430 |
|
|
|
252,717 |
|
|
|
103,546 |
|
|
|
(13,386 |
) |
|
|
|
|
Issuance of common stock |
|
|
140 |
|
|
|
698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based Compensation Expense |
|
|
|
|
|
|
596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.27 per share) |
|
|
|
|
|
|
|
|
|
|
(20,710 |
) |
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
55,612 |
|
|
|
|
|
|
$ |
55,612 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
available-for-sale, net of taxes $2,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,676 |
|
|
|
3,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
59,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2006 |
|
|
76,570 |
|
|
$ |
254,152 |
|
|
$ |
138,448 |
|
|
$ |
(9,710 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Common |
|
|
Retained |
|
|
Income (Loss), |
|
|
Comprehensive |
|
|
|
Outstanding |
|
|
Stock |
|
|
Earnings |
|
|
Net of Tax |
|
|
Income (Loss) |
|
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 ($0.33 per share) |
|
|
|
|
|
|
|
|
|
|
(21,085 |
) |
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
53,446 |
|
|
|
|
|
|
$ |
53,446 |
|
Other comprehensive 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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(amounts in thousands) |
|
Disclosure of reclassification amount |
|
|
|
|
|
|
|
|
Unrealized gains/(losses) on securities arising during the period |
|
$ |
6,335 |
|
|
$ |
(28,615 |
) |
(Tax expense)/tax benefit |
|
|
(2,659 |
) |
|
|
11,438 |
|
|
|
|
|
|
|
|
Net unrealized gains/ (losses) on securities |
|
$ |
3,676 |
|
|
$ |
(17,177 |
) |
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
5
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollar amounts in thousands) |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Interest received |
|
$ |
228,030 |
|
|
$ |
179,076 |
|
Service charges and other fees received |
|
|
22,854 |
|
|
|
22,277 |
|
Interest paid |
|
|
(101,873 |
) |
|
|
(52,308 |
) |
Cash paid to suppliers and employees |
|
|
(62,208 |
) |
|
|
(64,571 |
) |
Income taxes paid |
|
|
(20,750 |
) |
|
|
(22,100 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
66,053 |
|
|
|
62,374 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from sales of MBS |
|
|
57,132 |
|
|
|
126,598 |
|
Proceeds from repayment of MBS |
|
|
297,193 |
|
|
|
316,067 |
|
Proceeds from repayment of investment securities available-for-sale |
|
|
|
|
|
|
67 |
|
Proceeds from maturity of investment securities |
|
|
4,368 |
|
|
|
10,346 |
|
Purchases of investment securities available-for-sale |
|
|
(193,887 |
) |
|
|
(90,090 |
) |
Purchases of MBS |
|
|
(456,648 |
) |
|
|
(525,168 |
) |
Purchases of FHLB stock |
|
|
(4,629 |
) |
|
|
(16,428 |
) |
Net increase in loans |
|
|
(246,985 |
) |
|
|
(162,757 |
) |
Proceeds from sales of premises and equipment |
|
|
766 |
|
|
|
18 |
|
Purchase of premises and equipment |
|
|
(9,425 |
) |
|
|
(10,021 |
) |
Cash acquired from purchase of Granite State Bank, net of cash paid |
|
|
|
|
|
|
12,232 |
|
Purchase of Bank Owned Life Insurance |
|
|
(25,000 |
) |
|
|
|
|
Investment in common stock of CVB Statutory Trust III |
|
|
(774 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(577,889 |
) |
|
|
(339,136 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net (decrease) increase in transaction deposits |
|
|
(135,619 |
) |
|
|
199,058 |
|
Net increase in time deposits |
|
|
235,051 |
|
|
|
36,739 |
|
Advances from Federal Home Loan Bank |
|
|
350,000 |
|
|
|
370,000 |
|
Repayment of advances from Federal Home Loan Bank |
|
|
(445,000 |
) |
|
|
(106,000 |
) |
Net increase (decrease) in short-term borrowings |
|
|
498,577 |
|
|
|
(142,924 |
) |
Cash dividends on common stock |
|
|
(20,710 |
) |
|
|
(21,085 |
) |
Repurchase of common stock |
|
|
|
|
|
|
(12,286 |
) |
Issuance of junior subordinated debentures |
|
|
25,774 |
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
698 |
|
|
|
1,601 |
|
Tax benefit related to exercise of stock options |
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
508,912 |
|
|
|
325,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
(2,924 |
) |
|
|
48,341 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
130,141 |
|
|
|
84,400 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
127,217 |
|
|
$ |
132,741 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
6
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollar amounts in thousands) |
|
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
55,612 |
|
|
$ |
53,446 |
|
Adjustments to reconcile net earnings to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
(Gain)/loss on sale of investment securities |
|
|
(1,062 |
) |
|
|
46 |
|
Gain on sale of premises and equipment |
|
|
(441 |
) |
|
|
(1 |
) |
Increase in cash value of life insurance |
|
|
(2,095 |
) |
|
|
(1,674 |
) |
Net amortization of premiums on investment securities |
|
|
5,983 |
|
|
|
6,976 |
|
Provisions for credit losses |
|
|
2,400 |
|
|
|
|
|
Stock-based compensation |
|
|
596 |
|
|
|
|
|
Depreciation and amortization |
|
|
6,020 |
|
|
|
6,274 |
|
Change in accrued interest receivable |
|
|
(7,162 |
) |
|
|
(3,528 |
) |
Change in accrued interest payable |
|
|
1,207 |
|
|
|
1,078 |
|
Change in other assets and liabilities |
|
|
4,995 |
|
|
|
(243 |
) |
|
|
|
|
|
|
|
Total adjustments |
|
|
10,441 |
|
|
|
8,928 |
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
$ |
66,053 |
|
|
$ |
62,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
4,029 |
|
|
$ |
33,441 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
7
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the nine months ended September 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 nine months
ended September 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 Companys 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 Companys 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. We offer trust services to
customers through our Financial Advisory Services Division and Business Financial Centers (branch
offices). The Banks customers consist primarily of small to mid-sized businesses and individuals
located in the counties of San Bernardino, Riverside, Orange, Madera, Fresno, Tulare, Kern, 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.
Our 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
Companys 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.
8
Investment 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. 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 Companys investment in Federal Home Loan Bank (FHLB) stock is
carried at cost. At September 30, 2006, all of the Companys 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 September 30, 2006, the Company entered into
commitments with certain customers amounting to $839.6 million compared to $895.8 million at
December 31, 2005. Letters of credit at September 30, 2006, and December 31, 2005, were $67.7
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 managements 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 nine months of 2006, we recorded $2.4
million provision for credit losses. The allowance for credit losses was $26.9 million as of
September 30, 2006. This represents an increase of $3.7 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 $2.4 million to allow for the growth and inherent risks of the loan
portfolio and the loan recoveries of $1.5 million, offset by the loans charged off of $145,000
during the first nine months of 2006.
9
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 in other liabilities. Provision to this reserve was expensed in other expense.
For the nine months ended September 30, 2006, there were no provisions to this reserve. As of
September 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 Companys 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.
There were no loans classified as impaired at September 30, 2006 and 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 September 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.
Additionally, as required by SFAS No. 142, the Company completed its annual impairment test as
of June 30, 2006 and did not record any impairment of goodwill. At September 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 September 30, 2006, intangible assets that continue to be subject to amortization include
core deposits of $10.7 million (net of $8.9 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 $1.8 million for
the nine months ended September 30, 2006. Estimated amortization expense, for the remainder of 2006
is expected to be $588,000.
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 4.3 years.
10
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 September 30, 2006 was 76,569,847. 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 Nine Months |
|
|
Ended September 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 |
|
$ |
55,612 |
|
|
|
76,487 |
|
|
$ |
0.73 |
|
|
$ |
53,446 |
|
|
|
76,500 |
|
|
$ |
0.70 |
|
EFFECT OF DILUTIVE
SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental shares from
assumed exercise of
outstanding options and
restricted stock grants |
|
|
|
|
|
|
723 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
724 |
|
|
|
(0.01 |
) |
|
|
|
|
|
DILUTED EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common stockholders |
|
$ |
55,612 |
|
|
|
77,210 |
|
|
$ |
0.72 |
|
|
$ |
53,446 |
|
|
|
77,224 |
|
|
$ |
0.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share Reconciliation |
|
|
(Dollars and shares in thousands, except per share amounts) |
|
|
For the Three Months |
|
|
Ended September 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 |
|
$ |
18,455 |
|
|
|
76,509 |
|
|
$ |
0.24 |
|
|
$ |
18,267 |
|
|
|
76,368 |
|
|
$ |
0.24 |
|
EFFECT OF DILUTIVE
SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental shares from
assumed exercise of
outstanding options and
restricted stock grants |
|
|
|
|
|
|
827 |
|
|
|
0.00 |
|
|
|
|
|
|
|
689 |
|
|
|
0.00 |
|
|
|
|
|
|
DILUTED EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common stockholders |
|
$ |
18,455 |
|
|
|
77,336 |
|
|
$ |
0.24 |
|
|
$ |
18,267 |
|
|
|
77,057 |
|
|
$ |
0.24 |
|
|
|
|
|
|
Stock-Based Compensation - At September 30, 2006, the Company has three stock-based
employee compensation plans, which are described more fully in Note 15 in the Companys Annual
Report on Form 10-K.
11
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 $596,000 for the
nine months and $296,000 for the three months ended September 30, 2006. This had the effect of
reducing net income by $511,000 and $250,000 for the nine 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 $596,000 of excess tax benefit resulting from disqualified
disposition classified as financing activities in the Consolidated Statements of Cash Flows for the
nine months ended September 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 nine months and
three months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2005 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
Net income, as reported |
|
$ |
18,267 |
|
|
$ |
53,446 |
|
Deduct: Total stock-based employee compensation
expense determined under fair value based method for all
awards, net of related tax effects |
|
|
247 |
|
|
|
836 |
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
18,020 |
|
|
$ |
52,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.24 |
|
|
$ |
0.70 |
|
Basic pro forma |
|
$ |
0.24 |
|
|
$ |
0.69 |
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.24 |
|
|
$ |
0.69 |
|
Diluted pro forma |
|
$ |
0.23 |
|
|
$ |
0.68 |
|
The estimated fair value of the options granted during 2006 and prior years was
calculated using the Black-Scholes options pricing model. There were 549,950 and 131,875 options
granted during the first nine 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:
12
|
|
|
|
|
|
|
September 30, |
|
|
2006 |
Dividend Yield |
|
|
2.4 |
% |
Volatility |
|
|
39.7 |
% |
Risk-Free Interest Rate |
|
|
4.9 |
% |
Expected Life |
|
7.4 years |
Option activity under the Companys stock option plan as of September 30, 2006 and
changes during the nine months ended September 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 |
|
|
1,872 |
|
|
$ |
9.35 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
550 |
|
|
$ |
15.40 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(90 |
) |
|
$ |
7.79 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(102 |
) |
|
$ |
12.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
2,230 |
|
|
$ |
10.78 |
|
|
|
6.34 |
|
|
$ |
9,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested shares at September 30, 2006 |
|
|
974 |
|
|
$ |
14.53 |
|
|
|
8.78 |
|
|
$ |
709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
1,257 |
|
|
$ |
7.87 |
|
|
|
4.45 |
|
|
$ |
8,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
132 |
|
|
$ |
15.90 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(576 |
) |
|
$ |
4.15 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(28 |
) |
|
$ |
11.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2005 |
|
|
1,944 |
|
|
$ |
9.29 |
|
|
|
5.72 |
|
|
$ |
10,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested shares at September 30, 2005 |
|
|
772 |
|
|
$ |
12.97 |
|
|
|
7.34 |
|
|
$ |
1,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2005 |
|
|
1,172 |
|
|
$ |
6.87 |
|
|
|
4.65 |
|
|
$ |
9,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the nine months
ended September 30, 2006 and 2005 was $6.23 and $6.09, respectively. The total intrinsic value of
options exercised during the nine months ended September 30, 2006 and 2005 was $745,000 and $6.46
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 Companys nonvested shares as of September 30, 2006 and 2005,
and changes during the nine months ended September 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 |
|
|
550 |
|
|
$ |
6.23 |
|
|
|
132 |
|
|
$ |
6.09 |
|
Vested |
|
|
(241 |
) |
|
$ |
4.36 |
|
|
|
(345 |
) |
|
$ |
3.12 |
|
Forfeited |
|
|
(102 |
) |
|
$ |
4.26 |
|
|
|
(28 |
) |
|
$ |
4.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, |
|
|
971 |
|
|
$ |
5.58 |
|
|
|
772 |
|
|
$ |
4.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
As of September 30, 2006, there was $4.0 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 4.5 years. The total fair
value of shares vested during the nine months ended September 30, 2006 and 2005 was $1.05 million
and $1.08 million, respectively.
As of September 30, 2006 and 2005, the Company had 3,609,412 and 4,055,628 shares of
common stock, respectively, available for granting of future options under the CVB2000 Stock Option
Plan.
On August 1, 2006, we granted 50,000 shares of restricted stock to our new President,
Christopher D. Myers. The stock will vest, in equal installments, over a five-year period. We are
accounting for this grant under the provisions of SFAS 123R.
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 July 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxesan 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 Companys consolidated financial position, results of
operations or cash flows.
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157,
Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157
applies under other accounting pronouncements that require or permit fair value measurements and
accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007. Management is
currently evaluating the effect of adoption of SFAS No. 157, but does not expect the adoption to
have a material effect on the Companys consolidated financial condition or results of operations.
14
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 158,
Employers Accounting for Defined Benefit Pension and Other Retirement Plans an amendment of
FASB Statements No. 87, 88, 106 and 132(R) (SFAS No. 158). SFAS No. 158 requires employers to
recognize the overfunded or underfunded status of a defined benefit post-retirement plan as an
asset or liability in its statement of financial position, measured as the difference between the
fair value of plan assets and the benefit obligation. Further, SFAS No. 158 requires employers to
recognize changes in that funded status in the year in which the changes occur through
comprehensive income. SFAS No. 158 is effective for the fiscal year ending after December 15,
2006. The Company does not expect the adoption of SFAS No. 158 to have a material effect on the
Companys consolidated financial position or results of operations.
