e10vq
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
or
|
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|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-10140
CVB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
|
|
|
California
(State or other jurisdiction of incorporation
or organization)
|
|
95-3629339
(I.R.S. Employer Identification No.) |
|
|
|
701 North Haven Ave, Suite 350, Ontario, California
(Address of Principal Executive Offices)
|
|
91764
(Zip Code) |
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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, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated
filer þ | Accelerated
filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Number of shares of common stock of the registrant: 83,270,263 outstanding as of November 3, 2008.
CVB FINANCIAL CORP.
2008 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
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
92,421 |
|
|
$ |
89,486 |
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
2,387,444 |
|
|
|
2,390,566 |
|
Investment securities held-to-maturity |
|
|
7,121 |
|
|
|
|
|
Interest-bearing balances due from depository institutions |
|
|
475 |
|
|
|
475 |
|
Investment in stock of Federal Home Loan Bank (FHLB) |
|
|
92,354 |
|
|
|
79,983 |
|
Loans and lease finance receivables, net |
|
|
3,595,337 |
|
|
|
3,495,144 |
|
Allowance for credit losses |
|
|
(40,058 |
) |
|
|
(33,049 |
) |
|
|
|
|
|
|
|
Total earning assets |
|
|
6,042,673 |
|
|
|
5,933,119 |
|
Premises and equipment, net |
|
|
44,015 |
|
|
|
46,855 |
|
Bank owned life insurance |
|
|
106,840 |
|
|
|
103,400 |
|
Accrued interest receivable |
|
|
28,800 |
|
|
|
29,734 |
|
Deferred tax asset |
|
|
13,748 |
|
|
|
|
|
Intangibles |
|
|
11,917 |
|
|
|
14,611 |
|
Goodwill |
|
|
55,097 |
|
|
|
55,167 |
|
Other assets |
|
|
26,275 |
|
|
|
21,591 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
6,421,786 |
|
|
$ |
6,293,963 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
1,302,205 |
|
|
$ |
1,295,959 |
|
Interest-bearing |
|
|
1,893,336 |
|
|
|
2,068,390 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
3,195,541 |
|
|
|
3,364,349 |
|
Demand Note to U.S. Treasury |
|
|
3,734 |
|
|
|
540 |
|
Repurchase agreements |
|
|
610,973 |
|
|
|
586,309 |
|
Short-term borrowings |
|
|
1,051,598 |
|
|
|
1,048,500 |
|
Long-term borrowings |
|
|
955,000 |
|
|
|
705,000 |
|
Deferred tax liabilities |
|
|
|
|
|
|
1,307 |
|
Accrued interest payable |
|
|
18,168 |
|
|
|
13,312 |
|
Deferred compensation |
|
|
9,074 |
|
|
|
8,166 |
|
Junior subordinated debentures |
|
|
115,055 |
|
|
|
115,055 |
|
Other liabilities |
|
|
27,823 |
|
|
|
26,477 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
5,986,966 |
|
|
|
5,869,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Preferred stock, authorized, 20,000,000 shares
without par; none issued or outstanding |
|
|
|
|
|
|
|
|
Common stock, authorized, 122,070,312 shares
without par; issued and outstanding
83,270,263 (2008) and 83,164,906 (2007) |
|
|
355,494 |
|
|
|
354,249 |
|
Retained earnings |
|
|
95,555 |
|
|
|
66,569 |
|
Accumulated other comprehensive (loss)/income, net of tax |
|
|
(16,229 |
) |
|
|
4,130 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
434,820 |
|
|
|
424,948 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
6,421,786 |
|
|
$ |
6,293,963 |
|
|
|
|
|
|
|
|
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 |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
|
$ |
52,954 |
|
|
$ |
58,677 |
|
|
$ |
159,211 |
|
|
$ |
165,117 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
22,142 |
|
|
|
20,591 |
|
|
|
65,448 |
|
|
|
65,401 |
|
Tax-preferred |
|
|
7,036 |
|
|
|
7,493 |
|
|
|
21,336 |
|
|
|
22,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
|
29,178 |
|
|
|
28,084 |
|
|
|
86,784 |
|
|
|
87,430 |
|
Dividends from FHLB stock |
|
|
1,367 |
|
|
|
1,047 |
|
|
|
3,666 |
|
|
|
3,152 |
|
Federal funds sold and Interest bearing deposits
with other institutions |
|
|
8 |
|
|
|
72 |
|
|
|
34 |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
83,507 |
|
|
|
87,880 |
|
|
|
249,695 |
|
|
|
255,791 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
7,417 |
|
|
|
18,445 |
|
|
|
28,233 |
|
|
|
53,531 |
|
Short-term borrowings |
|
|
21,954 |
|
|
|
19,886 |
|
|
|
50,352 |
|
|
|
36,505 |
|
Long-term borrowings |
|
|
3,411 |
|
|
|
5,853 |
|
|
|
24,200 |
|
|
|
40,437 |
|
Junior subordinated debentures |
|
|
1,713 |
|
|
|
1,988 |
|
|
|
5,286 |
|
|
|
5,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
34,495 |
|
|
|
46,172 |
|
|
|
108,071 |
|
|
|
136,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for credit losses |
|
|
49,012 |
|
|
|
41,708 |
|
|
|
141,624 |
|
|
|
119,755 |
|
Provision for credit losses |
|
|
4,000 |
|
|
|
|
|
|
|
8,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for credit losses |
|
|
45,012 |
|
|
|
41,708 |
|
|
|
132,924 |
|
|
|
119,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
3,829 |
|
|
|
3,340 |
|
|
|
11,381 |
|
|
|
9,827 |
|
Trust and Investment Services |
|
|
2,019 |
|
|
|
1,657 |
|
|
|
5,906 |
|
|
|
5,355 |
|
Bankcard services |
|
|
580 |
|
|
|
678 |
|
|
|
1,779 |
|
|
|
1,918 |
|
BOLI income |
|
|
932 |
|
|
|
981 |
|
|
|
3,151 |
|
|
|
2,896 |
|
Other |
|
|
1,013 |
|
|
|
1,207 |
|
|
|
2,999 |
|
|
|
3,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating
income |
|
|
8,373 |
|
|
|
7,863 |
|
|
|
25,216 |
|
|
|
23,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
15,943 |
|
|
|
13,794 |
|
|
|
46,987 |
|
|
|
41,449 |
|
Occupancy and Equipment |
|
|
4,811 |
|
|
|
4,605 |
|
|
|
14,430 |
|
|
|
12,905 |
|
Professional services |
|
|
1,600 |
|
|
|
1,844 |
|
|
|
5,015 |
|
|
|
4,535 |
|
Amortization of intangibles |
|
|
898 |
|
|
|
1,086 |
|
|
|
2,694 |
|
|
|
2,263 |
|
Other |
|
|
5,805 |
|
|
|
5,889 |
|
|
|
18,708 |
|
|
|
16,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating
expenses |
|
|
29,057 |
|
|
|
27,218 |
|
|
|
87,834 |
|
|
|
77,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
24,328 |
|
|
|
22,353 |
|
|
|
70,306 |
|
|
|
65,149 |
|
Income taxes |
|
|
6,868 |
|
|
|
6,232 |
|
|
|
19,510 |
|
|
|
17,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
17,460 |
|
|
$ |
16,121 |
|
|
$ |
50,796 |
|
|
$ |
47,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
6,949 |
|
|
$ |
31,779 |
|
|
$ |
30,437 |
|
|
$ |
50,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.21 |
|
|
$ |
0.19 |
|
|
$ |
0.61 |
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.21 |
|
|
$ |
0.19 |
|
|
$ |
0.61 |
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
0.085 |
|
|
$ |
0.085 |
|
|
$ |
0.255 |
|
|
$ |
0.255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
4
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
Amounts and shares in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Shares |
|
|
Common |
|
|
Retained |
|
|
Comprehensive |
|
|
Comprehensive |
|
|
|
|
|
|
Outstanding |
|
|
Stock |
|
|
Earnings |
|
|
Income |
|
|
Income |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2008 |
|
|
83,165 |
|
|
$ |
354,249 |
|
|
$ |
66,569 |
|
|
$ |
4,130 |
|
|
|
|
|
|
$ |
424,948 |
|
Issuance of common stock |
|
|
176 |
|
|
|
606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606 |
|
Repurchase of common stock |
|
|
(71 |
) |
|
|
(650 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(650 |
) |
Tax benefit from exercise of
stock options |
|
|
|
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172 |
|
Stock-based Compensation
Expense |
|
|
|
|
|
|
1,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,117 |
|
Adoption of EITF 06-4 Split
Dollar Life
Insurance |
|
|
|
|
|
|
|
|
|
|
(571 |
) |
|
|
|
|
|
|
|
|
|
|
(571 |
) |
Cash dividends ($0.255 per
share) |
|
|
|
|
|
|
|
|
|
|
(21,239 |
) |
|
|
|
|
|
|
|
|
|
|
(21,239 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
50,796 |
|
|
|
|
|
|
$ |
50,796 |
|
|
|
50,796 |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on
securities
available-for-sale,
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,359 |
) |
|
|
(20,359 |
) |
|
|
(20,359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2008 |
|
|
83,270 |
|
|
$ |
355,494 |
|
|
$ |
95,555 |
|
|
$ |
(16,229 |
) |
|
|
|
|
|
$ |
434,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Shares |
|
|
Common |
|
|
Retained |
|
|
Comprehensive |
|
|
Comprehensive |
|
|
|
|
|
|
Outstanding |
|
|
Stock |
|
|
Earnings |
|
|
Loss |
|
|
Income |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2007 |
|
|
84,282 |
|
|
$ |
366,082 |
|
|
$ |
34,464 |
|
|
$ |
(13,221 |
) |
|
|
|
|
|
$ |
387,325 |
|
Issuance of common stock |
|
|
185 |
|
|
|
1,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,053 |
|
Repurchase of common stock |
|
|
(2,720 |
) |
|
|
(30,030 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,030 |
) |
Shares issued for the acquisition
of First Coastal Bank |
|
|
1,606 |
|
|
|
18,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,046 |
|
Tax benefit from exercise of
stock options |
|
|
|
|
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317 |
|
Stock-based Compensation Expense |
|
|
|
|
|
|
752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
752 |
|
Cash dividends ($0.255 per share) |
|
|
|
|
|
|
|
|
|
|
(21,410 |
) |
|
|
|
|
|
|
|
|
|
|
(21,410 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
47,217 |
|
|
|
|
|
|
$ |
47,217 |
|
|
|
47,217 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on
securities
available-for-sale,
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,547 |
|
|
|
3,547 |
|
|
|
3,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
50,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2007 |
|
|
83,353 |
|
|
$ |
356,220 |
|
|
$ |
60,271 |
|
|
$ |
(9,674 |
) |
|
|
|
|
|
$ |