In September 2006, the Emerging Issues Task Force (EITF) reached a final consensus on Issue
06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements (EITF 06-4). EITF 06-4 requires that for a split-dollar
life insurance arrangement, an employer should recognize a liability for future benefits in
accordance with SFAS 106, Employers Accounting for Postretirement Benefits Other Than Pensions
or APB Opinion No. 12, Omnibus Opinion 1967. Under the guidance, the purchase of an
endorsement type policy does not constitute a settlement since the policy does not qualify as
nonparticipating because the policyholders are subject to the favorable and unfavorable experience
of the insurance company. EITF 06-4 is effective for fiscal years beginning after December 15,
2006. The Company is currently assessing the impact of the adoption of EITF 06-4 on its
consolidated financial statements.
In September 2006, the EITF reached a final consensus on Issue 06-5, Accounting for Purchases
of Life Insurance (EITF 06-05). EITF 06-5 provides guidance on FASB Technical Bulletin No.
85-4, Accounting for Purchases of Life Insurance. Under the guidance, the policyholder should
consider any additional amounts included in the contractual terms of the policy in determining the
amount that could be realized under the insurance contract. In addition, the policyholder should
also determine the amount that could be realized under the life insurance contract assuming the
surrender of an individual-life by individual-life policy. EITF 06-5 is effective for fiscal years
beginning after December 15, 2007. The Company does not expect the adoption of EITF 06-5 to have a
material effect on the Companys consolidated financial position or results of operations.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides guidance on how
to evaluate prior period financial statement misstatements for purposes of assessing their
materiality in the current period, including both the carryover and reversing effects of prior year
misstatements, using both a rollover and iron curtain approach. If the prior period effect is
material to the current period, then the prior period is required to be corrected. Correcting prior
year financial statements would not require an amendment of prior year financial statements, but
such corrections would be made the next time the company files the prior year financial statements.
Upon adoption, SAB 108 allows a one-time transitional cumulative effect adjustment to retained
earnings for corrections of prior period misstatements required under this statement. SAB 108 is
effective for fiscal years beginning after November 15, 2006. The Company does not expect the
adoption of SAB 108 to have a material effect on the Companys consolidated financial position or
results of operations.
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 nine months ended September 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
15
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 $436,000 and $1.1 million and
reduced salaries and employee benefits by $436,000 and $1.1 million for the three months and nine
months ended September 30, 2005, respectively. In addition, net interest margin tax equivalent
for the three months and nine months ended September 30, 2005 declined from 3.85% and 3.82% to
3.92% and 3.90%, 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
Companys 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 Companys 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 Companys 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
managements internal reporting system, which allows management to determine the performance of
each of its business units. Loan fees, included in the Business Financial Centers category are
the actual loan fees paid to the Company by its customers. These fees are eliminated and deferred
in the Other category, resulting in deferred loan fees for the consolidated financial statements.
All income and expense items not directly associated with the two business segments are grouped in
the Other category. Future changes in the Companys 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 nine months ended September 30, 2006 and
2005:
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended September 30, 2006 |
|
|
|
Business |
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
Centers |
|
|
Treasury |
|
|
Other |
|
|
Total |
|
Interest income, including loan fees |
|
$ |
102,976 |
|
|
$ |
89,307 |
|
|
$ |
39,756 |
|
|
$ |
232,039 |
|
Credit for funds provided |
|
|
50,019 |
|
|
|
|
|
|
|
5,793 |
|
|
|
55,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
152,995 |
|
|
|
89,307 |
|
|
|
45,549 |
|
|
|
287,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
36,002 |
|
|
|
60,710 |
|
|
|
6,368 |
|
|
|
103,080 |
|
Charge for funds used |
|
|
5,496 |
|
|
|
18,613 |
|
|
|
31,703 |
|
|
|
55,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
41,498 |
|
|
|
79,323 |
|
|
|
38,071 |
|
|
|
158,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
111,497 |
|
|
|
9,984 |
|
|
|
7,478 |
|
|
|
128,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
2,400 |
|
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for credit losses |
|
$ |
111,497 |
|
|
$ |
9,984 |
|
|
$ |
5,078 |
|
|
$ |
126,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
11,384 |
|
|
|
1,063 |
|
|
|
12,244 |
|
|
|
24,691 |
|
Non-interest expense |
|
|
29,877 |
|
|
|
800 |
|
|
|
39,682 |
|
|
|
70,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit |
|
$ |
93,004 |
|
|
$ |
10,247 |
|
|
|
($22,360 |
) |
|
$ |
80,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of September 30, 2006 |
|
$ |
3,221,611 |
|
|
$ |
2,284,708 |
|
|
$ |
468,329 |
|
|
$ |
5,974,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended September 30, 2005 |
|
|
|
Business |
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
Centers |
|
|
Treasury |
|
|
Other |
|
|
Total |
|
Interest income, including loan fees |
|
$ |
77,113 |
|
|
$ |
72,539 |
|
|
$ |
28,826 |
|
|
$ |
178,478 |
|
Credit for funds provided |
|
|
28,617 |
|
|
|
|
|
|
|
2,149 |
|
|
|
30,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
105,730 |
|
|
|
72,539 |
|
|
|
30,975 |
|
|
|
209,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
14,477 |
|
|
|
34,921 |
|
|
|
3,987 |
|
|
|
53,385 |
|
Charge for funds used |
|
|
2,784 |
|
|
|
18,469 |
|
|
|
9,513 |
|
|
|
30,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
17,261 |
|
|
|
53,390 |
|
|
|
13,500 |
|
|
|
84,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
88,469 |
|
|
|
19,149 |
|
|
|
17,475 |
|
|
|
125,093 |
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for credit losses |
|
$ |
88,469 |
|
|
$ |
19,149 |
|
|
$ |
17,475 |
|
|
$ |
125,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
8,929 |
|
|
|
(45 |
) |
|
|
13,348 |
|
|
|
22,232 |
|
Non-interest expense |
|
|
28,258 |
|
|
|
882 |
|
|
|
36,986 |
|
|
|
66,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit |
|
$ |
69,140 |
|
|
$ |
18,222 |
|
|
|
($6,163 |
) |
|
$ |
81,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of September 30, 2005 |
|
$ |
3,086,749 |
|
|
$ |
1,569,188 |
|
|
$ |
364,227 |
|
|
$ |
5,020,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended September 30, 2006 |
|
|
|
Business |
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
Centers |
|
|
Treasury |
|
|
Other |
|
|
Total |
|
Interest income, including loan fees |
|
$ |
32,518 |
|
|
$ |
32,455 |
|
|
$ |
18,032 |
|
|
$ |
83,005 |
|
Credit for funds provided |
|
|
16,809 |
|
|
|
|
|
|
|
1,466 |
|
|
|
18,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
49,327 |
|
|
|
32,455 |
|
|
|
19,498 |
|
|
|
101,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
14,100 |
|
|
|
24,725 |
|
|
|
2,208 |
|
|
|
41,033 |
|
Charge for funds used |
|
|
2,020 |
|
|
|
4,761 |
|
|
|
11,494 |
|
|
|
18,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
16,120 |
|
|
|
29,486 |
|
|
|
13,702 |
|
|
|
59,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
33,207 |
|
|
|
2,969 |
|
|
|
5,796 |
|
|
|
41,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
1,250 |
|
|
|
1,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for credit losses |
|
$ |
33,207 |
|
|
$ |
2,969 |
|
|
$ |
4,546 |
|
|
$ |
40,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
3,993 |
|
|
|
1,029 |
|
|
|
3,849 |
|
|
|
8,871 |
|
Non-interest expense |
|
|
10,246 |
|
|
|
291 |
|
|
|
12,093 |
|
|
|
22,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit |
|
$ |
26,954 |
|
|
$ |
3,707 |
|
|
|
($3,698 |
) |
|
$ |
26,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended September 30, 2005 |
|
|
|
Business |
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
Centers |
|
|
Treasury |
|
|
Other |
|
|
Total |
|
Interest income, including loan fees |
|
$ |
24,284 |
|
|
$ |
24,748 |
|
|
$ |
14,041 |
|
|
$ |
63,073 |
|
Credit for funds provided |
|
|
11,544 |
|
|
|
|
|
|
|
(3,571 |
) |
|
|
7,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
35,828 |
|
|
|
24,748 |
|
|
|
10,470 |
|
|
|
71,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
5,950 |
|
|
|
13,236 |
|
|
|
1,303 |
|
|
|
20,489 |
|
Charge for funds used |
|
|
1,177 |
|
|
|
7,060 |
|
|
|
(264 |
) |
|
|
7,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
7,127 |
|
|
|
20,296 |
|
|
|
1,039 |
|
|
|
28,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
28,701 |
|
|
|
4,452 |
|
|
|
9,431 |
|
|
|
42,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for credit losses |
|
$ |
28,701 |
|
|
$ |
4,452 |
|
|
$ |
9,431 |
|
|
$ |
42,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
3,336 |
|
|
|
|
|
|
|
4,525 |
|
|
|
7,861 |
|
Non-interest expense |
|
|
9,972 |
|
|
|
307 |
|
|
|
12,400 |
|
|
|
22,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit |
|
$ |
22,065 |
|
|
$ |
4,145 |
|
|
$ |
1,556 |
|
|
$ |
27,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS |
GENERAL
Managements discussion and analysis is written to provide greater insight into the results of
operations and the financial condition of CVB Financial Corp. and its subsidiaries. Throughout this
discussion, Company refers to CVB Financial Corp. and its subsidiaries as a consolidated entity.
CVB refers to CVB Financial Corp. as the unconsolidated parent company and Bank refers to
Citizens Business Bank. For a more complete understanding of the Company and its operations,
reference should be made to the financial statements included in this report and in the Companys
2005 Annual Report on Form 10-K. Certain statements in this Report on Form 10-Q constitute
forward-looking statements under the Private Securities Litigation Reform Act of 1995 which
involve risks and uncertainties. Our actual results may differ significantly from the results
discussed in such forward-looking statements. Factors that might cause such a difference include,
but are not limited to, economic conditions, competition in the geographic and business areas in
which we conduct operations, natural disasters, fluctuations in interest rates, credit quality, and
government regulations. For additional information concerning these factors, see the periodic
filings the Company makes with the Securities and Exchange Commission, and in particular Item 1A.
Risk Factors contained in the Companys Annual Report on Form 10-K for the year ended December 31,
2005. The Company does not undertake, and specifically disclaims, any obligation to update any
forward-looking statements to reflect the occurrence of events or circumstances after the date of
such statements except as required by law.
OVERVIEW
We are a bank holding company with one bank subsidiary, Citizens Business Bank. We have three
other inactive subsidiaries: CVB Ventures, Inc.; Chino Valley Bancorp and ONB Bancorp. In March
2006, we merged two of our operating subsidiaries, Community Trust Deed Services and Golden West
Enterprises, Inc. into the Bank to increase the lending limit of Golden Wests leasing operations
and to improve efficiency. We are also the common stockholder of CVB Statutory Trust I, CVB
Statutory Trust II and CVB Statutory Trust III. CVB Statutory Trust I and II were created in
December 2003 and CVB Statutory Trust III was created in January 2006 to issue $84.0 million and
$25.0 million, respectively, in 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 the City of Madera (the middle of the Central Valley) in the
center of California to the City of 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. As opportunities present themselves, we will continue to pursue
acquisition opportunities and other opportunities for growth which will enable us to meet our
business objectives and enhance shareholder value.
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 are also subject to competition from other financial institutions, which may affect
our pricing of products and services, and the fees and interest rates we can charge on them.
Economic conditions in our California service area impact our business. The economy in our
market area is showing some signs of weakening. Housing markets have remained flat or have declined
slightly. Housing starts have slowed. Unemployment remains low, but job growth is slowing.
Our growth in loans and investments for the first nine months of 2006 compared with the first
nine months of 2005 has allowed our interest income to grow. The Bank has always had an excellent
base of interest free deposits primarily due to our specialization in businesses and professionals as
customers. This has allowed us to have a low cost of deposits, currently 1.84% for the nine months
of 2006.
19
However, the rise in interest expense resulting primarily from an increase in average
interest-bearing liabilities and an increase in the cost of these liabilities has caused our net
interest margin to decline to 3.42% for the nine months of September 30, 2006 from 3.90% for the
nine months of September 30, 2005.
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.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of significant judgments
and uncertainties, and could potentially result in materially different results under different
assumptions and conditions. We believe that our most critical accounting policies upon which our
financial condition depends, and which involve the most complex or subjective decisions or
assessments are as follows:
Allowance for Credit Losses: Arriving at an appropriate level of allowance for credit losses
involves a high degree of judgment. Our allowance for credit losses provides for probable losses
based upon evaluations of known and inherent risks in the loan portfolio. The determination of the
balance in the allowance for credit losses is based on an analysis of the loan and lease finance
receivables portfolio using a systematic methodology and reflects an amount that, in our judgment,
is adequate to provide for probable credit losses inherent in the portfolio, after giving
consideration to the character of the loan portfolio, current economic conditions, past credit loss
experience, and such other factors as deserve current recognition in estimating inherent credit
losses. The provision for credit losses is charged to expense. During the first nine months of
2006, we recorded a $2.4 million provision for credit losses. For a full discussion of our
methodology of assessing the adequacy of the allowance for credit losses, see the Risk Management
section of this Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Investment Portfolio: The investment portfolio is an integral part of the Companys financial
performance. We invest primarily in fixed income securities. Accounting estimates are used in the
presentation of the investment portfolio and these estimates do impact the presentation of our
financial condition and results of operations. Many of the securities included in the investment
portfolio are purchased at a premium or discount. The premiums or discounts are amortized or
accreted over the life of the security. For mortgage-related securities (i.e., securities that are
collateralized and payments received from underlying mortgages), the amortization or accretion is
based on estimated average lives of the securities. The lives of these securities can fluctuate
based on the amount of prepayments received on the underlying collateral of the securities. The
amount of prepayments varies from time to time based on the interest rate environment (i.e., lower
interest rates increase the likelihood of refinances) and the rate of turnover of the mortgages
(i.e., how often the underlying properties are sold and mortgages paid-off). We use estimates for
the average lives of these mortgage-related securities based on information received from third
parties whose business it is to compile mortgage related data and develop a consensus of that data.
We adjust the rate of amortization or accretion regularly to reflect changes in the estimated
average lives of these securities.
We classify securities as held-to-maturity those debt securities that we have the positive
intent and ability to hold to maturity. Securities classified as trading are those securities that
are bought and held 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
20
securities are assessed to determine whether there is an
other-than-temporary impairment. Such impairment, if any, is required to be recognized in current
earnings rather than as a separate component of stockholders equity. Realized gains and losses on
sales of securities are recognized in earnings at the time of sale and are determined on a
specific-identification basis. Purchase premiums and discounts are recognized in interest income
using the interest method over the terms of the securities, except for mortgage-related securities
as discussed in the previous paragraph. Our investment in Federal Home Loan Bank (FHLB) stock is
carried at cost.
Income Taxes: We account for income taxes by deferring income taxes based on estimated future
tax effects of differences between the tax and book basis of assets and liabilities considering the
provisions of enacted tax laws. These differences result in deferred tax assets and liabilities,
which are included in our balance sheets. We must also assess the likelihood that any deferred tax
assets will be recovered from future taxable income and establish a valuation allowance for those
assets determined to not likely be recoverable. Our judgment is required in determining the amount
and timing of recognition of the resulting deferred tax assets and liabilities, including
projections of future taxable income. Although we have determined a valuation allowance is not
required for all deferred tax assets, there is no guarantee that these assets are realizable.
Goodwill and Intangible Assets: We have acquired entire banks and branches of banks. Those
acquisitions accounted for under the purchase method of accounting have given rise to goodwill and
intangible assets. We record the assets acquired and liabilities assumed at their fair value. These
fair values are arrived at by use of internal and external valuation techniques. The purchase price
is allocated to the assets and liabilities, resulting in identifiable intangibles. Any excess
purchase price after this allocation results in goodwill. Goodwill is tested on an annual basis for
impairment.
ANALYSIS OF THE RESULTS OF OPERATIONS
Earnings
We reported net earnings of $55.6 million for the nine months ended September 30, 2006. This
represented an increase of $2.2 million or 4.05%, over net earnings of $53.4 million, for the nine
months ended September 30, 2005. Basic earnings per share for the nine-month period increased to
$0.73 per share for 2006, compared to $0.70 per share for 2005. Diluted earnings per share for the
nine-month period increased to $0.72 per share for 2006, compared to $0.69 per share for 2005. The
annualized return on average assets was 1.31% for the nine months of 2006 compared to an annualized
return on average assets of 1.50% for the nine months ended September 30, 2005. The annualized
return on average equity was 21.03% for the nine months ended September 30, 2006, compared to an
annualized return of 21.29% for the nine months ended September 30, 2005.
During the third quarter of 2006, we sold all of our shares of FHLMC Preferred Stock at a net
gain of $1.1 million after write downs of $8.6 million in prior periods.
During the first nine months ended September 30, 2006 and 2005, the Company had net gain on
sales of investment securities of $1.1 million and net loss on sales of investment securities of
$46,000, respectively. There were no gains or losses on sales of other real estate owned.
For the quarter ended September 30, 2006, our net earnings were $18.5 million. This
represented an increase of $188,000 or 1.03%, over net earnings of $18.3 million, for the third
quarter of 2005. Basic and diluted earnings per share were $0.24 per share for the third quarter of
2006 and 2005. The annualized return on average assets was 1.23% for the third quarter of 2006
compared to an annualized return on average assets of 1.46% for the same period last year. The annualized return on average equity
was 20.71% for the third quarter of 2006 compared to an annualized return on average equity of
20.75% for the third quarter of 2005.
21
During the first nine months of 2005, we recorded the reversal of a reserve of $2.6 million
for a possible robbery loss that did not materialize. This was recorded as a reversal of other
expense, reducing the amount reported for the first nine months of 2005 by $2.6 million. See Item 3
Legal Proceedings of PART I in our Annual Report on Form 10-K for year ended December 31, 2005
for more information.
Net Interest Income
The principal component of the Companys earnings is net interest income, which is the
difference between the interest and fees earned on loans and investments (earning assets) and the
interest paid on deposits and borrowed funds (interest-bearing liabilities). When net interest
income is expressed as a percentage of average earning assets, the result is the net interest
margin. The net interest spread is the yield on average earning assets minus the cost of average
interest-bearing liabilities. Our net interest income, interest spread, and net interest margin are
sensitive to general business and economic conditions. These conditions include short-term and
long-term interest rates, inflation, monetary supply, and the strength of the economy, in general,
and the local economies in which we conduct business. Our 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 Companys net interest income, after provision for credit losses of $2.4 million, totaled
$126.6 million for the nine months ended September 30, 2006. This represented an increase of $1.5
million, or 1.17%, over net interest income of $125.1 million for the same period in 2005. The
increase in net interest income of $1.5 million resulted from a $53.6 million increase in interest
income, offset by a $49.7 million increase in interest expense and $2.4 million provision of credit
losses recorded in the nine months of 2006. The $53.6 million increase in interest income resulted
from the $857.5 million increase in average earning assets and an increase in average yield on
earning assets to 6.00% for the nine months of 2006 from 5.48% for the same period in 2005. The
$49.7 million increase in interest expense resulted from an $876.4 million increase in average
interest-bearing liabilities and an increase in the average rate paid on interest-bearing
liabilities to 3.51% for the nine months of 2006 from 2.34% for the same period in 2005.
Interest income totaled $232.0 million for the first nine months of 2006. This represented an
increase of $53.6 million, or 30.01%, compared to total interest income of $178.5 million for the
same period last year. The increase in interest income was primarily the result of the increase in
average earning assets from $4.46 billion in the nine months of 2005 to $5.31 billion in the same
period in 2006. This represents a 19.25% increase for the nine months of 2006 over the same period
last year. The average yield on earning assets increased by 52 basis points for the first nine
months of 2006 compared with the same period last year.
Interest expense totaled $103.1 million for the first nine months of 2006. This represented an
increase of $49.7 million, or 93.1%, over total interest expense of $53.4 million for the same
period last year. The increase in interest expense was primarily the result of an increase in
average interest-bearing liabilities from $3.0 million to $3.9 million, and an increase in the cost
of these liabilities by 117 basis points.
For the third quarter ended September 30, 2006, the Companys net interest income, after
provision for credit losses of $1.3 million, totaled $40.7 million. This represented a decrease of
$1.9 million, or 4.37%, from net interest income of $42.6 million for the same period in 2005. The
decrease in net interest income of $1.9 million for the third quarter of 2006 resulted from an
increase of $19.9 million in interest income,
offset by a $20.5 million increase in interest expense and $1.3 million provision of credit
losses recorded in the third quarter of 2006. The increase in interest income of $19.9 million
resulted from the increase in average earning assets of $928.9 million and an increase in the
average yield on earning assets to 6.15% for the third quarter of 2006 from 5.57% the same period
in 2005. The increase of $20.5 million in interest expense resulted from the increase in the
average rate paid on interest-bearing liabilities to 3.90% for the third quarter of 2006 from 2.55% the same period in 2005 and a $986.5 million increase in average interest-bearing liabilities
compared with the same period in 2005.
22
The increase in interest income for the third quarter ending September 30, 2006 as compared to
the third quarter ending September 30, 2005 was primarily the result of the increase in average
earning assets of $928.9 million and an increase in the average yield on earning assets of 58 basis
points between the third quarter of 2006 and the third quarter of 2005. Interest income totaled
$83.0 million for the third quarter of 2006. This represented an increase of $19.9 million, or
31.60%, compared to total interest income of $63.1 million for the same period last year.
The increase in interest expense for the third quarter ending September 30, 2006 as compared
to the third quarter ending September 30, 2005 was primarily the result of the increase in average
interest bearing liabilities of $986.5 million and the increase of 135 basis points in the average
yield paid on interest-bearing liabilities. Interest expense totaled $41.0 million for the third
quarter of 2006. This represented an increase of $20.5 million or 100.27%, over total interest
expense of $20.5 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 2006
and 2005.
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 and three-month
periods ended September 30, 2006, and 2005. Yields for tax-preferenced investments are shown on a
taxable equivalent basis using a 35% tax rate.
23
TABLE 1 Distribution of Average Assets, Liabilities, and Stockholders Equity; Interest
Rates and Interest Differentials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Rate (5) |
|
|
Balance |
|
|
Interest |
|
|
Rate (5) |
|
|
|
(amounts in thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
1,885,771 |
|
|
$ |
66,625 |
|
|
|
4.72 |
% |
|
$ |
1,761,106 |
|
|
$ |
56,594 |
|
|
|
4.29 |
% |
Tax preferenced (1) |
|
|
591,343 |
|
|
|
19,563 |
|
|
|
5.94 |
% |
|
|
413,794 |
|
|
|
13,873 |
|
|
|
5.96 |
% |
Investment in FHLB stock |
|
|
73,333 |
|
|
|
2,990 |
|
|
|
5.44 |
% |
|
|
62,078 |
|
|
|
1,813 |
|
|
|
3.89 |
% |
Federal Funds Sold & Interest Bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with other institutions |
|
|
2,464 |
|
|
|
92 |
|
|
|
4.98 |
% |
|
|
9,949 |
|
|
|
209 |
|
|
|
2.80 |
% |
Loans (2) (3) |
|
|
2,759,778 |
|
|
|
142,769 |
|
|
|
6.92 |
% |
|
|
2,208,258 |
|
|
|
105,989 |
|
|
|
6.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets |
|
|
5,312,689 |
|
|
|
232,039 |
|
|
|
6.00 |
% |
|
|
4,455,185 |
|
|
|
178,478 |
|
|
|
5.48 |
% |
Total Non Earning Assets |
|
|
361,579 |
|
|
|
|
|
|
|
|
|
|
|
310,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
5,674,268 |
|
|
|
|
|
|
|
|
|
|
$ |
4,765,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Deposits (4) |
|
$ |
1,210,910 |
|
|
$ |
18,769 |
|
|
|
2.07 |
% |
|
$ |
1,121,659 |
|
|
$ |
9,217 |
|
|
|
1.10 |
% |
Time Deposits |
|
|
939,699 |
|
|
|
29,629 |
|
|
|
4.22 |
% |
|
|
504,269 |
|
|
|
9,631 |
|
|
|
2.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits |
|
|
2,150,609 |
|
|
|
48,398 |
|
|
|
3.01 |
% |
|
|
1,625,928 |
|
|
|
18,848 |
|
|
|
1.55 |
% |
Other Borrowings |
|
|
1,749,222 |
|
|
|
54,682 |
|
|
|
4.12 |
% |
|
|
1,397,571 |
|
|
|
34,537 |
|
|
|
3.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
3,899,831 |
|
|
|
103,080 |
|
|
|
3.51 |
% |
|
|
3,023,499 |
|
|
|
53,385 |
|
|
|
2.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
1,358,135 |
|
|
|
|
|
|
|
|
|
|
|
1,373,174 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
62,800 |
|
|
|
|
|
|
|
|
|
|
|
33,511 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
353,502 |
|
|
|
|
|
|
|
|
|
|
|
335,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
5,674,268 |
|
|
|
|
|
|
|
|
|
|
$ |
4,765,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
128,959 |
|
|
|
|
|
|
|
|
|
|
$ |
125,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread tax equivalent |
|
|
|
|
|
|
|
|
|
|
2.49 |
% |
|
|
|
|
|
|
|
|
|
|
3.14 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.30 |
% |
|
|
|
|
|
|
|
|
|
|
3.80 |
% |
Net interest margin tax equivalent |
|
|
|
|
|
|
|
|
|
|
3.42 |
% |
|
|
|
|
|
|
|
|
|
|
3.90 |
% |
Net interest margin excluding loan fees |
|
|
|
|
|
|
|
|
|
|
3.19 |
% |
|
|
|
|
|
|
|
|
|
|
3.60 |
% |
Net interest margin excluding loan
fees tax equivalent |
|
|
|
|
|
|
|
|
|
|
3.31 |
% |
|
|
|
|
|
|
|
|
|
|
3.70 |
% |
|
|
|
(1) |
|
Non tax equivalent rate for 2006 was 4.47% and 2005 was 4.51%. |
|
(2) |
|
Loan fees are included in total interest income as follows, (000)s omitted: 2006, $4,633 2005,
$5,433 |
|
(3) |
|
Non performing loans are included in net loans as follows, (000)s omitted: 2006, $0 and 2005,
$2. |
|
(4) |
|
Includes interest bearing demand and money market accounts |
|
(5) |
|
Annualized interest rates |
24
TABLE 1 Distribution of Average Assets, Liabilities, and Stockholders Equity; Interest Rates and
Interest Differentials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Rate (5) |
|
|
Balance |
|
|
Interest |
|
|
Rate (5) |
|
|
|
(amounts in thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
2,018,439 |
|
|
$ |
24,725 |
|
|
|
4.99 |
% |
|
$ |
1,787,757 |
|
|
$ |
18,994 |
|
|
|
4.25 |
% |
Tax preferenced (1) |
|
|
602,341 |
|
|
|
6,510 |
|
|
|
5.81 |
% |
|
|
438,938 |
|
|
|
4,989 |
|
|
|
6.02 |
% |
Investment in FHLB stock |
|
|
75,118 |
|
|
|
1,200 |
|
|
|
6.25 |
% |
|
|
67,277 |
|
|
|
675 |
|
|
|
3.93 |
% |
Federal Funds Sold & Interest Bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with other institutions |
|
|
32 |
|
|
|
6 |
|
|
|
73.37 |
% |
|
|
9,924 |
|
|
|
74 |
|
|
|
2.92 |
% |
Loans (2) (3) |
|
|
2,857,573 |
|
|
|
50,564 |
|
|
|
7.02 |
% |
|
|
2,320,733 |
|
|
|
38,341 |
|
|
|
6.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets |
|
|
5,553,503 |
|
|
|
83,005 |
|
|
|
6.15 |
% |
|
|
4,624,629 |
|
|
|
63,073 |
|
|
|
5.57 |
% |
Total Non Earning Assets |
|
|
379,313 |
|
|
|
|
|
|
|
|
|
|
|
333,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
5,932,816 |
|
|
|
|
|
|
|
|
|
|
$ |
4,957,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Deposits (4) |
|
$ |
1,201,319 |
|
|
$ |
7,137 |
|
|
|
2.36 |
% |
|
$ |
1,165,077 |
|
|
$ |
3,812 |
|
|
|
1.30 |
% |
Time Deposits |
|
|
1,032,525 |
|
|
|
11,766 |
|
|
|
4.52 |
% |
|
|
512,551 |
|
|
|
3,727 |
|
|
|
2.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits |
|
|
2,233,844 |
|
|
|
18,903 |
|
|
|
3.36 |
% |
|
|
1,677,628 |
|
|
|
7,539 |
|
|
|
1.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Borrowings |
|
|
1,914,016 |
|
|
|
22,130 |
|
|
|
4.53 |
% |
|
|
1,483,728 |
|
|
|
12,950 |
|
|
|
3.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
4,147,860 |
|
|
|
41,033 |
|
|
|
3.90 |
% |
|
|
3,161,356 |
|
|
|
20,489 |
|
|
|
2.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
1,344,239 |
|
|
|
|
|
|
|
|
|
|
|
1,406,223 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
87,216 |
|
|
|
|
|
|
|
|
|
|
|
40,889 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
353,501 |
|
|
|
|
|
|
|
|
|
|
|
349,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
5,932,816 |
|
|
|
|
|
|
|
|
|
|
$ |
4,957,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
41,972 |
|
|
|
|
|
|
|
|
|
|
$ |
42,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread tax equivalent |
|
|
|
|
|
|
|
|
|
|
2.25 |
% |
|
|
|
|
|
|
|
|
|
|
3.02 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.18 |
% |
|
|
|
|
|
|
|
|
|
|
3.79 |
% |
Net interest margin tax equivalent |
|
|
|
|
|
|
|
|
|
|
3.22 |
% |
|
|
|
|
|
|
|
|
|
|
3.82 |
% |
Net interest margin excluding loan fees |
|
|
|
|
|
|
|
|
|
|
3.06 |
% |
|
|
|
|
|
|
|
|
|
|
3.59 |
% |
Net interest margin excluding loan fees tax equivalent |
|
|
|
|
|
|
|
|
|
|
3.10 |
% |
|
|
|
|
|
|
|
|
|
|
3.62 |
% |
|
|
|
(1) |
|
Non tax equivalent rate for 2006 was 4.84% and 2005 was 4.31%. |
|
(2) |
|
Loan fees are included in total interest income as follows, (000)s omitted: 2006, $1,600 and
2005, $ 1,884 |
|
(3) |
|
Non performing loans are included in net loans as follows, (000)s omitted: 2006, $0 and 2005,
$2. |
|
(4) |
|
Includes interest bearing demand and money market accounts |
|
(5) |
|
Annualized |
As stated above, the net interest margin measures net interest income as a percentage of
average earning assets, annualized. The net interest margin is an indication of how effectively the
Company generates its source of funds and employs its earning assets. The Companys tax effected
(TE) net interest margin declined from 3.90% for the nine months of 2005 to 3.42% for the nine
months of 2006. The decrease in the net interest margin compared to the same period last year was a
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 by 52 basis
points for the nine months of 2006 compared to the same period in 2005, the yield on
interest-bearing liabilities increased by 117 basis points for the nine months of 2006 compared to
the same period in 2005. The higher increase in cost of interest-bearing liabilities is due to the
short-term liability sensitivity of the Company. In addition, our net interest margin is affected
by the strategies we employ in regards to competition in our market areas.