406,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Disclosure of reclassification amount |
|
|
|
|
|
|
|
|
Unrealized (loss)/gain on securities arising during the period |
|
$ |
(35,101 |
) |
|
$ |
6,115 |
|
Tax benefit |
|
|
14,742 |
|
|
|
(2,568 |
) |
|
|
|
|
|
|
|
Net unrealized (loss)/gain on securities |
|
$ |
(20,359 |
) |
|
$ |
3,547 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
5
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Dollar amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Interest and dividends received |
|
$ |
247,921 |
|
|
$ |
255,894 |
|
Service charges and other fees received |
|
|
25,195 |
|
|
|
23,810 |
|
Interest paid |
|
|
(103,215 |
) |
|
|
(133,047 |
) |
Cash paid to vendors and employees |
|
|
(84,264 |
) |
|
|
(76,484 |
) |
Income taxes paid |
|
|
(19,346 |
) |
|
|
(11,250 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
66,291 |
|
|
|
58,923 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from sale of FHLB Stock |
|
|
|
|
|
|
3,712 |
|
Proceeds from repayment of MBS |
|
|
262,540 |
|
|
|
338,605 |
|
Proceeds from repayment of Fed Funds Sold |
|
|
|
|
|
|
52,000 |
|
Proceeds from maturity of investment securities |
|
|
25,244 |
|
|
|
35,955 |
|
Purchases of investment securities available-for-sale |
|
|
|
|
|
|
(72,608 |
) |
Purchases of investment securities held-to-maturity |
|
|
(7,694 |
) |
|
|
|
|
Purchases of MBS |
|
|
(320,395 |
) |
|
|
(85,907 |
) |
Purchases of FHLB stock |
|
|
(12,371 |
) |
|
|
(2,927 |
) |
Net increase in loans and lease finance receivables |
|
|
(98,568 |
) |
|
|
(101,124 |
) |
Proceeds from sales of premises and equipment |
|
|
110 |
|
|
|
111 |
|
Purchase of premises and equipment |
|
|
(2,966 |
) |
|
|
(5,935 |
) |
Cash paid for purchase of First Coastal Bancshares, net of cash acquired |
|
|
|
|
|
|
(743 |
) |
Purchase of Bank Owned Life Insurance |
|
|
(293 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by investing activities |
|
|
(154,393 |
) |
|
|
161,139 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net decrease in transaction deposits |
|
|
(93,208 |
) |
|
|
(145,032 |
) |
Net decrease in time deposits |
|
|
(75,600 |
) |
|
|
(20,226 |
) |
Advances from Federal Home Loan Bank |
|
|
450,000 |
|
|
|
600,000 |
|
Repayment of advances from Federal Home Loan Bank |
|
|
(100,000 |
) |
|
|
(480,000 |
) |
Net decrease in other borrowings |
|
|
(93,708 |
) |
|
|
(381,464 |
) |
Net increase in repurchase agreements |
|
|
24,664 |
|
|
|
236,316 |
|
Cash dividends on common stock |
|
|
(21,239 |
) |
|
|
(21,410 |
) |
Repurchase of common stock |
|
|
(650 |
) |
|
|
(30,030 |
) |
Proceeds from exercise of stock options |
|
|
606 |
|
|
|
1,053 |
|
Tax benefit related to exercise of stock options |
|
|
172 |
|
|
|
317 |
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities |
|
|
91,037 |
|
|
|
(240,476 |
) |
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
2,935 |
|
|
|
(20,414 |
) |
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
89,486 |
|
|
|
146,411 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
92,421 |
|
|
$ |
125,997 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
6
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
Dollar amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
50,796 |
|
|
$ |
47,217 |
|
Adjustments to reconcile net earnings to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
(Gain)/Loss on sale of premises and equipment |
|
|
169 |
|
|
|
(15 |
) |
Increase in bank owned life insurance |
|
|
(3,151 |
) |
|
|
(3,127 |
) |
Net amortization of premiums on investment securities |
|
|
1,205 |
|
|
|
2,454 |
|
Provisions for credit losses |
|
|
8,700 |
|
|
|
|
|
Stock-based compensation |
|
|
1,117 |
|
|
|
752 |
|
Depreciation and amortization |
|
|
8,290 |
|
|
|
7,097 |
|
Change in accrued interest receivable |
|
|
934 |
|
|
|
(2,583 |
) |
Change in accrued interest payable |
|
|
4,856 |
|
|
|
2,990 |
|
Change in other assets and liabilities |
|
|
(6,625 |
) |
|
|
4,138 |
|
|
|
|
|
|
|
|
Total adjustments |
|
|
15,495 |
|
|
|
11,706 |
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
$ |
66,291 |
|
|
$ |
58,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Transfer from loans to Other Real Estate Owned (OREO) |
|
$ |
1,927 |
|
|
$ |
|
|
|
Purchase of First Coastal Bancshares: |
|
|
|
|
|
|
|
|
Assets acquired |
|
$ |
|
|
|
$ |
190,712 |
|
Goodwill & Intangibles |
|
|
|
|
|
|
30,978 |
|
Liabilities assumed |
|
|
|
|
|
|
(204,387 |
) |
Stock issued |
|
|
|
|
|
|
(18,046 |
) |
|
|
|
|
|
|
|
Purchase price of acquisition, net of cash received |
|
$ |
|
|
|
$ |
(743 |
) |
|
|
|
|
|
|
|
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, 2008 and 2007
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, 2008 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, 2007 filed with the Securities and Exchange Commission. In the
opinion of management, the accompanying condensed consolidated unaudited financial statements
reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for
a fair presentation of financial results for the interim periods presented. A summary of the
significant accounting policies consistently applied in the preparation of the accompanying
consolidated financial statements follows.
Principles
of Consolidation The consolidated financial statements include the accounts of
CVB Financial Corp. (the Company) and its wholly owned subsidiary: Citizens Business Bank (the
Bank) after elimination of all intercompany transactions and balances. The Company also has
three inactive subsidiaries; CVB Ventures, Inc.; Chino Valley Bancorp; and ONB Bancorp. 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. The Company also acquired trust preferred securities through the acquisition of First
Coastal Bancshares (FCB). 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 Citizens Financial Services Division (formerly known as
Golden West Financial Division) and offers trust services to customers through its CitizensTrust
Division. The Banks customers consist primarily of small to mid-sized businesses and individuals
located in San Bernardino County, Riverside County, Orange County, Los Angeles County, Madera
County, Fresno County, Tulare County, Kern County and San Joaquin County. The Bank operates 44
Business Financial Centers and three Commercial Banking Centers with its headquarters located in
the city of Ontario.
The Companys operating business units have been combined into two main segments: (i) Business
Financial and Commercial Banking Centers and (ii) Treasury. Business Financial and Commercial
Banking Centers (branches) is comprised of loans, deposits, products and services the Bank offers
to the majority of its customers. The other segment is Treasury, which manages the investment
portfolio of the Company. The 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).
8
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.
Cash and due from banks Cash on hand, cash items in the process of collection, and amounts
due from correspondent banks and the Federal Reserve Bank are included in Cash and due from banks.
Investment Securities The Company classifies as held-to-maturity those debt securities that
the Company has the positive intent and ability to hold to maturity. Securities classified as
trading are those securities that are bought and held principally for the purpose of selling them
in the near term. All other debt and equity securities are classified as available-for-sale.
Securities held-to-maturity are accounted for at cost and adjusted for amortization of premiums and
accretion of discounts. Trading securities are accounted for at fair value with the unrealized
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, 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 effective-yield method over the terms of the
securities. For mortgage-backed securities (MBS), the amortization or accretion is based on
estimated average lives of the securities. The lives of these securities can fluctuate based on the
amount of prepayments received on the underlying collateral of the securities. The Companys
investment in Federal Home Loan Bank (FHLB) stock is carried at cost.
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, 2008, the Company entered into
commitments with certain customers amounting to $757.0 million compared to $747.5 million at
December 31, 2007. Letters of credit at September 30, 2008, and December 31, 2007, were $61.7
million and $60.9 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 using the effective-yield method.
Provision
and Allowance for Credit Losses The determination of the balance in the allowance
for credit losses is based on an analysis of the loan and lease finance receivables portfolio using
a systematic methodology and reflects an amount that, in 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 that would deserve current recognition in estimating inherent credit losses. The
estimate is reviewed quarterly by management and periodically by various regulatory entities and,
as adjustments become necessary, they are reported in earnings in the periods in which they become
known. The provision for credit losses is charged to expense.
During the first nine months of 2008, we recorded a provision for credit losses of $8.7
million. The allowance for credit losses was $40.1 million as of September 30, 2008. This
represents
9
an increase of $7.0 million when compared with an allowance for credit losses of $33.0
million as of December 31, 2007.
In addition to the allowance for credit losses, the Company also has a reserve for undisbursed
commitments for loans and letters of credit. This reserve is carried in the liabilities section of
the balance sheet in other liabilities. Provisions to this reserve are included in other expense.