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 2.49% for the nine months of 2006 and 3.14% for the same period last year. The decrease in the
net interest spread for the nine months ended September 30, 2006 resulted from a 52 basis point
increase in the yield on earning assets offset by a 117 basis point increase in the cost of interest-bearing liabilities, thus generating a 65
basis point decrease in the net interest spread from the same period last year.
25
For the third quarter of 2006 the Companys net interest spread (TE) was 2.25% as compared to
3.02% for the same period last year. The decrease in the net interest spread for the third quarter
ended September 30, 2006 resulted from a 135 basis point increase in the cost of interest-bearing
liabilities offset by a 58 basis point increase in the yield on earning assets, thus generating a
77 basis point decrease in the net interest spread from the same period last year.
The yield (TE) on earning assets increased to 6.00% for the nine months of 2006, from 5.48%
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 51.95% in the
nine months of 2006 from 49.57% for the same period in 2005. Average investments as a percent of
earning assets decreased to 46.63% in the nine months of 2006 from 48.82% for the same period in
2005. Average federal funds sold as a percent of earning assets was 0.03% for the nine months in
2006. The yield on loans for the nine months of 2006 increased to 6.92% as compared to 6.42% for
the same period in 2005 as a result of the growth in average loans, the increasing interest rate
environment and competition for quality loans. The yield (TE) on investments for the nine months of
2006 increased to 5.01% compared to 4.60% for the same period in 2005 as a result of an increase in
average investment balances and an increase in interest rates. The increase in the yield on earning
assets for the nine months of 2006 was the result of higher yields on loans and investments.
The cost of average interest-bearing liabilities increased to 3.51% for the nine months of
2006 as compared to 2.34% for the same period in 2005, reflecting the continued increase in
interest rates and a change in the mix of interest-bearing liabilities. Average borrowings as a
percent of average interest-bearing liabilities decreased to 44.85% during the first nine months of
2006 as compared to 46.22% for the same period in 2005. The cost of borrowings for the nine months
of 2006 increased to 4.12% as compared to 3.26% for the same period in 2005, reflecting the
continued increase in interest rates. Borrowings typically have a higher cost than
interest-bearing deposits. The cost of interest-bearing deposits for the nine months of 2006
increased to 3.01% as compared to 1.55% for the same period in 2005, also reflecting the continued
increase in interest rates and the competition for interest-bearing deposits. The FDIC has approved
the payment of interest on certain demand deposit accounts. This could have a negative impact on
our net interest margin, net interest spread, and net earnings, should this be implemented fully.
Currently, we pay interest on NOW and Money Market Accounts.
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).
26
TABLE 2 Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of nine months ended September 30, |
|
|
|
2006 Compared to 2005 |
|
|
|
Increase (Decrease) Due to |
|
|
|
|
|
|
|
|
|
|
|
Rate/ |
|
|
|
|
|
|
Volume |
|
|
Rate |
|
|
Volume |
|
|
Total |
|
|
|
( amounts in thousands ) |
|
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities |
|
$ |
3,927 |
|
|
$ |
5,677 |
|
|
$ |
427 |
|
|
$ |
10,031 |
|
Tax-advantaged securities |
|
|
5,867 |
|
|
|
(124 |
) |
|
|
(53 |
) |
|
|
5,690 |
|
Fed funds sold & interest-bearing
deposits with other institutions |
|
|
(157 |
) |
|
|
163 |
|
|
|
(123 |
) |
|
|
(117 |
) |
Investment in FHLB stock |
|
|
328 |
|
|
|
722 |
|
|
|
127 |
|
|
|
1,177 |
|
Loans |
|
|
26,483 |
|
|
|
8,258 |
|
|
|
2,039 |
|
|
|
36,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on earning assets |
|
|
36,448 |
|
|
|
14,696 |
|
|
|
2,417 |
|
|
|
53,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits |
|
|
734 |
|
|
|
8,138 |
|
|
|
635 |
|
|
|
9,507 |
|
Time deposits |
|
|
8,305 |
|
|
|
6,299 |
|
|
|
5,439 |
|
|
|
20,043 |
|
Other borrowings |
|
|
8,693 |
|
|
|
9,114 |
|
|
|
2,338 |
|
|
|
20,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on interest-bearing liabilities |
|
|
17,732 |
|
|
|
23,551 |
|
|
|
8,412 |
|
|
|
49,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
18,716 |
|
|
$ |
(8,855 |
) |
|
$ |
(5,995 |
) |
|
$ |
3,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE 2 Rate and Volume Analysis for Changes in Interest Income,
Interest Expense and Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of three-month periods ended |
|
|
|
September 30, 2006 and 2005 |
|
|
|
Increase (Decrease) Due to |
|
|
|
|
|
|
|
|
|
|
|
Rate/ |
|
|
|
|
|
|
Volume |
|
|
Rate |
|
|
Volume |
|
|
Total |
|
|
|
( amounts in thousands ) |
|
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities |
|
$ |
2,063 |
|
|
$ |
3,307 |
|
|
$ |
361 |
|
|
$ |
5,731 |
|
Tax-advantaged securities |
|
$ |
1,827 |
|
|
$ |
(224 |
) |
|
$ |
(82 |
) |
|
|
1,521 |
|
Fed funds sold & interest-bearing
deposits with other institutions |
|
$ |
(72 |
) |
|
$ |
1,748 |
|
|
$ |
(1,744 |
) |
|
|
(68 |
) |
Investment in FHLB stock |
|
$ |
77 |
|
|
$ |
390 |
|
|
$ |
58 |
|
|
|
525 |
|
Loans |
|
$ |
8,863 |
|
|
$ |
2,749 |
|
|
$ |
611 |
|
|
|
12,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on earning assets |
|
|
12,758 |
|
|
|
7,970 |
|
|
|
(796 |
) |
|
|
19,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits |
|
$ |
119 |
|
|
$ |
3,113 |
|
|
$ |
93 |
|
|
|
3,325 |
|
Time deposits |
|
$ |
3,775 |
|
|
$ |
2,119 |
|
|
$ |
2,145 |
|
|
|
8,039 |
|
Other borrowings |
|
$ |
3,761 |
|
|
$ |
4,209 |
|
|
$ |
1,210 |
|
|
|
9,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on interest-bearing liabilities |
|
|
7,655 |
|
|
|
9,441 |
|
|
|
3,448 |
|
|
|
20,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
5,103 |
|
|
$ |
(1,471 |
) |
|
$ |
(4,244 |
) |
|
$ |
(612 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Fees on Loans
Our major source of revenue and primary component of interest income is interest and fees on
loans. Interest and fees on loans totaled $142.8 million for the nine months of 2006. This
represented an increase of $36.8 million, or 34.70%, over interest and fees on loans of $106.0
million for the same period in
27
2005. The increase in interest and fees on loans for the nine months of 2006 reflects increases in
the average balance of loans and the increase in interest rates between periods. The yield on loans
increased to 6.92 % for the nine months of 2006, compared to 6.42% for the same period in 2005.
Average loans increased 24.98% from $2.21 billion for the nine months of 2005 to $2.76 billion for
the nine months of 2006. Deferred loan origination fees, net of costs, totaled $10.6 million at
September 30, 2006. This represented a decrease of $930,000, or 8.10%, from deferred loan
origination fees, net of costs, of $11.5 million at December 31, 2005.
Interest and fees on loans totaled $50.6 million for the third quarter of 2006. This
represented an increase of $12.2 million, or 31.88%, over interest and fees on loans of $38.3
million for the same period in 2005. The increase was primarily due to increases in the average
balance of loans and an increase in interest rates during 2006.
In general, we stop accruing interest on a loan after its principal or interest becomes 90
days or more past due. When a loan is placed on nonaccrual, all interest previously accrued but not
collected is charged against earnings. There was no interest income that was accrued and not
reversed on non-performing loans at September 30, 2006 and 2005.
Fees collected on loans are an integral part of the loan pricing decision. Loan fees and the
direct costs associated with the origination of loans are deferred and deducted from the loan
balance. Deferred net loan fees are recognized in interest income over the term of the loan in a
manner that approximates the level-yield method. We recognized loan fee income of $4.6 million for
the nine months of 2006, as compared to $5.4 million for the same period in 2005, a decrease of
$801,000, or 14.74%.
Interest on Investments
The second most important component of interest income is interest on investments, which
totaled $86.2 million for the first nine months of 2006. This represented an increase of $15.7
million, or 22.31%, over interest on investments of $70.5 million for the same period in 2005. The
increase in interest on investments for the nine months of 2006 over the same period last year
reflected increases in the average balance of investments and the increase in interest rates. The
interest rate environment and the investment strategies we employ directly affect the yield on the
investment portfolio. We continually adjust our investment strategies in response to the changing
interest rate environment in order to maximize the rate of total return consistent within prudent
risk parameters, and to minimize the overall interest rate risk of the Company. The
weighted-average yield (TE) on investments increased to 5.01% for the nine months of 2006, compared
to 4.60% for the same period in 2005 as a result of the increase in interest rates.
For the third quarter of 2006, interest income on investments totaled $31.2 million. This
represented an increase of $7.3 million, or 30.24%, over interest on investments of $24.0 million
for the same period in 2005. The increase in interest on investments for the third quarter of 2006
over the same period last year reflected increases in the average balance of investments and
increases in the interest rate environment. The weighted-average yield (TE) on investments
increased to 5.18% for the third quarter of 2006, compared to 4.60% for the same period in 2005 as
a result of the increasing interest rate environment.
Provision for Credit Losses
The Company maintains an allowance for inherent credit losses that is increased by a provision
for credit losses charged against operating results. We made a provision for credit losses of $2.4
million and $1.3 million during the nine-months and three-months ended September 30, 2006,
respectively. No provision was made during the same periods in 2005. We believe the allowance is
appropriate. No
assurance can be given that economic conditions which adversely affect the Companys service
areas or other circumstances will not be reflected in increased provisions for credit losses in the
future. The nature of this process requires considerable judgment. See Risk Management Credit
Risk herein.
28
Other Operating Income
Other operating income for the Company includes income derived from special services offered
by the Bank, such as Financial Advisory Services, merchant card, international banking, and other
business services. Also included in other operating income are service charges and fees, primarily
from deposit accounts; gains (net of losses) from the sale of investment securities, other real
estate owned, and fixed assets; and other revenues not included as interest on earning assets.