For the nine months of 2008, the Company recorded an increase of $1.2 million in the reserve for
undisbursed commitments. As of September 30, 2008, the balance in this reserve was $4.0 million.
A loan for which collection of principal and interest according to its original terms is not
probable is considered to be impaired. The 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.
At September 30, 2008, the Company had impaired loans of $19.1 million. Of this amount, $8.0
million consisted of non-accrual residential construction and residential land loans, $2.1 million
of non-accrual single family mortgage loans, $6.2 million of non-accrual commercial loans, $300,000
of non-accrual consumer loans and one loan of $2.5 million whose terms were modified in a troubled
debt restructure. As a result of the restructure of this one loan, $598,000 was charged-off during
the quarter ended September 30, 2008. The loans are supported by collateral with a fair value less
selling costs, net of prior liens, of $16.3 million. The amount of specific reserve for these
loans was $2.8 million at September 30, 2008. At December 31, 2007, the Bank had one impaired loan
with a balance of $1.1 million.
Premises
and Equipment Premises and equipment are stated at cost, less accumulated
depreciation, which is provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives using the straight-line method. Properties under
capital lease and leasehold improvements are amortized over the shorter of estimated economic lives
of 15 years or the initial terms of the leases. Estimated lives are 3 to 5 years for computer and
equipment, 5 to 7 years for furniture, fixtures and equipment, and 15 to 40 years for buildings and
improvements. Long-lived assets are reviewed periodically for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. The impairment is
calculated as the difference in fair value of assets and their carrying value. The impairment loss,
if any, would be recorded in noninterest expense.
Other
Real Estate Owned Other real estate owned (OREO) represents real estate acquired
through foreclosure in satisfaction of commercial and real estate loans and is stated at fair
value, minus estimated costs to sell (fair value at time of foreclosure). Loan balances in excess
of fair value of the real estate acquired at the date of acquisition are charged against the
allowance for credit losses. Any subsequent operating expenses or income, reduction in estimated
values, and gains or losses on disposition of such properties are charged to current operations. As
of September 30, 2008, we had $1.9 million in OREO. This balance consists of $1.1 million
representing a foreclosed condominium construction project, $315,000 for one single family
residence from our mortgage pools and $475,000 for one residential construction loan. There was no
OREO at December 31, 2007.
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. The Company completed its annual impairment test as of July 1, 2008, and
did not record any impairment of goodwill.
10
At September 30, 2008 goodwill was $55.1 million. As of September 30, 2008, intangible assets
that continue to be subject to amortization include core deposit premiums of $11.9 million (net of
$15.2 million of accumulated amortization). Amortization expense for such intangible assets was
$2.7 million for the nine months ended September 30, 2008. Estimated amortization expense, for the
remainder of 2008 is expected to be $897,000. Estimated amortization expense, for the succeeding
five fiscal years is $3.0 million for year one, $2.9 million for year two, $2.8 million for year
three, $1.6 million for year four and $653,000 for year five. The weighted average remaining life
of intangible assets is approximately 3.3 years.
Bank Owned Life Insurance The Bank invests in Bank-Owned Life Insurance (BOLI). BOLI
involves the purchasing of life insurance by the Bank on a select group of employees. The Bank is
the owner and beneficiary of these policies. BOLI is recorded as an asset at cash surrender value.
Increases in the cash value of these policies, as well as insurance proceeds received, are recorded
in other non-interest income and are not subject to income tax.
As of January 1, 2008, the Company adopted EITF 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. 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. The
adoption did not have a material effect on the Companys consolidated financial position or results
of operations. The cumulative effect of the adoption was recorded in equity.
Income Taxes Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Future realization of deferred tax assets ultimately depends on
the existence of sufficient taxable income of the appropriate character (for example, ordinary
income or capital gain) within the carryback or carryforward periods available under the tax law.
Based on historical and future expected taxable earnings and available strategies, the Company
considers the future realization of these deferred tax assets more likely than not.
The Company adopted FIN 48, Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the
accounting for uncertainty in tax positions taken or expected to be taken on a tax return and
provides that the tax effects from an uncertain tax position can be recognized in the financial
statements only if, based on its merits, the position is more likely than not to be sustained on
audit by the taxing authorities. Management believes that all tax positions taken to date are
highly certain and, accordingly, no accounting adjustment has been made to the financial
statements. Interest and penalties related to uncertain tax positions are recorded as part of
other operating expense.
Earnings per Common Share Basic earnings per common 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
tax-effected shares issuable upon the assumed exercise of outstanding common stock options. Share
and per share amounts have been retroactively restated to give effect to all stock dividends and
splits. The number of shares outstanding at September 30, 2008 was 83,270,263. The tables below
presents the reconciliation of earnings per share for the periods indicated.
11
Earnings Per Share Reconciliation
(Dollars and shares in thousands, except per share amounts)
For the Nine Months
Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
|
|
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 |
|
$ |
50,796 |
|
|
|
83,106 |
|
|
$ |
0.61 |
|
|
$ |
47,217 |
|
|
|
83,716 |
|
|
$ |
0.56 |
|
EFFECT OF DILUTIVE
SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental shares
from assumed exercise
of outstanding options |
|
|
|
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
DILUTED EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common stockholders |
|
$ |
50,796 |
|
|
|
83,329 |
|
|
$ |
0.61 |
|
|
$ |
47,217 |
|
|
|
84,373 |
|
|
$ |
0.56 |
|
|
|
|
|
|
Earnings Per Share Reconciliation
(Dollars and shares in thousands, except per share amounts)
For the Three Months
Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
|
|
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 |
|
$ |
17,460 |
|
|
|
83,148 |
|
|
$ |
0.21 |
|
|
$ |
16,121 |
|
|
|
84,373 |
|
|
$ |
0.19 |
|
EFFECT OF DILUTIVE
SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental shares
from assumed exercise
of outstanding options |
|
|
|
|
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
357 |
|
|
|
|
|
|
|
|
|
|
DILUTED EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common stockholders |
|
$ |
17,460 |
|
|
|
83,373 |
|
|
$ |
0.21 |
|
|
$ |
16,121 |
|
|
|
84,730 |
|
|
$ |
0.19 |
|
|
|
|
|
|
Stock-Based Compensation At September 30, 2008, the Company has three stock-based employee
compensation plans, two of which are described more fully in Note 15 in the Companys Annual Report
on Form 10-K.
At the annual shareholders meeting in May 2008, the shareholders approved the 2008 Equity
Incentive Plan which authorizes the issuance of up to 3,949,891 shares of Company common stock for
grants of stock options and restricted stock to employees, officers, consultants and directors of
the Company and its subsidiaries, and expires in 2018. The plan authorizes the issuance of
incentive and non-qualified stock options, as well as, restricted stock awards. No further grants
will be made under the 2000 Stock Option Plan, but shares may continue to be issued under such plan
pursuant to grants previously made.
Derivative Financial Instruments The Company accounts for derivatives in accordance with
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and
interpreted. Pursuant to the requirements of SFAS No. 133, all derivative instruments, including
certain derivative instruments embedded in other contracts, are to be recognized on the
consolidated balance sheet at fair value. For derivatives designated as fair value hedges, changes
in the fair value of the derivative and the hedged item related to the hedged risk are recognized
in earnings. Changes in fair value of derivatives designated and accounted for as cash flow hedges,
to the extent they are effective as hedges, are recorded in Other Comprehensive Income, net of
deferred taxes and are subsequently reclassified to earnings
12
when the hedged transaction affects
earnings. Any hedge ineffectiveness would be recognized in the income statement line item
pertaining to the hedged item.
The Bank is exposed to certain risks relating to its ongoing business operations. The primary
risks managed by using derivative instruments are market risk and interest rate risk. As of
September 30, 2008, the Bank entered into 16 interest-rate swap agreement with customers and 16
with a counterparty bank. The swaps are not designated as hedging instruments. The purpose of
entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank
a variable-rate loan receivable and provide the customer the financial effects of a fixed-rate loan
without creating volatility in the banks earnings.
The structure of the swaps is as follows. The Bank enters into a swap with its customers to
allow them to convert variable rate loans to fixed rate loans, and at the same time, the Bank
enters into a swap with the counterparty bank to allow the Bank to pass on the interest-rate risk
associated with fixed rate loans. The net effect of the transaction allows the Bank to receive
interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The
changes in the market value of the swaps primarily offset each other and therefore do not have a
significant impact on the Companys results of operations.
As of September 30, 2008, the total notional amount of the Banks swaps was $49.8 million.
The following tables present the location of the asset and liability and the amount of gain
recognized as of and for the nine months ended September 30, 2008.
Fair Value of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
September 30, 2008 |
|
|
September 30, 2008 |
|
|
|
(amounts in thousands) |
|
|
|
Balance Sheet |
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
Derivatives Not Designated as Hedging Instruments |
|
Location |
|
|
Fair Value |
|
|
Location |
|
|
Fair Value |
|
Interest Rate Swaps |
|
Other Assets |
|
|
$ |
762 |
|
|
Other Liabilities |
|
|
$ |
762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives |
|
|
|
|
|
$ |
762 |
|
|
|
|
|
|
$ |
762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments on the Consolidated Statement of Earnings for
the nine months ended September 30, 2008
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
|
|
|
|
Location of Gain Recognized in |
|
|
Recognized in Income |
|
Derivatives Not Designated as Hedging Instruments |
|
Income on Derivative |
|
|
on Derivative |
|
|
|
|
|
|
September 30, 2008 |
|
Interest Rate Swaps |
|
Other Income |
|
$ |
615 |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
615 |
|
|
|
|
|
|
|
|
Statement of Cash Flows - Cash and cash equivalents as reported in the statements of cash
flows include cash and due from banks. Cash flows from loans and deposits are reported net.