Other operating income totaled $24.7 million for the nine months of 2006. This represents an
increase of $2.5 million, or 11.06%, over other operating income of $22.2 million for the same
period in 2005. The increase was partially due to the net gain on sale of $1.1 million from
investment securities during the third quarter of 2006. Other operating income as a percent of net
revenues (net interest income before loan loss provision plus other operating income) was 16.07%
for the nine months of 2006, as compared to 15.09% for the same period in 2005.
Other Operating Expenses
Other operating expenses for the Company include expenses for salaries and benefits,
occupancy, equipment, stationary and supplies, professional services, promotion, amortization of
intangibles, and other expenses. Other operating expenses totaled $70.4 million for the nine months
of 2006. This represents an increase of $4.2 million, or 6.40% over other operating expenses of
$66.1 million for the same period in 2005. The increase is partially due to the reversal of a
reserve of $2.6 million for possible robbery loss that did not materialize in the first quarter of
2005. This increase is partially offset by the decrease in salary and benefits expenses due to a
reversal of $750,000 excess accruals in bonus and benefits in 2006.
For the third quarter of 2006, other operating expenses totaled $22.6 million. This represents
a decrease of $48,000, or 0.21% from other operating expenses of $22.7 million for the same period
last year.
At September 30, 2006, we employed 684 full time equivalent employees, compared to 676 full
time equivalent employees at September 30, 2005.
For the most part, other operating expenses reflect the direct expenses and related
administrative expenses associated with staffing, maintaining, promoting, and operating branch
facilities. Our ability to control other operating expenses in relation to asset growth can be
measured in terms of other operating expenses as a percentage of average assets. Operating expenses
measured as a percentage of average assets decreased to 1.66% for the nine months of 2006, compared
to a ratio of 1.86% for the same period in 2005. The decrease in percentage was primarily due to
the increase in total average assets for the nine months ended September 30, 2006 as compared to
the same period in 2005.
Our ability to control other operating expenses in relation to the level of net revenue (net
interest income plus other operating income) is measured by the efficiency ratio and indicates the
percentage of net revenue that is used to cover expenses. For the first nine months of 2006, the
efficiency ratio was 46.52%, compared to a ratio of 44.88% for the same period in 2005. The
increase was primarily due to the reversal of a reserve of $2.6 million for possible robbery loss
that did not materialize in the first quarter of 2005.
For the third quarter of 2006 the efficiency ratio increased to 45.63% as compared to 44.96%
for the same period last year.
29
Income Taxes
The Companys effective tax rate for the nine months of 2006 was 31.25%, compared to 34.18%
for the same period in 2005. The effective tax rates are below the nominal combined Federal and
State tax rates as a result of tax preferenced income from certain investments and municipal
loans/leases for each period. The majority of tax preferenced income is derived from municipal
securities.
ANALYSIS OF FINANCIAL CONDITION
The Company reported total assets of $5.97 billion at September 30, 2006. This represented an
increase of $551.7 million, or 10.17%, over total assets of $5.42 billion at December 31, 2005.
Earning assets totaled $5.61 billion at September 30, 2006, increasing $525.4 million, or 10.34%,
over earning assets of $5.08 billion at December 31, 2005. Total liabilities were $5.59 billion at
September 30, 2006, up $511.7 million, or 10.07%, over total liabilities of $5.08 billion at
December 31, 2005. Total equity increased $40.0 million, or 11.67%, to $382.9 million at September
30, 2006, compared with total equity of $342.9 million at December 31, 2005.
Investment Securities
The Company reported total investment securities of $2.64 billion at September 30, 2006. This
represented an increase of $273.2 million, or 11.53%, over total investment securities of $2.37
billion at December 31, 2005. Investment securities comprise 47.13% of the Companys total earning
assets at September 30, 2006.
In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, securities held as available-for-sale are reported at current market value for
financial reporting purposes. The related unrealized gains or losses, net of income taxes, are
recorded in stockholders equity. At September 30, 2006, securities held as available-for-sale had
a fair market value of $2.64 billion, representing 100% of total investment securities, with an
amortized cost of $2.66 billion. At September 30, 2006, the net unrealized holding loss on
securities available-for-sale was $16.7 million and that resulted in accumulated other
comprehensive loss of $9.7 million (net of $7.0 million in deferred taxes). At December 31, 2005,
the Company reported net unrealized loss on investment securities available-for-sale of $23.1
million and accumulated other comprehensive income of $13.4 million (net of deferred taxes of $9.7
million).
Table 3 sets forth investment securities at September 30, 2006 and December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Holding |
|
|
Holding |
|
|
|
|
|
|
Total |
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Market Value |
|
|
Percent |
|
|
|
(Amounts in thousands) |
|
Investment Securities Available-for-Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
965 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
967 |
|
|
|
0.04 |
% |
Mortgage-backed securities |
|
|
1,144,769 |
|
|
|
2,097 |
|
|
|
(28,894 |
) |
|
|
1,117,972 |
|
|
|
42.30 |
% |
CMOs / REMICs |
|
|
837,816 |
|
|
|
2,909 |
|
|
|
(6,771 |
) |
|
|
833,954 |
|
|
|
31.55 |
% |
Government agency & government-sponsored
enterprises |
|
|
69,672 |
|
|
|
173 |
|
|
|
(561 |
) |
|
|
69,284 |
|
|
|
2.62 |
% |
Municipal bonds |
|
|
604,321 |
|
|
|
15,939 |
|
|
|
(1,636 |
) |
|
|
618,624 |
|
|
|
23.40 |
% |
Other securities |
|
|
2,299 |
|
|
|
|
|
|
|
|
|
|
|
2,299 |
|
|
|
0.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities |
|
$ |
2,659,842 |
|
|
$ |
21,120 |
|
|
$ |
(37,862 |
) |
|
$ |
2,643,100 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Holding |
|
|
Holding |
|
|
|
|
|
|
Total |
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Market Value |
|
|
Percent |
|
|
|
(Amounts in thousands) |
|
Investment Securities Available-for-Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
498 |
|
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
497 |
|
|
|
0.02 |
% |
Mortgage-backed securities |
|
|
1,211,869 |
|
|
|
1,974 |
|
|
|
(29,235 |
) |
|
|
1,184,608 |
|
|
|
49.99 |
% |
CMOs / REMICs |
|
|
617,031 |
|
|
|
237 |
|
|
|
(7,356 |
) |
|
|
609,912 |
|
|
|
25.74 |
% |
Government agency & government-sponsored
enterprises |
|
|
54,608 |
|
|
|
69 |
|
|
|
(588 |
) |
|
|
54,089 |
|
|
|
2.28 |
% |
Municipal bonds |
|
|
452,080 |
|
|
|
15,818 |
|
|
|
(3,998 |
) |
|
|
463,900 |
|
|
|
19.57 |
% |
FHLMC preferred stock |
|
|
56,070 |
|
|
|
|
|
|
|
|
|
|
|
56,070 |
|
|
|
2.37 |
% |
Other securities |
|
|
816 |
|
|
|
|
|
|
|
|
|
|
|
816 |
|
|
|
0.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities |
|
$ |
2,392,972 |
|
|
$ |
18,098 |
|
|
$ |
(41,178 |
) |
|
$ |
2,369,892 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average yield (TE) on the investment portfolio at September 30, 2006 was
5.01% with a weighted-average life of 4.5 years. This compares to a yield of 4.64% at December 31,
2005 with a weighted-average life of 4.0 years and a yield of 4.60% at September 30, 2005 with a
weighted-average life of 3.8 years. The weighted average life is the average number of years that
each dollar of unpaid principal due remains outstanding. Average life is computed as the
weighted-average time to the receipt of all future cash flows, using as the weights the dollar
amounts of the principal paydowns.
Approximately 97.02% of the portfolio represents securities issued by the U.S government or
U.S. government-sponsored enterprises, which guarantee payment of principal and interest.
The remaining CMO/REMICs are backed by agency-pooled collateral or whole loan collateral. All
non-agency CMO/REMIC issues held are rated A or better by either Standard & Poors or Moodys, as
of September 30, 2006 and December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
Holding |
|
|
|
|
|
|
Holding |
|
|
|
|
|
|
Holding |
|
Description of Securities |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(amounts in thousands) |
|
Government agency & government-
sponsored enterprises |
|
|
32,462 |
|
|
|
123 |
|
|
|
21,611 |
|
|
|
438 |
|
|
|
54,073 |
|
|
|
561 |
|
Mortgage-backed securities |
|
|
62,804 |
|
|
|
339 |
|
|
|
926,798 |
|
|
|
28,555 |
|
|
|
989,602 |
|
|
|
28,894 |
|
CMO/REMICs |
|
|
43,871 |
|
|
|
131 |
|
|
|
482,783 |
|
|
|
6,640 |
|
|
|
526,654 |
|
|
|
6,771 |
|
Municipal bonds |
|
|
104,999 |
|
|
|
809 |
|
|
|
67,149 |
|
|
|
827 |
|
|
|
172,148 |
|
|
|
1,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
244,136 |
|
|
$ |
1,402 |
|
|
$ |
1,498,341 |
|
|
$ |
36,460 |
|
|
$ |
1,742,477 |
|
|
$ |
37,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
Holding |
|
|
|
|
|
|
Holding |
|
|
|
|
|
|
Holding |
|
Description of Securities |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(amounts in thousands) |
|
U.S. Treasury & Government Securities |
|
$ |
497 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
497 |
|
|
$ |
1 |
|
Government agency & government-
sponsored enterprises |
|
|
2,972 |
|
|
|
28 |
|
|
|
18,463 |
|
|
|
560 |
|
|
|
21,435 |
|
|
|
588 |
|
Mortgage-backed securities |
|
|
459,242 |
|
|
|
8,385 |
|
|
|
634,731 |
|
|
|
20,850 |
|
|
|
1,093,973 |
|
|
|
29,235 |
|
CMO/REMICs |
|
|
444,431 |
|
|
|
5,198 |
|
|
|
119,603 |
|
|
|
2,158 |
|
|
|
564,034 |
|
|
|
7,356 |
|
Municipal bonds |
|
|
162,193 |
|
|
|
3,624 |
|
|
|
8,737 |
|
|
|
374 |
|
|
|
170,930 |
|
|
|
3,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,069,335 |
|
|
$ |
17,236 |
|
|
$ |
781,534 |
|
|
$ |
23,942 |
|
|
$ |
1,850,869 |
|
|
$ |
41,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
The tables above show the Companys investment securities gross unrealized losses and
fair value by investment category and length of time that individual securities have been in a
continuous unrealized loss position, at September 30, 2006 and December 31, 2005. The Company has
reviewed individual securities classified as available-for-sale to determine whether a decline in
fair value below the amortized cost basis is other-than-temporary. If it is probable that the
Company will be unable to collect all amounts due according to the contractual terms of a debt
security not impaired at acquisition, an other-than-temporary impairment shall be considered to
have occurred. If an other-than-temporary impairment occurs, the cost basis of the security would
be written down to its fair value as a new cost basis and the write down accounted for as a
realized loss.
The following summarizes our analysis of these securities and the unrealized losses. This
assessment was based on the following factors: i) the length of the time and the extent to which
the market value has been less than cost; ii) the financial condition and near-term prospects of
the issuer; iii) the intent and ability of the Company to retain its investment in a security for a
period of time sufficient to allow for any anticipated recovery in market value; and iv) general
market conditions which reflect prospects for the economy as a whole, including interest rates and
sector credit spreads.
U.S. Treasury Obligations and Government Agency & Government Sponsored Enterprises The U.S.
Treasury Obligations and government agency and government sponsored enterprises are backed by the
full faith and credit of the U.S. Treasury and Agencies of the U.S. Government. These securities
are bullet securities, that is, they have a defined maturity date on which the principal is paid.
The contractual term of these investments provides that the Bank will receive the face value of the
bond at maturity which will equal the amortized cost of the bond. Interest is received throughout
the life of the security. The unrealized loss greater than 12 months of $438,000 is comprised of
primarily two issues: one Fannie Mae and one Freddie Mac. These securities mature within 2.7
years. The agencies are rated in the As and, although they have had some accounting difficulties
in the past few years, this has not impacted their credit worthiness. Because the decline in
market value is attributable to the changes in interest rates and not credit quality, and the Bank
has the ability and intent to hold these investments until recovery of fair value, which may be at
maturity, the Bank does not consider these investments to be other than temporarily impaired at
September 30, 2006.
Mortgaged-Backed Securities and CMO/REMICs The mortgage-backed and CMO/REMICs securities are
issued and guaranteed by the government sponsored enterprises such as Ginnie Mae, Fannie Mac and
Freddie Mac. These securities are collateralized or backed by the underlying mortgages. All
mortgage-backed securities are rated AAA with average life of approximately 3.48 years. The
contractual cash flows of these investments are guaranteed by agencies of the U.S. government or
private insurance companies. Accordingly, it is expected the securities would not be settled at a
price less than the amortized cost of the bond. The unrealized loss greater than 12 months on
these securities at September 30, 2006 is $35.2 million. This loss is comprised of three main
blocks of securities: FNMAs with a loss of $18.2 million, Freddie Mac with a loss of $15.3
million and non government sponsored enterprises such as financial institutions with a loss of $1.7
million. Because we believe the decline in market value is attributable to the changes in interest
rates and not credit quality, and the Company has the ability and intent to hold these securities
until recovery of fair value, which may be at maturity, management does not consider these
investments to be other than temporarily impaired at September 30, 2006.
Municipal Bonds The municipal bonds in the Banks portfolio are all rated AAA and they are
insured by the largest bond insurance companies with maturities of approximately 8.5 years. The
unrealized loss greater than 12 months on these securities at September 30, 2006 is $827,000. As
with the other securities in the portfolio, this loss is due to the rising rate environment not the
credit risk of these securities. The Bank diversifies its holdings by owning selections of
securities from different issuers and by holding securities from geographically diversified
municipal issuers, thus reducing the Banks exposure to any single adverse event. Because the
decline in market value is attributable to the changes in interest rates and not credit quality,
and the Bank has the ability and intent to hold these securities until recovery of fair value,
which may be at maturity, the Bank does not consider these investments to be other than temporarily
impaired at September 30, 2006.