13
CitizensTrust This division provides trust, investment and brokerage related services, as
well as financial, estate and business succession planning services. The Company maintains funds
in trust for customers. CitizensTrust has approximately $2.5 billion in assets under administration
and $839 million in assets under management. The amount of these funds and the related liability
have not been recorded in the accompanying consolidated balance sheets because they are not assets
or liabilities of the Bank or Company, with the exception of any funds held on deposit with the
Bank.
Use of Estimates in the Preparation of Financial Statements The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. A material estimate that is particularly
susceptible to significant change in the near term relates to the determination of the allowance
for credit losses. Other significant estimates which may be subject to change include fair value
disclosures, impairment of investments and goodwill, and valuation of deferred tax assets and other
intangibles.
Recent Accounting Pronouncements On October 10, 2008, the FASB issued FSP FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,
which clarifies how companies should apply the fair value measurement methodologies of SFAS 157 to
financial assets when markets they are traded in are illiquid or inactive. Under the provisions of
this FSP, companies may use their own assumptions about future cash flows and appropriately
risk-adjusted discount rates when relevant observable inputs are either not available or are based
solely on transaction prices that reflect forced liquidations or distressed sales. This FSP is
effective as of September 30, 2008. There was no impact to our financial position or results of
operations from the adoption of this FSP.
In December 2007, the FASB issued a revision to SFAS No. 141, Business Combinations, SFAS
No. 141(R). SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions specified in the Statement. This
replaces SFAS No. 141s cost-allocation process, which required the cost of the acquisition to be
allocated to the individual assets acquired and liabilities assumed based on their estimated fair
values. SFAS No. 141(R) is applied prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. An entity may not apply it before that date. The Company does not expect
the adoption of SFAS 141(R) to have a material effect on the Companys consolidated financial
position or results of operations. The Company is evaluating the impact this standard will have on
future transactions.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interest in Consolidated
Financial Statements an amendment of ARB No. 51. SFAS No. 160 amends ARB No. 51 to establish
accounting and reporting standards for non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS No. 160 is effective for fiscal years, and interim periods,
within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited.
The Company does not expect the adoption of SFAS 160 to have a material effect on the Companys
consolidated financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. SFAS 161 amends and expands SFAS No. 131, requiring enhanced disclosures that
would enable financial-statement users to understand how and why a company uses derivative
instruments and better understand their effects on an entitys financial position, financial
performance, and cash flows. SFAS 161 is effective for fiscal years, and interim periods, within
those fiscal years,
14
beginning on or after November 15, 2008. The Company does not expect the adoption of SFAS 161
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 with no impact
on previously reported net income or stockholders equity.
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, 2007.
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.
At September 30, 2008, the Company does not have any litigation reserves and is not aware of any
material pending legal action or complaints asserted against the Company.
Business Segments The Company has identified two principal reportable segments: Business
Financial and Commercial Banking Centers and the Treasury Department. The Companys subsidiary bank
has 44 Business Financial Centers and 3 Commercial Banking Centers (branches), organized in 6
geographic regions, which are the focal points for customer sales and services. The Company
utilizes an internal reporting system to measure the performance of various operating segments
within the Bank which is the basis for determining the Banks reportable segments. The Chief
Operating Decision Maker (currently our CEO) regularly reviews the financial information of these
segments in deciding how to allocate resources and assessing performance. The Banks geographic
regions are considered operating segments and have been aggregated for segment reporting purposes
because the products and services are similar and are sold to similar types of customers, have
similar production and distribution processes, have similar economic characteristics, and have
similar reporting and organizational structures. The Treasury Departments primary focus is
managing the Banks investments, liquidity, and interest rate risk. Information related to the
Companys remaining operating segments which include construction lending, dairy and livestock
lending, SBA lending, leasing, and centralized functions have been aggregated and included in
Other. In addition, the Company allocates internal funds transfer pricing to the segments using a
methodology that charges users of funds interest expense and credits providers of funds interest
income with the net effect of this allocation being recorded in administration.
The following table represents the selected financial information for these two business
segments. Accounting principles generally accepted in the United States of America do not have an
authoritative body of knowledge regarding the management accounting used in presenting segment
financial information. The accounting policies for each of the business units is the same as those
policies identified for the consolidated Company and identified in the footnote on the summary of
significant accounting policies. The income numbers represent the actual income and expenses of
each business unit. In addition, each segment has allocated income and expenses based on
managements internal reporting system, which allows management to determine the performance of
each of its business units. Loan fees, included in the Business Financial and Commercial Banking
Centers category are the actual loan fees paid to the Company by its customers. These fees are
eliminated and deferred in the Other category, resulting in deferred loan fees for the
consolidated financial statements. All income and expense items not directly associated with the
two business segments are grouped in the Other category. Future changes in
15
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 reportable segments for the three and nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008 |
|
|
|
Business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Centers |
|
|
Treasury |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, including loan fees |
|
$ |
42,120 |
|
|
$ |
30,620 |
|
|
$ |
10,767 |
|
|
$ |
|
|
|
$ |
83,507 |
|
Credit for funds provided (1) |
|
|
18,306 |
|
|
|
|
|
|
|
4,458 |
|
|
|
(22,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
60,426 |
|
|
|
30,620 |
|
|
|
15,225 |
|
|
|
(22,764 |
) |
|
|
83,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
7,214 |
|
|
|
24,712 |
|
|
|
2,569 |
|
|
|
|
|
|
|
34,495 |
|
Charge for funds used (1) |
|
|
19,360 |
|
|
|
856 |
|
|
|
2,548 |
|
|
|
(22,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
26,574 |
|
|
|
25,568 |
|
|
|
5,117 |
|
|
|
(22,764 |
) |
|
|
34,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
33,852 |
|
|
|
5,052 |
|
|
|
10,108 |
|
|
|
|
|
|
|
49,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for credit losses |
|
$ |
33,852 |
|
|
$ |
5,052 |
|
|
$ |
6,108 |
|
|
$ |
|
|
|
$ |
45,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
5,471 |
|
|
|
1 |
|
|
|
2,901 |
|
|
|
|
|
|
|
8,373 |
|
Non-interest expense |
|
|
12,173 |
|
|
|
342 |
|
|
|
16,542 |
|
|
|
|
|
|
|
29,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss) |
|
$ |
27,150 |
|
|
$ |
4,711 |
|
|
|
($7,533 |
) |
|
$ |
|
|
|
$ |
24,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007 |
|
|
|
Business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Centers |
|
|
Treasury |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, including loan fees |
|
|
45,362 |
|
|
$ |
29,224 |
|
|
$ |
13,294 |
|
|
$ |
|
|
|
$ |
87,880 |
|
Credit for funds provided (1) |
|
|
16,266 |
|
|
$ |
0 |
|
|
|
3,764 |
|
|
|
(20,030 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
61,628 |
|
|
|
29,224 |
|
|
|
17,058 |
|
|
|
(20,030 |
) |
|
|
87,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
17,025 |
|
|
$ |
24,113 |
|
|
|
5,034 |
|
|
|
|
|
|
|
46,172 |
|
Charge for funds used (1) |
|
|
4,477 |
|
|
$ |
8,365 |
|
|
|
7,188 |
|
|
|
(20,030 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
21,502 |
|
|
|
32,478 |
|
|
|
12,222 |
|
|
|
(20,030 |
) |
|
|
46,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
40,126 |
|
|
|
(3,254 |
) |
|
|
4,836 |
|
|
|
|
|
|
|
41,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for credit losses |
|
$ |
40,126 |
|
|
|
($3,254 |
) |
|
$ |
4,836 |
|
|
$ |
|
|
|
$ |
41,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
4,628 |
|
|
$ |
1 |
|
|
|
3,234 |
|
|
|
|
|
|
|
7,863 |
|
Non-interest expense |
|
|
11,515 |
|
|
$ |
312 |
|
|
|
15,391 |
|
|
|
|
|
|
|
27,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss) |
|
$ |
33,239 |
|
|
|
($3,565 |
) |
|
|
($7,321 |
) |
|
$ |
|
|
|
$ |
22,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008 |
|
|
|
Business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Centers |
|
|
Treasury |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, including loan fees |
|
$ |
125,280 |
|
|
$ |
90,545 |
|
|
$ |
33,870 |
|
|
$ |
|
|
|
$ |
249,695 |
|
Credit for funds provided (1) |
|
|
39,224 |
|
|
|
|
|
|
|
6,421 |
|
|
|
(45,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
164,504 |
|
|
|
90,545 |
|
|
|
40,291 |
|
|
|
(45,645 |
) |
|
|
249,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
27,569 |
|
|
|
71,568 |
|
|
|
8,934 |
|
|
|
|
|
|
|
108,071 |
|
Charge for funds used (1) |
|
|
27,519 |
|
|
|
6,596 |
|
|
|
11,530 |
|
|
|
(45,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
55,088 |
|
|
|
78,164 |
|
|
|
20,464 |
|
|
|
(45,645 |
) |
|
|
108,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
109,416 |
|
|
|
12,381 |
|
|
|
19,827 |
|
|
|
|
|
|
|
141,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
8,700 |
|
|
|
|
|
|
|
8,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for credit losses |
|
$ |
109,416 |
|
|
$ |
12,381 |
|
|
$ |
11,127 |
|
|
$ |
|
|
|
$ |
132,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
16,068 |
|
|
|
7 |
|
|
|
9,141 |
|
|
|
|
|
|
|
25,216 |
|
Non-interest expense |
|
|
36,135 |
|
|
|
950 |
|
|
|
50,749 |
|
|
|
|
|
|
|
87,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss) |
|
$ |
89,349 |
|
|
$ |
11,438 |
|
|
|
( $30,481 |
) |
|
$ |
|
|
|
$ |
70,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of September 30, 2008 |
|
$ |
3,300,145 |
|
|
$ |
2,512,581 |
|
|
$ |
609,060 |
|
|
$ |
|
|
|
$ |
6,421,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007 |
|
|
|
Business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Centers |
|
|
Treasury |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
Interest income, including loan fees |
|
$ |
127,191 |
|
|
$ |
90,727 |
|
|
$ |
37,873 |
|
|
$ |
|
|
|
$ |
255,791 |
|
Credit for funds provided (1) |
|
|
47,252 |
|
|
|
|
|
|
|
10,876 |
|
|
|
(58,128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
174,443 |
|
|
|
90,727 |
|
|
|
48,749 |
|
|
|
(58,128 |
) |
|
|
255,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
47,655 |
|
|
|
74,737 |
|
|
|
13,644 |
|
|
|
|
|
|
|
136,036 |
|
Charge for funds used (1) |
|
|
11,292 |
|
|
|
24,198 |
|
|
|
22,638 |
|
|
|
(58,128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
58,947 |
|
|
|
98,935 |
|
|
|
36,282 |
|
|
|
(58,128 |
) |
|
|
136,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
115,496 |
|
|
|
(8,208 |
) |
|
|
12,467 |
|
|
|
|
|
|
|
119,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for credit losses |
|
$ |
115,496 |
|
|
|
( $8,208 |
) |
|
$ |
12,467 |
|
|
$ |
|
|
|
$ |
119,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
13,586 |
|
|
|
1 |
|
|
|
9,770 |
|
|
|
|
|
|
|
23,357 |
|
Non-interest expense |
|
|
32,695 |
|
|
|
857 |
|
|
|
44,411 |
|
|
|
|
|
|
|
77,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss) |
|
$ |
96,387 |
|
|
|
($9,064 |
) |
|
|
($22,174 |
) |
|
$ |
|
|
|
$ |
65,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of September 30, 2007 |
|
$ |
3,479,527 |
|
|
$ |
1,991,940 |
|
|
$ |
685,927 |
|
|
$ |
|
|
|
$ |
6,157,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit for funds provided and charge for funds used is eliminated in the consolidated presentation. |
Fair Value Information Effective January 1, 2008, the Company adopted SFAS No. 157, Fair
Value Measurements for financial assets and liabilities. In accordance with FASB Statement of
Position, FSP No. 157-2, the Company has not applied the provisions of SFAS No. 157 to
non-financial assets and liabilities, such as, fixed assets, goodwill, intangibles, and OREO. SFAS
No. 157 clarifies the definition of fair value, describes methods used to appropriately measure
fair value in accordance with generally accepted accounting principles and expands fair value
disclosure requirements. This statement applies whenever other accounting pronouncements require or
permit fair value measurements.
The fair value hierarchy under SFAS No. 157 prioritizes the inputs to valuation techniques
used to measure fair value into three broad levels (Level 1, Level 2, and Level 3).
|
|
|
Level 1 Valuation is based upon quoted prices for identical instruments traded in
active markets. |
|
|
|
|
Level 2 Valuation is based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant assumptions are
observable in the market. |
17
|
|
|
Level 3 Valuation is generated from model-based techniques that use significant
assumptions not observable in the market. These unobservable assumptions reflect the
Companys own estimates of assumptions that market participants would use in pricing
the asset or liability. Valuation techniques include use of option pricing models,
discounted cash flows and similar techniques. |
The Company performs fair value measurements on certain assets and liabilities as the result
of the application of accounting guidelines and pronouncements that were relevant prior to the
adoption of SFAS No. 157. Some fair value measurements, such as for available-for-sale securities
and interest rate
swaps are performed on a recurring basis, while others, such as impaired loans, impairment of
goodwill and other intangibles, are performed on a nonrecurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets & Liabilities Measured at Fair Value on a Recuring Basis |
|
|
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
|
|
|
|
Active Markets |
|
Other |
|
Significant |
|
|
|
|
|
|
for Identical |
|
Observable |
|
Unobservable |
|
|
September 30, |
|
Assets |
|
Inputs |
|
Inputs |
(in thousands) |
|
2008 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Description of Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities-AFS |
|
$ |
2,387,444 |
|
|
$ |
|
|
|
$ |
2,387,444 |
|
|
$ |
|
|
Interest Rate Swaps |
|
|
762 |
|
|
|
|
|
|
|
762 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,388,206 |
|
|
$ |
|
|
|
$ |
2,388,206 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
762 |
|
|
$ |
|
|
|
$ |
762 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets & Liabilities Measured at Fair Value on a Non-Recuring Basis |
|
|
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
Other |
|
Significant |
|
|
|
|
|
|
|
|
for Identical |
|
Observable |
|
Unobservable |
|
|
|
|
September 30, |
|
Assets |
|
Inputs |
|
Inputs |
|
Total |
(in thousands) |
|
2008 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans |
|
$ |
16,285 |
|
|
$ |
|
|
|
$ |
10,578 |
|
|
$ |
5,707 |
|
|
|
(2,843 |
) |
|
|
|
Investment securities available-for-sale are valued based upon quotes obtained from a
reputable third-party pricing service. The service uses evaluated pricing applications and model
processes. Market inputs, such as, benchmark yields, reported trades, broker/dealer quotes, issuer
spreads, two-sided markets, benchmark securities, bids, offers and reference data are considered as
part of the evaluation. The inputs are related directly to the security being evaluated, or
indirectly to a similarly situated security. Market assumptions and market data are utilized in
the valuation models. Accordingly, the Company categorized its investment portfolio as a Level 2
valuation.
The fair value of the interest rate swap contracts are provided by our counterparty using a
system that constructs a yield curve based on cash LIBOR rates, Eurodollar futures contracts, and
3-year through 30-year swap rates. The yield curve determines the valuations of the interest rate
swaps. Accordingly, the swap is categorized as a Level 2 valuation.
In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, an
Amendment of FASB Statements No. 5 and 15, the Companys impaired loans are generally measured
18
using the fair value of the underlying collateral, which is determined based on the most recent
appraisal information received, less costs to sell. These loans fall within Level 2 of the fair
value hierarchy. Appraised values may be adjusted based on factors such as the changes in market
conditions from the time of valuation. These loans fall within Level 3 of the fair value
hierarchy. As of September 30, 2008, impaired loans totaled $19.1 million, with a specific reserve
of $2.8 million, resulting in a fair value of $16.3 million.
19
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ITEM 2. |
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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
2007 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 including changes resulting from a prolonged economic
downturn, adverse capital and credit market conditions and volatility within those markets,
competition in the geographic and business areas in which we conduct operations, natural disasters,
ability to successfully integrate acquisitions, fluctuations in interest rates, ability of
borrowers to perform under the terms of their loans, credit quality, and government regulations.
For additional information concerning these factors and other factors which may cause actual
results to differ from the results discussed in our forward-looking statements, see the periodic
filings the Company makes with the Securities and Exchange Commission, and in particular Item 1A.
Risk Factors contained in the Companys Annual Report on Form 10-K for the year ended December 31,
2007. 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. We are also
the common stockholder of CVB Statutory Trust I, CVB Statutory Trust II and CVB Statutory Trust III
which were formed to issue trust preferred securities in order to increase the capital of the
Company. Through our acquisition of FCB in September 2007, we acquired FCB Capital Trust I and II.
We are based in Ontario, California in what is known as the Inland Empire. Our geographical
market area encompasses the City of Stockton (the middle of the Central Valley) in the center of
California to the City of Laguna Beach (in Orange County) in the southern portion of California.
Through our acquisition of FCB our geographic market has expanded to include the South Bay region
of Los Angeles County. Our mission is to offer the finest financial products and services to
professionals and businesses in our market area.
Our primary source of income is from the interest earned on our loans and investments and our
primary area of expense is the interest paid on deposits, borrowings, and salaries and benefits.
As such our net income is subject to fluctuations in interest rates and their impact on our income
statement. We are also subject to competition from other financial institutions, which may affect
our pricing of products and services, and the fees and interest rates we can charge on them, as
well as our net interest margin.
Economic conditions in our California service area impact our business. We have seen a
significant decline in the housing market resulting in slower growth in construction loans and a
decrease in deposit balances from escrow companies. Unemployment is increasing. Job growth is
slowing and the Inland Empire and other areas of our marketplace have been significantly impacted
as economic conditions continue to deteriorate. Approximately 22% of our total loan portfolio of
$3.6 billion is located in the Inland Empire region of California. The balance of the portfolio is
from outside of this region.
20
Weaknesses in the local economy could adversely affect us through diminished loan demand,
credit quality deterioration, and increases in loan delinquencies and defaults.
Over the past few years, we have been active in acquisitions and we will continue to pursue
acquisition targets which will enable us to meet our business objectives and enhance shareholder
value. Since 2000, we have acquired four banks and a leasing company, and we have opened five de
novo branches: Glendale, Bakersfield, Fresno, Madera, and Stockton. In February 2008, we opened
our first Commercial Banking Center in Encino, California. In May 2008, we opened two additional
Commercial Banking Centers, one for the Inland Empire region and one for Orange County. These
centers will operate primarily as a sales office and focus on business clients and their
principals, professionals, and high net-worth individuals.
Our net income increased to $50.8 million for the first nine months of 2008 compared with
$47.2 million for the first nine months of 2007, an increase of $3.6 million or 7.58%. Diluted
earnings per share increased to $0.61 per share for 2008, from $0.56 per share in 2007. The
increase of $3.6 million is primarily the result of the decrease in interest expense by $28.0
million offset by a decrease in interest income of $6.1 million, increases in other operating
expenses of $9.9 million and an increase of $8.7 million in provision for credit losses.
Net income increased to $17.5 million for the quarter ended September 30, 2008 compared with
$16.1 million for the same period in 2007, an increase of $1.3 million or 8.31%. Diluted earnings
per share increased to $0.21 per share for the third quarter of 2008, from $0.19 per share for the
third quarter of 2007. The increase of $1.3 million is primarily the result of the decrease in
interest expense by $11.7 million offset by a decrease in interest income of $4.4 million,
increases in other operating expenses of $1.8 million and an increase of $4.0 million in provision
for credit losses.