32
At September 30, 2006 and December 31, 2005, investment securities having an amortized cost of
approximately $2.49 billion and $2.04 billion respectively, were pledged to secure public deposits,
short and long-term borrowings, and for other purposes as required or permitted by law.
Loans
At September 30, 2006, we reported total loans, net of deferred loan fees, of $2.92 billion.
This represents an increase of $253.2 million, or 9.50%, over total loans, net of deferred loan
fees, of $2.66 billion at December 31, 2005. Total loans, net of deferred loan fees, comprise
52.01% of our total earning assets.
Table 4 Distribution of Loan Portfolio by Type (dollar amount in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
Commercial and Industrial |
|
$ |
1,032,342 |
|
|
|
35.3 |
% |
|
$ |
980,602 |
|
|
|
36.7 |
% |
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
286,982 |
|
|
|
9.8 |
% |
|
|
270,436 |
|
|
|
10.1 |
% |
Mortgage |
|
|
1,102,079 |
|
|
|
37.6 |
% |
|
|
877,481 |
|
|
|
32.8 |
% |
Consumer, net of unearned discount |
|
|
54,449 |
|
|
|
1.9 |
% |
|
|
59,801 |
|
|
|
2.2 |
% |
Municipal lease finance receivables |
|
|
120,434 |
|
|
|
4.1 |
% |
|
|
108,832 |
|
|
|
4.1 |
% |
Auto and equipment leases |
|
|
50,329 |
|
|
|
1.7 |
% |
|
|
39,442 |
|
|
|
1.5 |
% |
Agribusiness |
|
|
280,969 |
|
|
|
9.6 |
% |
|
|
338,035 |
|
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans |
|
|
2,927,584 |
|
|
|
100.0 |
% |
|
|
2,674,629 |
|
|
|
100.0 |
% |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
|
(26,912 |
) |
|
|
|
|
|
|
(23,204 |
) |
|
|
|
|
Deferred net loan fees |
|
|
(10,557 |
) |
|
|
|
|
|
|
(10,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans |
|
$ |
2,890,115 |
|
|
|
|
|
|
$ |
2,640,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans are loans and leases to commercial entities to finance
capital purchases or improvements, or to provide cash flow for operations. Real estate loans are
loans secured by conforming first trust deeds on real property, including property under
construction, commercial property and single family and multifamily residences. Consumer loans
include installment loans to consumers as well as home equity loans and other loans secured by
junior liens on real property. Municipal lease finance receivables are leases to municipalities.
Agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations,
cattle feeders, livestock raisers, and farmers.
Non-performing Assets
We had no non-performing assets at September 30, 2006 and December 31, 2005. Non-performing
assets, include non-performing loans plus other real estate owned (foreclosed property),
non-performing loans, include non-accrual loans, loans past due 90 or more days and still accruing, and
restructured loans. There were no loans classified as impaired at September 30, 2006 and December
31, 2005.
We are not aware of any loans as of September 30, 2006 for which known credit problems of the
borrower would cause serious doubts as to the ability of such borrowers to comply with their
present loan repayment terms, or any known events that would result in the loan being designated as
non-performing at some future date. We cannot, however, predict the extent to which the
deterioration in general economic conditions, real estate values, increase in general rates of
interest, change in the financial conditions or business of a borrower may adversely affect a
borrowers ability to pay. See Risk Management Credit Risk herein.
33
At September 30, 2006 and December 31, 2005, the Company held no properties as other real
estate owned.
Deferred Tax Assets
At September 30, 2006, deferred tax assets were $15.8 million. This represented a decrease of
$2.6 million, or 13.99%, from the deferred tax assets of $18.4 million at December 31, 2005.
Deposits
The primary source of funds to support earning assets (loans and investments) is the
generation of deposits from our customer base. The ability to grow the customer base and
subsequently deposits is a crucial element in the performance of the Company.
At September 30, 2006, total deposits were $3.52 billion, representing an increase of $99.4
million, or 2.90%, over total deposits of $3.42 billion at December 31, 2005. Average total
deposits for the nine months of 2006 were $3.51 billion. The comparison of average balances for the
nine months of 2006 has historically been more representative of our Companys growth in deposits
as it excludes the historical seasonal peak in deposits at year-end. The composition of deposits is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
|
(Amounts in thousands) |
|
Non-interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
1,288,569 |
|
|
|
36.6 |
% |
|
$ |
1,490,613 |
|
|
|
43.5 |
% |
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Deposits |
|
|
1,216,680 |
|
|
|
34.5 |
% |
|
|
1,150,256 |
|
|
|
33.6 |
% |
Time deposits |
|
|
1,018,228 |
|
|
|
28.9 |
% |
|
|
783,177 |
|
|
|
22.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
3,523,477 |
|
|
|
100.0 |
% |
|
$ |
3,424,046 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of non-interest-bearing demand deposits in relation to total deposits is an
integral element in achieving a low cost of funds. Demand deposits totaled $1.29 billion at
September 30, 2006, representing a decrease of $202.0 million, or 13.55%, from total demand
deposits of $1.49 billion at December 31, 2005. Non-interest-bearing demand deposits represented
36.57% of total deposits as of September 30, 2006 and 43.53% of total deposits as of December 31,
2005.
Savings deposits, which include savings, interest-bearing demand, and money market accounts,
totaled $1.22 billion at September 30, 2006, representing an increase of $66.4 million, or 5.77%,
over savings deposits of $1.15 billion at December 31, 2005.
Time deposits totaled $1.02 billion at September 30, 2006 of which $161.4 million were
brokered. This represented an increase of $235.1 million, or 30.01%, over total time deposits of
$783.2 million at December 31, 2005.
Other Borrowed Funds
To achieve the desired growth in earning assets and to fully utilize our capital, we fund this
growth through generating sources of funds other than deposits. The first source of funds we pursue
is non-interest-bearing deposits (the lowest cost of funds to the Company). Next we pursue the
growth in interest-bearing deposits and finally we supplement the growth in deposits with borrowed
funds. Average borrowed funds, as a percent of average total funding (total deposits plus demand
notes plus borrowed funds) was 31.90% as of September 30, 2006, as compared to 30.55% as of
December 31, 2005.
34
During 2006 and 2005, we entered into short-term borrowing agreements (borrowings with
maturities of less than one year) with the Federal Home Loan Bank (FHLB) and other institutions.
The Bank had outstanding balances of $1.45 billion and $916.0 million under these agreements at
September 30, 2006 and December 31, 2005, respectively. The weighted average annual interest rate
was 4.35% and 3.42% at September 30, 2006 and December 31, 2005, respectively. The FHLB holds
certain investment securities of the Bank as collateral for these borrowings.
We also entered into long-term borrowing agreements (borrowings with maturities of one year or
longer) with the FHLB. We had outstanding balances of $450.0 million and $580.0 million under these
agreements at September 30, 2006 and December 31, 2005, respectively. The weighted average annual
interest rate was 5.70% and 3.62% at September 30, 2006 and December 31, 2005, respectively. The
FHLB holds certain investment securities of the Bank as collateral for these borrowings.
The Bank has an agreement, known as the Treasury Tax & Loan (TT&L) Note Option Program with
the Federal Reserve Bank and the U.S. Department of Treasury in which federal tax deposits made by
depositors can be held by the bank until called (withdrawn) by the U.S. Department of Treasury. The
maximum amount of accumulated federal tax deposits allowable to be held by the Bank, as set forth
in the agreement, is $15.0 million. On September 30, 2006 and December 31, 2005 the amounts held by
the Bank in the TT&L Note Option Program were $1.5 million and $6.4 million, collateralized by
securities, respectively. Amounts are payable on demand. The Bank borrows at a variable rate of 67
and 43 basis points less than the average weekly federal funds rate, which was 4.88% and 3.21% at
September 30, 2006 and December 31, 2005, respectively.
At September 30, 2006, borrowed funds totaled $1.90 billion, representing an increase of
$403.6 million, or 26.86%, over total borrowed funds of $1.50 billion at December 31, 2005. In June
2006, the Company purchased securities totaling $250.0 million. This purchase was funded by a
repurchase agreement of $250.0 million with a double cap imbedded in the repurchase agreement. The
interest rate on this agreement is tied to three-month LIBOR and reset quarterly. The Company
entered into this arrangement to protect itself from continued rising rates while benefiting from
declining rates. The amount of the repurchase agreement is carried in borrowed funds on the balance
sheet.
Aggregate Contractual Obligations
The following table summarizes the Companys aggregate contractual obligations as of September
30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity by Period |
|
|
|
|
|
|
|
Less Than |
|
|
One Year |
|
|
Four Year |
|
|
After |
|
|
|
|
|
|
|
One |
|
|
to Three |
|
|
to Five |
|
|
Five |
|
|
|
Total |
|
|
Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
|
(amounts in thousands) |
|
Deposits |
|
$ |
3,523,477 |
|
|
$ |
3,409,344 |
|
|
$ |
101,081 |
|
|
$ |
9,766 |
|
|
$ |
3,286 |
|
FHLB and Other Borrowings |
|
|
1,906,011 |
|
|
|
1,456,011 |
|
|
|
350,000 |
|
|
|
100,000 |
|
|
|
|
|
Junior Subordinated Debentures |
|
|
108,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,250 |
|
Deferred Compensation |
|
|
10,186 |
|
|
|
751 |
|
|
|
2,253 |
|
|
|
1,380 |
|
|
|
5,802 |
|
Operating Leases |
|
|
17,866 |
|
|
|
4,678 |
|
|
|
8,602 |
|
|
|
2,013 |
|
|
|
2,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,565,790 |
|
|
$ |
4,870,784 |
|
|
$ |
461,936 |
|
|
$ |
113,159 |
|
|
$ |
119,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits represent non-interest bearing, money market, savings, NOW, certificates of
deposits, brokered and all other deposits.
35
FHLB borrowings represent the amounts that are due to the Federal Home Loan Bank. These
borrowings have fixed maturity dates. Other borrowings represent the amounts that are due to
overnight Federal funds purchases and TT&L.
Junior subordinated debentures represent the amounts that are due from the Company to CVB
Statutory Trust I, CVB Statutory Trust II & CVB Statutory Trust III. The debentures have the same
maturity as the Trust Preferred Securities. CVB Statutory Trust I and II, which mature in 2033 and
become callable in whole or in part in 2008. CVB Statutory Trust III which matures in 2036 and
becomes callable in whole or in part in 2011.
Deferred compensation represents the amounts that are due to former employees salary
continuation agreements as a result of acquisitions.
Operating leases represent the total minimum lease payments under noncancelable operating
leases.
Other Liabilities
At September 30, 2006, other liabilities totaled $27.6 million, representing a decrease of
$21.4 million, or 43.70%, from the other liabilities of $49.0 million at December 31, 2005. The
decrease was primarily due to the decrease in securities purchased and not settled.
Off-Balance Sheet Arrangements
At September 30, 2006, we had commitments to extend credit of approximately $839.6 million and
obligations under letters of credit of $67.7 million and available lines of credit totaling $960.2
million from certain institutions. Commitments to extend credit are agreements to lend to
customers, provided there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a
fee. Commitments are generally variable rate, and many of these commitments are expected to expire
without being drawn upon. As such, the total commitment amounts do not necessarily represent future
cash requirements. The Bank uses the same credit underwriting policies in granting or accepting
such commitments or contingent obligations as it does for on-balance-sheet instruments, which
consist of evaluating customers creditworthiness individually.
Standby letters of credit written are conditional commitments issued by the Bank to guarantee
the financial performance of a customer to a first party. Those guarantees are primarily issued to
support private borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers. When deemed
necessary, the Bank holds appropriate collateral supporting those commitments.
The following table summarizes the off-balance sheet arrangements at September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity by Period |
|
|
|
|
|
|
|
Less Than |
|
|
One Year |
|
|
Four Year |
|
|
After |
|
|
|
|
|
|
|
One |
|
|
to Three |
|
|
to Five |
|
|
Five |
|
|
|
Total |
|
|
Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
2006 |
|
( Amounts in thousands ) |
|
Commitment to extend credit |
|
|
839,619 |
|
|
|
295,378 |
|
|
|
44,928 |
|
|
|
68,929 |
|
|
|
430,384 |
|
Obligations under letters of credit |
|
|
67,744 |
|
|
|
49,137 |
|
|
|
14,848 |
|
|
|
3,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
907,363 |
|
|
$ |
344,515 |
|
|
$ |
59,776 |
|
|
$ |
72,688 |
|
|
$ |
430,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has a reserve of $1.7 million for anticipated losses on these off balance
sheet arrangements.
36
Liquidity and Cash Flow
Since the primary sources and uses of funds for the Bank are loans and deposits, the
relationship between gross loans and total deposits provides a useful measure of the Banks
liquidity. Typically, the closer the ratio of loans to deposits is to 100%, the more reliant the
Bank is on its loan portfolio to provide for short-term liquidity needs. Since repayment of loans
tends to be less predictable than the maturity of investments and other liquid resources, the
higher the loans to deposit ratio the less liquid are the Banks assets. For the first nine months
of 2006, the Banks loan to deposit ratio averaged 78.65%, compared to an average ratio of 74.35%
for the same period in 2005.
CVB is a company separate and apart from the Bank that must provide for its own liquidity.
Substantially all of CVBs revenues are obtained from dividends declared and paid by the Bank. The
remaining cashflow is from rents paid by third parties on office space in the Companys corporate
headquarters. There are statutory and regulatory provisions that could limit the ability of the
Bank to pay dividends to CVB. At September 30, 2006, approximately $104.6 million of the Banks
equity was unrestricted and available to be paid as dividends to CVB. Management of CVB believes
that such restrictions will not have an impact on the ability of CVB to meet its ongoing cash
obligations.
For the Bank, sources of funds normally include principal payments on loans and investments,
other borrowed funds, and growth in deposits. Uses of funds include withdrawal of deposits,
interest paid on deposits, increased loan balances, purchases, and other operating expenses.