Although our loans and investments for the first nine months of 2008 compared with the first
nine months of 2007 has grown, our interest income has decreased slightly due to lower interest
rates. 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 1.16% for the nine months of 2008.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are defined as those that are reflective of significant
judgments and uncertainties, and could potentially result in materially different results under
different assumptions and conditions. We believe that our most critical accounting estimates upon
which our financial condition depends, and which involve the most complex or subjective decisions
or assessments are as follows:
Allowance for Credit Losses: Arriving at an appropriate level of allowance for credit losses
involves a high degree of judgment. Our allowance for credit losses provides for probable losses
based upon evaluations of known and inherent risks in the loan portfolio. The determination of the
balance in the allowance for credit losses is based on an analysis of the loan and lease finance
receivables portfolio using a systematic methodology and reflects an amount that, in our judgment,
is adequate to provide for probable credit losses inherent in the portfolio, after giving
consideration to the character of the loan portfolio, current economic conditions, past credit loss
experience, and such other factors as deserve current recognition in estimating inherent credit
losses. The provision for credit losses is charged to expense. For a full discussion of our
methodology of assessing the adequacy of the allowance for credit losses, see the Risk Management
section of this 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
21
condition and results of operations. Many of the securities included in the investment
portfolio are purchased at a premium or discount. The premiums or discounts are amortized or
accreted over the life of the security. For mortgage-related securities (i.e., securities that are
collateralized and payments received from underlying mortgages), the amortization or accretion is
based on estimated average lives of the securities. The lives of these securities can fluctuate
based on the amount of prepayments received on the underlying collateral of the securities. The
amount of prepayments varies from time to time based on the interest rate environment (i.e., lower
interest rates increase the likelihood of refinances) and the rate of turnover of the mortgages
(i.e., how often the underlying properties are sold and mortgages paid-off). We use estimates for
the average lives of these mortgage-related securities based on information received from third
parties whose business it is to compile mortgage related data and develop a consensus of that data.
We adjust the rate of amortization or accretion regularly to reflect changes in the estimated
average lives of these securities.
We classify as held-to-maturity those debt securities that we have the positive intent and
ability to hold to maturity. Securities classified as trading are those securities that are bought
and held principally for the purpose of selling them in the near term. All other debt and equity
securities are classified as available-for-sale. Securities held-to-maturity are accounted for at
cost and adjusted for amortization of premiums and accretion of discounts. Trading securities are
accounted for at fair value with the unrealized holding gains and losses being included in current
earnings. Securities available-for-sale are accounted for at fair value, with the net unrealized
gains and losses, net of income tax effects, presented as a separate component of stockholders
equity. At each reporting date, 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 using the asset and liability method by deferring
income taxes based on estimated future tax effects of differences between the tax and book basis of
assets and liabilities considering the provisions of enacted tax laws. These differences result in
deferred tax assets and liabilities, which are included in our balance sheets. We must also assess
the likelihood that any deferred tax assets will be recovered from future taxable income and
establish a valuation allowance for those assets determined to not likely be recoverable. Our
judgment is required in determining the amount and timing of recognition of the resulting deferred
tax assets and liabilities, including projections of future taxable income. Although we have
determined a valuation allowance is not required for any of our deferred tax assets, there is no
guarantee that these assets are recoverable.
Goodwill and Intangible Assets: We have acquired entire banks and branches of banks. Those
acquisitions accounted for under the purchase method of accounting have given rise to goodwill and
intangible assets. We record the assets acquired and liabilities assumed at their fair value. These
fair values are determined through the use of internal and external valuation techniques. The
purchase price is allocated to assets and liabilities, including identified intangibles. The
identified intangibles are amortized over the estimated lives of the assets or liabilities. Any
excess purchase price after this allocation results in goodwill. Goodwill is tested on an annual
basis for impairment.
RECENT DEVELOPMENTS
There have been significant disruptions in the U.S. and international financial system during
the period covered by this report. As a result, available credit has been reduced or ceased to
exist. The reduction in availability of credit, loss of confidence in the entire financial sector,
and volatility in financial markets adversely affects the Company and the Bank. Although we do not
actively lend in the
home mortgage market, we have experienced a decline in fair value of some of our investment
securities as a result of the disruptions in the financial markets. Continued disruptions in the
financial system are
22
likely to have an ongoing adverse impact on all institutions in the U.S.
banking and financial industries. The U.S. government, the governments of other countries, and
multinational institutions have provided vast amounts of liquidity and capital into the banking
system.
In response to the financial crises affecting the overall banking system and financial markets
in the United States, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA)
was enacted. Under that act, the United States Treasury Department (Treasury) has authority,
among other things, to purchase mortgages, mortgage backed securities and certain other financial
instruments from financial institutions for the purpose of stabilizing and providing liquidity to
the U.S. financial markets.
On October 3, 2008, the Troubled Asset Relief Program (TARP) was signed into law. TARP gave
the Treasury authority to deploy up to $750 billion into the financial system with an objective of
improving liquidity in capital markets. On October 24, 2008, Treasury announced plans to direct
$250 billion of this authority into preferred stock investments in banks. The general terms of
this preferred stock program include:
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dividends on the Treasurys preferred stock at a rate of 5% for the first five years and
9% dividends thereafter; |
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stock splits are prohibited, but common stock dividends are allowed; |
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common stock dividends cannot be increased for three years while Treasury is an investor
unless preferred stock is redeemed or consent from Treasury is received; |
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the Treasury preferred stock cannot be redeemed for three years unless the participating
institution raises qualifying private capital; |
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Treasury must consent to any buy back of other stock (common or other preferred); |
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Treasury receives warrants equal to 15% of Treasurys total investment in the
participating institution; |
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participating institutions executives must agree to certain compensation restrictions,
and |
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restrictions on the amount of executive compensation which is tax deductible. |
The term of this Treasury preferred stock program could reduce investment returns to
participating banks shareholders by restricting dividends to common shareholders, diluting
existing shareholders interests, and restricting capital management practices. The Company and
the Bank meet all applicable regulatory capital requirements and remain well capitalized. We
currently expect to participate in the TARP capital purchase program and have made an application
for the sale of shares of its preferred stock.
Federal and state governments could pass additional legislation responsive to current credit
conditions. As a result, we could experience higher credit losses because of federal or state
legislation or regulatory action that reduces the principal amount or interest rate under existing
loan contracts. Also, we could experience higher credit losses because of federal or state
legislation or regulatory action that limits the Banks ability to foreclose on property or other
collateral or makes foreclosure less economically feasible.
The Federal Deposit Insurance Corporation (FDIC) insures deposits at FDIC insured financial
institutions up to certain limits. The FDIC charges insured financial institutions premiums to
maintain the Deposit Insurance Fund. Current economic conditions have increased expectations for
bank failures, in which case, the FDIC would take control of failed banks and ensure payment of
deposits up to insured limits using the resources of the Deposit Insurance Fund. In such case, the
FDIC may increase premium assessments to maintain adequate funding of the Deposit Insurance Fund,
including requiring riskier institutions to pay a larger share of the premiums. An increase in
premium assessments would increase the Companys expenses. The EESA included a provision for an
increase in the amount of deposits
insured by FDIC to $250,000 until December 2009. On October 14, 2008, the FDIC announced a
new program the Temporary Liquidity Guarantee Program that provides unlimited deposit insurance
on funds in noninterest-bearing transaction deposit accounts not otherwise covered by the existing
deposit insurance
23
limit of $250,000. All eligible institutions will be covered under the program
for the first 30 days without incurring any costs. After the initial period, participating
institutions will be assessed an annualized 10 basis point surcharge on the additional insured
deposits. The behavior of depositors in regard to the level of FDIC insurance could cause the
Banks existing customers to reduce the amount of deposits held at the Bank, or could cause new
customers to open deposit accounts at the Bank. We have decided to remain in this program for the
benefit of our customer base. The level and composition of our deposit portfolio directly impacts
our funding cost and net interest margin. As a result of these measures, it is likely that the
premiums we pay for FDIC insurance will increase, which would adversely affect net income. The
impact of such measures cannot be assessed at this time.
The actions described above, together with additional actions announced by the Treasury and
other regulatory agencies continue to develop. It is not clear at this time what impact, EESA,
TARP, other liquidity and funding initiatives of the Treasury and other bank regulatory agencies
that have been previously announced, and any additional programs that may be initiated in the
future will have on the financial markets and the financial services industry. The extreme levels
of volatility and limited credit availability, currently being experienced, could continue to
affect the U.S. banking industry and the broader U.S. and global economies, which will have an
affect on all financial institutions, including the Company.
ANALYSIS OF THE RESULTS OF OPERATIONS
Earnings
We reported net earnings of $50.8 million for the nine months ended September 30, 2008. This
represented an increase of $3.6 million or 7.58%, over net earnings of $47.2 million for the nine
months ended September 30, 2007. Basic and diluted earnings per share for the nine-month period
increased to $0.61 per share for 2008, compared to $0.56 per share for 2007. The annualized return
on average assets was 1.07% for the nine months of 2008 compared to an annualized return on average
assets of 1.04% for the nine months of 2007. The annualized return on average equity was 15.10%
for the nine months ended September 30, 2008, compared to an annualized return of 15.82% for the
nine months ended September 30, 2007. The decrease in annualized return on average equity for the
nine month period is attributed to a higher average equity balance in 2008, as a result of
unrealized gains recorded in other comprehensive income during the first three months of 2008 and
earnings in excess of dividends.