Net cash provided by operating activities totaled $66.1 million for the nine months of 2006,
compared to $62.4 million for the same period last year. The decrease was primarily the result of
the increases in interest paid and cash paid to suppliers and employees.
Net cash used in investing activities totaled $577.9 million for the nine months of 2006,
compared to $339.1 million used by investing activities for the same period in 2005. The decrease
was primarily the result of a decrease in the purchase of investment securities, offset by an
increase in loans.
Funds provided by financing activities totaled $508.9 million for the nine months of 2006,
compared to funds provided by financing activities of $325.1 million for the same period last year.
The decrease in net cash provided by financing activities was primarily the result of a decrease in
transaction deposits and repayment of FHLB advances, offset by increases in time deposits,
short-term borrowings and the issuance of junior subordinated debentures during the period.
At September 30, 2006, cash and cash equivalents totaled $127.2 million. This represented a
decrease of $5.5 million, or 4.16%, from a total of $132.7 million at September 30, 2005 and a
decrease of $2.9 million, or 2.25%, from a total of $130.1 million at December 31, 2005.
Capital Resources
Historically, our primary source of capital has been the retention of operating earnings. In
order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources
and uses of capital in conjunction with projected increases in assets and the level of risk.
The Bank and the Company are required to meet risk-based capital standards set by their
respective regulatory authorities. The risk-based capital standards require the achievement of a
minimum ratio of total capital to risk-weighted assets of 8.0% (of which at least 4.0% must be Tier
1 capital). In addition, the regulatory authorities require the highest rated institutions to
maintain a minimum leverage ratio of 4.0%. At September 30, 2006, the Bank and the Company exceeded
the minimum risk-based capital ratio and leverage ratio required to be considered Well
Capitalized.
37
The Companys equity capital was $382.9 million at September 30, 2006. This represented an
increase of $40.0 million, or 11.67% from equity capital of $342.9 million at December 31, 2005.
The increase was due primarily to the net earnings for the first nine months of 2006 in the amount
of $55.6 million and the decrease in net unrealized loss on securities available-for-sale in the
amount of $3.7 million. This increase was partially offset by the payment of dividends in the
amount of $20.7 million. The Companys 2005 Annual Report on Form 10-K (Managements Discussion and
Analysis and Note 16 of the accompanying financial statements) describes the regulatory capital
requirements of the Company and the Bank.
Table 6 below presents the Companys and the Banks risk-based and leverage capital ratios as
of September 30, 2006, and December 31, 2005.
Table 6 Regulatory Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required |
|
|
|
|
|
|
Minimum |
|
September 30, 2006 |
|
December 31, 2005 |
Capital Ratios |
|
Ratios |
|
Company |
|
Bank |
|
Company |
|
Bank |
Risk-based capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I |
|
|
4.00 |
% |
|
|
12.39 |
% |
|
|
11.23 |
% |
|
|
11.29 |
% |
|
|
10.82 |
% |
Total |
|
|
8.00 |
% |
|
|
13.16 |
% |
|
|
12.00 |
% |
|
|
12.00 |
% |
|
|
11.53 |
% |
Leverage ratio |
|
|
4.00 |
% |
|
|
7.70 |
% |
|
|
6.98 |
% |
|
|
7.66 |
% |
|
|
7.34 |
% |
RISK MANAGEMENT
We have adopted a Risk Management Plan to ensure the proper control and management of all risk
factors inherent in the operation of the Company and the Bank. Specifically, credit risk, interest
rate risk, liquidity risk, transaction risk, compliance risk, strategic risk, reputation risk,
price risk and foreign exchange risk, can all affect the market risk exposure of the Company. These
specific risk factors are not mutually exclusive. It is recognized that any product or service
offered by us may expose the Bank to one or more of these risks.
Credit Risk
Credit risk is defined as the risk to earnings or capital arising from an obligors failure to
meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all
activities where success depends on counter party, issuer, or borrower performance. Credit risk
arises through the extension of loans and leases, certain securities, and letters of credit.
Credit risk in the investment portfolio and correspondent bank accounts is addressed through
defined limits in the Banks policy statements. In addition, certain securities carry insurance to
enhance credit quality of the bond. Limitations on industry concentration, aggregate customer
borrowings, geographic boundaries and standards on loan quality also are designed to reduce loan
credit risk. Senior Management, Directors Committees, and the Board of Directors are provided with
information to appropriately identify, measure, control and monitor the credit risk of the Bank.
Implicit in lending activities is the risk that losses will occur and that the amount of such
losses will vary over time. Consequently, we maintain an allowance for credit losses by charging a
provision for credit losses to earnings. Loans determined to be losses are charged against the
allowance for credit losses. Our allowance for credit losses is maintained at a level considered by
us to be adequate to provide
for estimated probable losses inherent in the existing portfolio, and unused commitments to
provide financing, including commitments under commercial and standby letters of credit.
38
The allowance for credit losses is based upon estimates of probable losses inherent in the
loan and lease portfolio. The nature of the process by which we determine the appropriate allowance
for credit losses requires the exercise of considerable judgment. The amount actually observed in
respect of these losses can vary significantly from the estimated amounts. We employ a systematic
methodology that is intended to reduce the differences between estimated and actual losses.
Our methodology for assessing the appropriateness of the allowance is conducted on a regular
basis and considers all loans. The systematic methodology consists of two major elements.
The first major element includes a detailed analysis of the loan portfolio in two phases. The
first phase is conducted in accordance with SFAS No. 114, Accounting by Creditors for the
Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan Income Recognition and Disclosures. Individual loans are reviewed to identify loans for
impairment. A loan is impaired when principal and interest are deemed uncollectable in accordance
with the original contractual terms of the loan. Impairment is measured as either the expected
future cash flows discounted at each loans effective interest rate, the fair value of the loans
collateral if the loan is collateral dependent, or an observable market price of the loan (if one
exists). Upon measuring the impairment, we will insure an appropriate level of allowance is present
or established.
Central to the first phase and our credit risk management is its loan risk rating system. The
originating credit officer assigns borrowers an initial risk rating, which is reviewed and possibly
changed by Credit Management, which is based primarily on a thorough analysis of each borrowers
financial capacity in conjunction with industry and economic trends. Approvals are made based upon
the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness
by senior line and credit management personnel. Credits are monitored by line and credit management
personnel for deterioration in a borrowers financial condition, which would impact the ability of
the borrower to perform under the contract. Risk ratings are adjusted as necessary.
Loans are risk rated into the following categories: loss, Doubtful, Substandard, Special
Mention and Pass. Each of these groups is assessed for the proper amount to be used in determining
the adequacy of our allowance for losses. While each loan is looked at annually to determine its
proper classification, the Impaired and Doubtful loans are analyzed on an individual basis for
allowance amounts. The other categories have formulae used to determine the needed allowance
amount.
Based on the risk rating system, specific allowances are established in cases where we have
identified significant conditions or circumstances related to a credit that we believe indicates
the probability that a loss has been incurred. We perform a detailed analysis of these loans,
including, but not limited to, cash flows, appraisals of the collateral, conditions of the
marketplace for liquidating the collateral and assessment of the guarantors. We then determine the
inherent loss potential and allocate a portion of the allowance for losses as a specific allowance
for each of these credits.
The second phase is conducted by evaluating or segmenting the remainder of the loan portfolio
into groups or pools of loans with similar characteristics in accordance with SFAS No. 5,
Accounting for Contingencies. In this second phase, groups or pools of homogeneous loans are
reviewed to determine a portfolio formula allowance. In the case of the portfolio formula
allowance, homogeneous portfolios, such as small business loans, consumer loans, agricultural
loans, and real estate loans, are aggregated or pooled in determining the appropriate allowance.
The risk assessment process in this case emphasizes trends in the different portfolios for
delinquency, loss, and other-behavioral characteristics of the subject portfolios.
The second major element in our methodology for assessing the appropriateness of the allowance
consists of our considerations of all known relevant internal and external factors that may affect
a loans collectibility. This includes our estimates of the amounts necessary for concentrations,
economic uncertainties, the volatility of the market value of collateral, and other relevant
factors. The relationship of the two major elements of the allowance to the total allowance may
fluctuate from period to period.
39
In the second major element of the analysis which considers all known relevant internal and
external factors that may affect a loans collectibility, we perform an evaluation of various
conditions, the effects of which are not directly measured in the determination of the formula and
specific allowances. The evaluation of the inherent loss with respect to these conditions is
subject to a higher degree of uncertainty because they are not identified with specific problem
credits or portfolio segments. The conditions evaluated in connection with the second element of
the analysis of the allowance include, but are not limited to the following conditions that existed
as of the balance sheet date:
|
|
|
then-existing general economic and business conditions affecting the key lending areas
of the Company, |
|
|
|
|
then-existing economic and business conditions of areas outside the lending areas, such
as other sections of the United States, Asia and Latin America, |
|
|
|
|
credit quality trends (including trends in non-performing loans expected to result from
existing conditions), |
|
|
|
|
collateral values, |
|
|
|
|
loan volumes and concentrations, |
|
|
|
|
seasoning of the loan portfolio, |
|
|
|
|
specific industry conditions within portfolio segments, |
|
|
|
|
recent loss experience in particular segments of the portfolio, |
|
|
|
|
duration of the current business cycle, |
|
|
|
|
bank regulatory examination results and |
|
|
|
|
findings of the Companys external credit examiners. |
We review these conditions in discussion with our senior credit officers. To the extent that
any of these conditions is evidenced by a specifically identifiable problem credit or portfolio
segment as of the evaluation date, our estimate of the effect of such condition may be reflected as
a specific allowance applicable to such credit or portfolio segment. Where any of these conditions
is not evidenced by a specifically identifiable problem credit or portfolio segment as of the
evaluation date, our evaluation of the inherent loss related to such condition is reflected in the
second major element of the allowance. Although we have allocated a portion of the allowance to
specific loan categories, the adequacy of the allowance must be considered in its entirety.
We maintain an allowance for inherent credit losses that is increased by a provision for
credit losses charged against operating results. The allowance for credit losses is also increased
by recoveries on loans previously charged off and reduced by actual loan losses charged to the
allowance. The Company
recorded $2.4 million provision for credit losses during the first nine months of 2006. There
was no provision for credit losses during the first nine months of 2005.
At September 30, 2006, we reported an allowance for credit losses of $26.9 million. This
represented an increase of $3.7 million, or 15.98%, over the allowance for credit losses of $23.2
million at December 31, 2005. The increase is primarily due to the provision for credit losses of
$2.4 million, offset by recoveries exceeding charge-offs for the nine months of 2006.
At September 30, 2006 and December 31, 2005, we had no loans classified as impaired.
40
Non-performing loans include non-accrual loans, loans past due 90 or more days and still
accruing, and restructured loans. There were no non-accrual loans at September 30, 2006 and
December 31, 2005.
TABLE 7 Summary of Credit Loss Experience
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(amounts in thousands) |
|
Amount of Total Loans at End of Period (1) |
|
$ |
2,917,027 |
|
|
$ |
2,375,226 |
|
|
|
|
|
|
|
|
Average Total Loans Outstanding (1) |
|
$ |
2,759,778 |
|
|
$ |
2,208,258 |
|
|
|
|
|
|
|
|
Allowance for Credit Losses: |
|
|
|
|
|
|
|
|
Beginning of Period |
|
$ |
23,204 |
|
|
$ |
22,494 |
|
Acquisition of Granite State Bank |
|
|
|
|
|
|
756 |
|
Loans Charged-Off: |
|
|
|
|
|
|
|
|
Real Estate Loans |
|
|
|
|
|
|
|
|
Commercial and Industrial |
|
|
36 |
|
|
|
63 |
|
Lease Financing Receivables |
|
|
79 |
|
|
|
66 |
|
Consumer Loans |
|
|
30 |
|
|
|
62 |
|
|
|
|
|
|
|
|
Total Loans Charged-Off |
|
|
145 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
Real Estate Loans |
|
|
1,020 |
|
|
|
525 |
|
Commercial and Industrial |
|
|
327 |
|
|
|
459 |
|
Lease Financing Receivables |
|
|
61 |
|
|
|
88 |
|
Consumer Loans |
|
|
45 |
|
|
|
106 |
|
|
|
|
|
|
|
|
Total Loans Recovered |
|
|
1,453 |
|
|
|
1,178 |
|
|
|
|
|
|
|
|
|
|
Net Loans (Recovered) |
|
|
(1,308 |
) |
|
|
(987 |
) |
|
|
|
|
|
|
|
Provision Charged to Operating Expense |
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses at End of period |
|
$ |
26,912 |
|
|
$ |
24,237 |
|
|
|
|
|
|
|
|
|
(1) Net of deferred loan fees |
|
|
|
|
|
|
|
|
|
Net Loans Charged-Off (Recovered) to Average Total Loans |
|
|
-0.05 |
% |
|
|
-0.04 |
% |
Net Loans Charged-Off (Recovered) to Total Loans at End of Period |
|
|
-0.04 |
% |
|
|
-0.04 |
% |
Allowance for Credit Losses to Average Total Loans |
|
|
0.98 |
% |
|
|
1.10 |
% |
Allowance for Credit Losses to Total Loans at End of Period |
|
|
0.92 |
% |
|
|
1.02 |
% |
Net Loans Charged-Off (Recovered) to Allowance for Credit Losses |
|
|
-4.86 |
% |
|
|
-4.07 |
% |
Net Loans Charged-Off (Recovered) to Provision for Credit Losses |
|
|
-54.50 |
% |
|
|
|
|
While we believe that the allowance at September 30, 2006, was adequate to absorb losses
from any known or inherent risks in the portfolio, no assurance can be given that economic
conditions or natural disasters which adversely affect the Companys service areas or other
circumstances will not be reflected in increased provisions or credit losses in the future.
41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
In the normal course of its business activities, we are exposed to market risks, including
price and liquidity risk. Market risk is the potential of loss from adverse changes in market rates
and prices, such as interest rates (interest rate risk). Liquidity risk arises from the possibility
that we may not be able to satisfy current or future commitments or that we may be more reliant on
alternative funding sources such as long-term debt. Financial products that expose us to market
risk include securities, loans, deposits, debts and derivative financial instruments.