For the quarter ended September 30, 2008, our net earnings were $17.5 million. This
represented an increase of $1.3 million or 8.31%, over net earnings of $16.1 million, for the third
quarter of 2007. Basic and diluted earnings per share increased to $0.21 per share for the third
quarter of 2008 compared to $0.19 per share for the third quarter of 2007. The annualized return on
average assets was 1.08% for the third quarter of 2008 and 1.04% for the third quarter of 2007. The
annualized return on average equity was 15.55% for the third quarter of 2008 compared to an
annualized return on average equity of 15.99% for the third quarter of 2007.
Net Interest Income
The principal component of our earnings is net interest income, which is the difference
between the interest and fees earned on loans and investments (earning assets) and the interest
paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is the
taxable-equivalent of net interest income as a percentage of average earning assets for the period.
The level of interest rates and the volume and mix of earning assets and interest-bearing
liabilities impact net interest income and net interest margin. The net interest spread is the
yield on average earning assets minus the cost of average interest-bearing liabilities. Our net
interest income, interest spread, and net interest margin are sensitive
to general business and economic conditions. These conditions include short-term and long-term
interest rates, inflation, monetary supply, and the strength of the economy, in general, and the
local economies in which we conduct business. Our ability to manage the net interest income during
changing interest rate environments will have a significant impact on our overall performance. Our
balance sheet is currently
24
liability-sensitive; meaning interest-bearing liabilities will generally
reprice more quickly than earning assets. Therefore, our net interest margin is likely to decrease
in sustained periods of rising interest rates and increase in sustained periods of declining
interest rates. We manage net interest income by affecting changes in the mix of earning assets as
well as the mix of interest-bearing liabilities, changes in the level of interest-bearing
liabilities in proportion to earning assets, and in the growth of earning assets.
Our net interest income, after the provision for credit losses, totaled $132.9 million for the
nine months ended September 30, 2008. This represented an increase of $13.2 million, or 11.00%,
over net interest income, after provision for credit losses, of $119.8 million for the same period
in 2007. The increase in net interest income of $13.2 million resulted from a $28.0 million
decrease in interest expense, offset by a $6.1 million decrease in interest income and $8.7 million
provision for credit losses recorded in the first nine months of 2008.
Interest income totaled $249.7 million for the first nine months of 2008. This represented a
decrease of $6.1 million, or 2.38%, compared to total interest income of $255.8 million for the
same period last year. The decrease in interest income was primarily the result of the decrease in
average yield on earning assets to 5.75% for the nine months of 2008 from 6.20% for the same period
of 2007, or 45 basis points. Average earning assets increased by $342.3 million, or 6.04%, from
$5.67 billion to $6.01 billion.
Interest expense totaled $108.1 million for the first nine months of 2008. This represented a
decrease of $28.0 million, or 20.56%, from total interest expense of $136.0 million for the same
period last year. The decrease in interest expense was primarily the result of a decrease in the
average rate paid on interest-bearing liabilities to 3.10% for the first nine months of 2008 from
4.18% for the same period in 2007, or 108 basis points. The decrease in yields and deposits was
offset by an increase in average borrowings of $431.3 million, or 19.83%, from $2.17 billion to
$2.61 billion.
For the third quarter ended September 30, 2008, the Companys net interest income, after
provision for credit losses, totaled $45.0 million. This represented an increase of $3.3 million,
or 7.92%, over net interest income of $41.7 million for the same period in 2007. The increase in
net interest income of $3.3 million for the third quarter of 2008 resulted from a decrease of $11.7
million in interest expense, offset by a $4.4 million decrease in interest income and $4.0 million
provision of credit losses recorded in the third quarter of 2008.
Interest income totaled $83.5 million for the third quarter of 2008. This represented a
decrease of $4.4 million, or 4.98%, compared to total interest income of $87.9 million for the same
period last year. The decrease in interest income for the third quarter ending September 30, 2008
as compared to the third quarter ending September 30, 2007 was primarily the result of the decrease
in average yield on earning assets to 5.65% for the third quarter of 2008 from 6.28% for the same
period of 2007, or 63 basis points. Average earning assets increased by $360.3 million, or 6.29%,
from $5.73 billion to $6.09 billion.
Interest expense totaled $34.5 million for the third quarter of 2008. This represented a
decrease of $11.7 million or 25.29%, from total interest expense of $46.2 million for the same
period last year. The decrease in interest expense was primarily the result of a decrease in the
average rate paid on interest-bearing liabilities to 2.91% for the third quarter ending September
30, 2008 from 4.16% for the same period in 2007, or 125 basis points. The decrease in yields was
offset by an increase in average borrowings of $549.9 million, or 25.39%, from $2.17 billion to
$2.72 billion.
Table 1 shows the average balances of assets, liabilities, and stockholders equity and the
related interest income, expense, and yields/rates for the nine-month and three-month period ended
September 30, 2008 and 2007. Yields for tax-preferenced investments are shown on a taxable equivalent
basis using a 35% tax rate.
25
TABLE 1 Distribution of Average Assets, Liabilities, and Stockholders Equity; Interest Rates and Interest Differentials
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Nine-month period ended September 30, |
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2008 |
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2007 |
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Average |
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Average |
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Average |
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Average |
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Balance |
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Interest |
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Rate |
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Balance |
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Interest |
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Rate |
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(amounts in thousands) |
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ASSETS |
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|
|
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|
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Investment Securities |
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Taxable |
|
$ |
1,778,551 |
|
|
$ |
65,448 |
|
|
|
4.95 |
% |
|
$ |
1,746,192 |
|
|
$ |
65,401 |
|
|
|
5.00 |
% |
Tax preferenced (1) |
|
|
685,113 |
|
|
|
21,336 |
|
|
|
5.84 |
% |
|
|
663,680 |
|
|
|
22,029 |
|
|
|
5.92 |
% |
Investment in FHLB stock |
|
|
88,508 |
|
|
|
3,666 |
|
|
|
5.52 |
% |
|
|
81,041 |
|
|
|
3,152 |
|
|
|
5.19 |
% |
Federal
Funds Sold & Interest Bearing Deposits with other institutions |
|
|
1,334 |
|
|
|
34 |
|
|
|
3.40 |
% |
|
|
2,010 |
|
|
|
92 |
|
|
|
6.10 |
% |
Loans (2) (3) |
|
|
3,459,916 |
|
|
|
159,211 |
|
|
|
6.15 |
% |
|
|
3,178,242 |
|
|
|
165,117 |
|
|
|
6.95 |
% |
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|
|
|
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|
|
|
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|
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|
|
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Total Earning Assets |
|
|
6,013,422 |
|
|
|
249,695 |
|
|
|
5.75 |
% |
|
|
5,671,165 |
|
|
|
255,791 |
|
|
|
6.20 |
% |
Total Non Earning Assets |
|
|
357,204 |
|
|
|
|
|
|
|
|
|
|
|
380,047 |
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Total Assets |
|
$ |
6,370,626 |
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|
|
|
|
|
|
|
|
$ |
6,051,212 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Savings Deposits (4) |
|
$ |
1,260,483 |
|
|
$ |
13,255 |
|
|
|
1.40 |
% |
|
$ |
1,290,946 |
|
|
$ |
24,531 |
|
|
|
2.54 |
% |
Time Deposits |
|
|
734,050 |
|
|
|
14,978 |
|
|
|
2.73 |
% |
|
|
854,353 |
|
|
|
29,000 |
|
|
|
4.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits |
|
|
1,994,533 |
|
|
|
28,233 |
|
|
|
1.89 |
% |
|
|
2,145,299 |
|
|
|
53,531 |
|
|
|
3.34 |
% |
Other Borrowings |
|
|
2,605,543 |
|
|
|
79,838 |
|
|
|
4.03 |
% |
|
|
2,174,278 |
|
|
|
82,505 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
4,600,076 |
|
|
|
108,071 |
|
|
|
3.10 |
% |
|
|
4,319,577 |
|
|
|
136,036 |
|
|
|
4.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
1,257,843 |
|
|
|
|
|
|
|
|
|
|
|
1,289,429 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
63,389 |
|
|
|
|
|
|
|
|
|
|
|
43,210 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
449,318 |
|
|
|
|
|
|
|
|
|
|
|
398,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
6,370,626 |
|
|
|
|
|
|
|
|
|
|
$ |
6,051,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
141,624 |
|
|
|
|
|
|
|
|
|
|
$ |
119,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread tax equivalent |
|
|
|
|
|
|
|
|
|
|
2.65 |
% |
|
|
|
|
|
|
|
|
|
|
2.02 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.18 |
% |
|
|
|
|
|
|
|
|
|
|
2.84 |
% |
Net interest margin tax equivalent |
|
|
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
|
|
|
3.02 |
% |
Net interest margin excluding loan fees |
|
|
|
|
|
|
|
|
|
|
3.09 |
% |
|
|
|
|
|
|
|
|
|
|
2.75 |
% |
Net interest margin excluding loan fees tax equivalent |
|
|
|
|
|
|
|
|
|
|
3.28 |
% |
|
|
|
|
|
|
|
|
|
|
2.92 |
% |
|
|
|
(1) |
|
Non tax equivalent rate was 4.15% for 2008 and 4.43% for 2007. |