Interest Rate Risk
During periods of changing interest rates, the ability to reprice interest-earning assets and
interest-bearing liabilities can influence net interest income, the net interest margin, and
consequently, our earnings. Interest rate risk is managed by attempting to control the spread
between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities
within the constraints imposed by market competition in the Banks service area. Short-term
repricing risk is minimized by controlling the level of floating rate loans and maintaining a
downward sloping ladder of bond payments and maturities. Basis risk is managed by the timing and
magnitude of changes to interest-bearing deposit rates. Yield curve risk is reduced by keeping the
duration of the loan and bond portfolios balanced to attempt to minimize the risks of rising or
falling yields. Options risk in the bond portfolio is monitored monthly and actions are recommended
when appropriate.
We monitor the interest rate sensitivity risk to earnings from potential changes in interest
rates using various methods, including a maturity/repricing gap analysis. This analysis measures,
at specific time intervals, the differences between earning assets and interest-bearing liabilities
for which repricing opportunities will occur. A positive difference, or gap, indicates that earning
assets will reprice faster than interest-bearing liabilities. This will generally produce a greater
net interest margin during periods of rising interest rates, and a lower net interest margin during
periods of declining interest rates. Conversely, a negative gap will generally produce a lower net
interest margin during periods of rising interest rates and a greater net interest margin during
periods of decreasing interest rates.
The interest rates paid on deposit accounts do not always move in unison with the rates
charged on loans. In addition, the magnitude of changes in the rates charged on loans is not always
proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in
interest rates do not necessarily result in an increase or decrease in the net interest margin
solely as a result of the differences between repricing opportunities of earning assets or
interest-bearing liabilities. In general, when we report a positive gap in the short-term period
and negative gap in the long-term period does not necessarily indicate that, if interest rates
decreased, net interest income would increase, or if interest rates increased, net interest income
would decrease.
Approximately $2.0 billion, or 73.85%, of the total investment portfolio at September 30, 2006
consisted of securities backed by mortgages. The final maturity of these securities can be affected
by the speed at which the underlying mortgages repay. Mortgages tend to repay faster as interest
rates fall, and slower as interest rates rise. As a result, we may be subject to a prepayment
risk resulting from greater funds available for reinvestment at a time when available yields are
lower. Conversely, we may be subject to extension risk resulting from lesser amounts available
for reinvestment at a time when available yields are higher. Prepayment risk includes the risk
associated with the payment of an investments principal faster than originally intended. Extension
risk is the risk associated with the payment of an investments principal over a longer time period
than originally anticipated. In addition,
there can be greater risk of price volatility for mortgage-backed securities as a result of
anticipated prepayment or extension risk.
42
We also utilize the results of a dynamic simulation model to quantify the estimated exposure
of net interest income to sustained interest rate changes. The sensitivity of our net interest
income is measured over a rolling two-year horizon.
The simulation model estimates the impact of changing interest rates on the interest income
from all interest-earning assets and the interest expense paid on all interest-bearing liabilities
reflected on the Companys balance sheet. This sensitivity analysis is compared to policy limits,
which specify a maximum tolerance level for net interest income exposure over a one-year horizon
assuming no balance sheet growth, given both a 200 basis point upward and downward shift in
interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed.
The following depicts the Companys net interest income sensitivity analysis as of September
30, 2006:
|
|
|
|
|
Estimated Net |
Simulated |
|
Interest Income |
Rate Changes |
|
Sensitivity |
+ 200 basis points
- - 200 basis points
|
|
( 6.58% )
10.15% |
The Company is currently more liability sensitive. The estimated sensitivity does not
necessarily represent our forecast and the results may not be indicative of actual changes to our
net interest income. These estimates are based upon a number of assumptions including: the nature
and timing of interest rate levels including yield curve shape, prepayments on loans and
securities, pricing strategies on loans and deposits, and replacement of asset and liability cash
flows. While the assumptions used are based on current economic and local market conditions, there
is no assurance as to the predictive nature of these conditions including how customer preferences
or competitor influences might change.
Liquidity Risk
Liquidity risk is the risk to earnings or capital resulting from our inability to meet its
obligations when they come due without incurring unacceptable losses. It includes the ability to
manage unplanned decreases or changes in funding sources and to recognize or address changes in
market conditions that affect our ability to liquidate assets quickly and with minimum loss of
value. Factors considered in liquidity risk management are stability of the deposit base;
marketability, maturity, and pledging of investments; and the demand for credit.
In general, liquidity risk is managed daily by controlling the level of fed funds and the use
of funds provided by the cash flow from the investment portfolio. To meet unexpected demands, lines
of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal
Reserve Bank. The sale of bonds maturing in the near future can also serve as a contingent source
of funds. Increases in deposit rates are considered a last resort as a means of raising funds to
increase liquidity.
Transaction Risk
Transaction risk is the risk to earnings or capital arising from problems in service or
product delivery. This risk is significant within any bank and is interconnected with other risk
categories in most activities throughout the Bank. Transaction risk is a function of internal
controls, information systems, associate integrity, and operating processes. It arises daily
throughout the Bank as transactions are processed. It pervades all divisions, departments and
branches and is inherent in all products and services we offer.
In general, transaction risk is defined as high, medium or low by the internal auditors during
the audit process. The audit plan ensures that high-risk areas are reviewed at least annually.
43
The key to monitoring transaction risk is in the design, documentation and implementation of
well-defined procedures. All transaction related procedures include steps to report events that
might increase transaction risk. Dual controls are also a form of monitoring.
Compliance Risk
Compliance risk is the risk to earnings or capital arising from violations of, or
non-conformance with, laws, rules, regulations, prescribed practices, or ethical standards.
Compliance risk also arises in situations where the laws or rules governing certain Bank products
or activities of the Banks customers may be ambiguous or untested. Compliance risk exposes us to
fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk can
also lead to a diminished reputation, reduced business value, limited business opportunities,
lessened expansion potential, and lack of contract enforceability.
There is no single or primary source of compliance risk. It is inherent in every Bank
activity. Frequently, it blends into operational risk and transaction processing. A portion of this
risk is sometimes referred to as legal risk. This is not limited solely to risk from failure to
comply with consumer protection laws; it encompasses all laws, as well as prudent ethical standards
and contractual obligations. It also includes the exposure to litigation from all aspects of
banking, traditional and non-traditional.
Our Compliance Management Policy and Program and the Code of Ethical Conduct are the
cornerstone for controlling compliance risk. An integral part of controlling this risk is the
proper training of associates. The Compliance Officer is responsible for developing and executing a
comprehensive compliance training program. The Compliance Officer will ensure that each associate
receives adequate training with regard to their position to ensure that laws and regulations are
not violated. All associates who deal in compliance high risk areas are trained to be knowledgeable
about the level and severity of exposure in those areas and the policies and procedures in place to
control such exposure.
Our Compliance Management Policy and Program includes an audit program aimed at identifying
problems and ensuring that problems are corrected. The audit program includes two levels of review.
One is in-depth audits performed by an external firm and the other is periodic monitoring performed
by the Compliance Officer.
We utilize an external firm to conduct compliance audits as a means of identifying weaknesses
in the compliance program itself. The external firms audit plan includes a periodic review of each
branch and department of the Bank.
The branch or department that is the subject of an audit is required to respond to the audit
and correct any violations noted. The Compliance Officer will review audit findings and the
response provided by the branch or department to identify areas which pose a significant compliance
risk.
The Compliance Officer conducts periodic monitoring of our compliance efforts with a special
focus on those areas that expose us to compliance risk. The purpose of the periodic monitoring is
to ensure that our associates are adhering to established policies and procedures adopted by the
Bank. The Compliance Officer will notify the appropriate department head and the Compliance
Committee of any violations noted. The branch or department that is the subject of the review will
be required to respond to the findings and correct any noted violations.
We recognize that customer complaints can often identify weaknesses in our compliance program
which could expose the Bank to risk. Therefore, all complaints are given prompt attention. Our
Compliance Management Policy and Program includes provisions on how customer complaints are to be
addressed. The Compliance Officer reviews all complaints to determine if a significant compliance
risk exists and communicates those findings to Senior Management.
44
Strategic Risk
Strategic risk is the risk to earnings or capital arising from adverse decisions or improper
implementation of strategic decisions. This risk is a function of the compatibility between an
organizations goals, the resources deployed against those goals and the quality of implementation.
Strategic risks are identified as part of the strategic planning process. Offsite strategic
planning sessions are held annually. The strategic review consists of an economic assessment,
competitive analysis, industry outlook and legislative and regulatory review.
A primary measurement of strategic risk is peer group analysis. Key performance ratios are
compared to three separate peer groups to identify any sign of weakness and potential
opportunities. The peer group consists of:
|
1. |
|
All banks of comparable size |
|
|
2. |
|
High performing banks |
|
|
3. |
|
A list of specific banks |
Another measure is the comparison of the actual results of previous strategic initiatives
against the expected results established prior to implementation of each strategy.
The corporate strategic plan is formally presented to all branch managers and department
managers at an annual leadership conference.
Reputation Risk
Reputation risk is the risk to capital and earnings arising from negative public opinion. This
affects our ability to establish new relationships or services, or continue servicing existing
relationships. It can expose us to litigation and, in some instances, financial loss.
Price and Foreign Exchange Risk
Price risk arises from changes in market factors that affect the value of traded instruments.
Foreign exchange risk is the risk to earnings or capital arising from movements in foreign exchange
rates.
Our current exposure to price risk is nominal. We do not have trading accounts. Consequently,
the level of price risk within the investment portfolio is limited to the need to sell securities
for reasons other than trading. The section of this policy pertaining to liquidity risk addresses
this risk.
We maintain deposit accounts with various foreign banks. Our Interbank Liability Policy limits
the balance in any of these accounts to an amount that does not present a significant risk to our
earnings from changes in the value of foreign currencies.
Our asset liability model calculates the market value of the Banks equity. In addition,
management prepares on a monthly basis a Capital Volatility report that compares changes in the
market value of the investment portfolio. We have as our target to always be well-capitalized by
regulatory standards.
The Balance Sheet Management Policy requires the submission of a Fair Value Matrix Report to
the Balance Sheet Management Committee on a quarterly basis. The report calculates the economic
value of equity under different interest rate scenarios, revealing the level or price risk of the
Banks interest sensitive asset and liability portfolios.
45
ITEM 4. CONTROLS AND PROCEDURES
We maintain controls and procedures designed to ensure that information is recorded and
reported in all filings of financial reports with the Securities and Exchange Commission. Such
information is reported to the Companys management, including its Chief Executive Officer and its
Chief Financial Officer to allow timely and accurate disclosure based on the definition of
disclosure controls and procedures in SEC Rule 13a-15(e). In designing these controls and
procedures, management recognizes that they can only provide reasonable assurance of achieving the
desired control objectives. We also evaluate the cost-benefit relationship of controls and
procedures.
As of the end of the period covered by this report, we carried out an evaluation of the
effectiveness of the Companys disclosure controls and procedures under the supervision and with
the participation of the Chief Executive Officer, the Chief Financial Officer and other senior
management of the Company. Based on the foregoing, the Companys Chief Executive Officer and the
Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective as of the end of the period covered by this report.
During our most recent fiscal quarter, there have been no changes in our internal control over
financial reporting that has materially affected or is reasonably likely to materially affect our
internal control over financial reporting.
46
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors set forth in Part I, Item 1A,
Risk Factors, of the Companys FORM 10-K for the year ended December 31, 2005, during
the nine months ended September 30, 2006. Please refer to that section of the Companys
10-K for disclosure regarding the risks and uncertainties related to the Companys
business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In October 2001, the Companys board of directors authorized the repurchase of up to
2.0 million shares (all share amounts will not be adjusted to reflect stock dividends and
splits) of the Companys common stock. This program does not have an expiration date.
There were no repurchase transactions during the nine months ended September 30, 2006. As
of September 30, 2006, 775,163 shares are available to be repurchased in the future under
this repurchase plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS
The Exhibits listed below are filed or incorporated by reference as part of this Report.
|
|
|
Exhibit No. |
|
Description of Exhibits |
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CVB FINANCIAL CORP.
(Registrant)
|
|
|
|
|
|
|
|
Date: November 3, 2006 |
/s/ Edward J. Biebrich Jr.
|
|
|
Edward J. Biebrich Jr. |
|
|
Chief Financial Officer |
|
|
48
exv31w1
Exhibit 31.1
CERTIFICATION
I, Christopher D. Myers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CVB Financial Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrants internal control over financial reporting.
|
|
|
|
|
|
|
|
Date: November 3, 2006 |
/s/ Christopher D. Myers
|
|
|
Christopher D. Myers |
|
|
Chief Executive Officer |
|
|
exv31w2
Exhibit 31.2
CERTIFICATION
I, Edward J. Biebrich, Jr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CVB Financial Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrants internal control over financial reporting.
|
|
|
|
|
|
|
|
Date: November 3, 2006 |
/s/ Edward J. Biebrich, Jr.
|
|
|
Edward J. Biebrich, Jr. |
|
|
Chief Financial Officer |
|
|
exv32w1
Exhibit 32.1
CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CVB Financial Corp. (the Company) on Form 10-Q
for the period ended September 30, 2006, as filed with the Securities and Exchange Commission on
the date hereof (the Report), I, Christopher D. Myers, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, to the best of my knowledge that:
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(1) |
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The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
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(2) |
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The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
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Date: November 3, 2006 |
/s/ Christopher D. Myers
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Christopher D. Myers |
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Chief Executive Officer |
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exv32w2
Exhibit 32.2
CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CVB Financial Corp. (the Company) on Form 10-Q
for the period ended September 30, 2006, as filed with the Securities and Exchange Commission on
the date hereof (the Report), I, Edward J. Biebrich, Jr., Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, to the best of my knowledge that:
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(1) |
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The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
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(2) |
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The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
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Date: November 3, 2006 |
/s/ Edward J. Biebrich Jr.
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Edward J. Biebrich Jr. |
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Chief Financial Officer |
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