|
(2) |
|
Loan fees are included in total interest income as follows, (000)s omitted: 2008, $4,193; 2007, $ 4,106 |
|
(3) |
|
Non performing loans are included in net loans as follows, (000)s omitted: 2008, $16.6 million; 2007, $3,474 |
|
(4) |
|
Includes interest bearing demand and money market accounts |
26
TABLE 1 Distribution of Average Assets, Liabilities, and Stockholders Equity; Interest Rates and Interest Differentials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
(amounts in thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
1,767,850 |
|
|
$ |
22,142 |
|
|
|
5.01 |
% |
|
$ |
1,643,382 |
|
|
$ |
20,591 |
|
|
|
5.02 |
% |
Tax preferenced (1) |
|
|
672,765 |
|
|
|
7,036 |
|
|
|
5.88 |
% |
|
|
671,883 |
|
|
|
7,493 |
|
|
|
5.97 |
% |
Investment in FHLB stock |
|
|
91,729 |
|
|
|
1,367 |
|
|
|
5.96 |
% |
|
|
81,410 |
|
|
|
1,047 |
|
|
|
5.14 |
% |
Federal
Funds Sold & Interest Bearing Deposits with other institutions |
|
|
752 |
|
|
|
8 |
|
|
|
4.26 |
% |
|
|
5,377 |
|
|
|
72 |
|
|
|
5.36 |
% |
Loans (2) (3) |
|
|
3,556,724 |
|
|
|
52,954 |
|
|
|
5.92 |
% |
|
|
3,327,462 |
|
|
|
58,677 |
|
|
|
7.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets |
|
|
6,089,820 |
|
|
|
83,507 |
|
|
|
5.65 |
% |
|
|
5,729,514 |
|
|
|
87,880 |
|
|
|
6.28 |
% |
Total Non Earning Assets |
|
|
354,801 |
|
|
|
|
|
|
|
|
|
|
|
399,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
6,444,621 |
|
|
|
|
|
|
|
|
|
|
$ |
6,129,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Deposits (4) |
|
$ |
1,215,067 |
|
|
$ |
3,477 |
|
|
|
1.14 |
% |
|
$ |
1,299,069 |
|
|
$ |
8,218 |
|
|
|
2.51 |
% |
Time Deposits |
|
|
721,035 |
|
|
|
3,940 |
|
|
|
2.17 |
% |
|
|
901,710 |
|
|
|
10,227 |
|
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits |
|
|
1,936,102 |
|
|
|
7,417 |
|
|
|
1.52 |
% |
|
|
2,200,779 |
|
|
|
18,445 |
|
|
|
3.33 |
% |
Other Borrowings |
|
|
2,715,548 |
|
|
|
27,078 |
|
|
|
3.90 |
% |
|
|
2,165,624 |
|
|
|
27,727 |
|
|
|
5.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
4,651,650 |
|
|
|
34,495 |
|
|
|
2.91 |
% |
|
|
4,366,403 |
|
|
|
46,172 |
|
|
|
4.16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
1,299,630 |
|
|
|
|
|
|
|
|
|
|
|
1,316,035 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
46,620 |
|
|
|
|
|
|
|
|
|
|
|
47,069 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
446,721 |
|
|
|
|
|
|
|
|
|
|
|
399,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
6,444,621 |
|
|
|
|
|
|
|
|
|
|
$ |
6,129,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
49,012 |
|
|
|
|
|
|
|
|
|
|
$ |
41,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread tax equivalent |
|
|
|
|
|
|
|
|
|
|
2.74 |
% |
|
|
|
|
|
|
|
|
|
|
2.12 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.24 |
% |
|
|
|
|
|
|
|
|
|
|
2.93 |
% |
Net interest margin tax equivalent |
|
|
|
|
|
|
|
|
|
|
3.43 |
% |
|
|
|
|
|
|
|
|
|
|
3.11 |
% |
Net interest margin excluding loan fees |
|
|
|
|
|
|
|
|
|
|
3.16 |
% |
|
|
|
|
|
|
|
|
|
|
2.81 |
% |
Net interest margin excluding loan fees tax equivalent |
|
|
|
|
|
|
|
|
|
|
3.35 |
% |
|
|
|
|
|
|
|
|
|
|
2.99 |
% |
|
|
|
(1) |
|
Non tax equivalent rate was 4.18% for 2008 and 4.46% for 2007. |
|
(2) |
|
Loan fees are included in total interest income as follows, (000)s omitted: 2008, $1,190; 2007, $ 1,726 |
|
(3) |
|
Non performing loans are included in net loans as follows, (000)s omitted: 2008, $16.6 million; 2007, $3,474 |
|
(4) |
|
Includes interest bearing demand and money market accounts |
As stated above, the net interest margin measures net interest income as a percentage of
average earning assets. Our tax effected (TE) net interest margin was 3.37% for the nine months of
2008, compared to 3.02% for the nine months of 2007. Our tax effected (TE) net interest margin
for the third quarter of 2008 was 3.43%, compared to 3.11% for the third quarter of 2007. The
increase in the net interest margin over the same period last year is primarily the result of the
decreasing interest rate environment, which impacted interest earned and interest paid as a percent
of earning assets. This was partially offset by changes in the mix of assets and liabilities as
discussed in the following paragraphs. Generally, our net interest margin improves in a decreasing
interest rate environment as our deposits and borrowings reprice much faster than our loans and
securities.
The net interest spread is the difference between the yield on average earning assets and the
cost of average interest-bearing liabilities. The net interest spread is an indication of our
ability to manage 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 2.65% for the nine months of 2008 and 2.02% for the same period last year. The increase in the
net interest spread for the nine months ended September 30, 2008 resulted from a 108 basis point
decrease in the cost of interest-bearing liabilities, offset by a 45 basis point decrease in the
yield on earning assets, thus generating a 63 basis point increase in the net interest spread from
the same period last year.
For the third quarter of 2008, the Companys net interest spread (TE) was 2.74% as compared to
2.12% for the same period last year. The increase in net interest spread for the third quarter
ended September 30, 2008 resulted from a 125 basis point decrease in the cost of interest-bearing
liabilities,
27
offset by a 63 basis point decrease in the yield on earning assets, thus generating a
62 basis point increase in the net interest spread from the same period last year.
The yield (TE) on earning assets decreased to 5.75% for the nine months of 2008, from 6.20%
for the same period last year, and reflects a decreasing interest rate environment and a change in
the mix of earning assets. Average loans as a percent of earning assets increased to 57.54% in the
nine months of 2008 from 56.04% for the same period in 2007. Average investments as a percent of
earning assets decreased to 40.97% in the nine months of 2008 from 42.49% for the same period in
2007. The yield on loans for the first nine months of 2008 decreased to 6.15% as compared to 6.95%
for the same period in 2007 as a result of the decreasing interest rate environment during that
period. The yield on loans decline at a slower rate than general interest rates as approximately
80% of the Companys loans are fixed-rate loans or hybrid adjustable loans with interest rates that
are fixed typically for the first five or ten years of the loans. The yield (TE) on investments
for the first nine months of 2008 decreased to 5.20% as compared to 5.25% for the same period in
2007. The decrease in rates, offset by increases in average loan and investment balances, resulted
in a decrease in our interest income.
The cost of average interest-bearing liabilities decreased to 3.10% for the first nine months
of 2008 as compared to 4.18% for the same period in 2007, reflecting the decrease in interest rates
and a change in the mix of interest-bearing liabilities. The fact that the cost of interest-bearing
liabilities dropped more than the yield on earning assets is due to the liability-sensitive nature
of our balance sheet. Average borrowings as a percent of average interest-bearing liabilities
increased to 56.64% during the first nine months of 2008 as compared to 50.34% for the same period
in 2007. The cost of borrowings for the first
nine months of 2008 decreased to 4.03% as compared to 5.00% for the same period in 2007,
reflecting the decrease in interest rates. Borrowings typically have a higher cost than
interest-bearing deposits. The cost of interest-bearing deposits for the first nine months of 2008
decreased to 1.89% as compared to 3.34% for the same period in 2007, also reflecting the decrease
in interest rates. The FDIC has approved the payment of interest on certain demand deposit
accounts. This could have a negative impact on our net interest margin, net interest spread, and
net earnings, should this be implemented fully. Currently, we pay interest on NOW and Money Market
Accounts. The decrease in rates and decrease in average interest-bearing deposits, offset by an
increase in average borrowings, resulted in a decrease in our interest expense.
For the third quarter of 2008, the yield (TE) on earning assets decreased to 5.65%, from 6.28%
for the same period last year. The cost of average interest-bearing liabilities decreased to 2.91%
for the third quarter of 2008 as compared to 4.16% for the same period in 2007. The changes reflect
the decreasing interest rate environment and change in mix of earning assets and interest-bearing
liabilities, reflecting similar trends as described above.
Table 2 presents a comparison of interest income and interest expense resulting from changes
in the volumes and rates on average earning assets and average interest-bearing liabilities for the
periods indicated. Changes in interest income or expense attributable to volume changes are
calculated by multiplying the change in volume by the initial average interest rate. The change in
interest income or expense attributable to changes in interest rates is calculated by multiplying
the change in interest rate by the initial volume. The changes attributable to both interest rate
and volume changes are calculated by multiplying the change in rate times the change in volume.
28
TABLE 2 Rate and Volume Analysis for Changes in Interest Income, Interest
Expense and Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of nine months ended September 30, |
|
|
|
2008 Compared to 2007 |
|
|
|
Increase (Decrease) Due to |
|
|
|
|
|
|
|
|
|
|
|
Rate/ |
|
|
|
|
|
|
Volume |
|
|
Rate |
|
|
Volume |
|
|
Total |
|
|
|
( amounts in thousands ) |
|
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities |
|
$ |
600 |
|
|
$ |
(655 |
) |
|
$ |
102 |
|
|
$ |
47 |
|
Tax-advantaged securities |
|
|
1,002 |
|
|
|
(398 |
) |
|
|
(1,297 |
) |
|
|
(693 |
) |
Fed funds sold & interest-bearing
deposits with other institutions |
|
|
(31 |
) |
|
|
(41 |
) |
|
|
14 |
|
|
|
(58 |
) |
Investment in FHLB stock |
|
|
291 |
|
|
|
201 |
|
|
|
22 |
|
|
|
514 |
|
Loans |
|
|
14,656 |
|
|
|
(19,035 |
) |
|
|
(1,527 |
) |
|
|
(5,906 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on earning assets |
|
|
16,518 |
|
|
|
(19,928 |
) |
|
|
(2,686 |
) |
|
|
(6,096 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits |
|
|
(579 |
) |
|
|
(11,017 |
) |
|
|
334 |
|
|
|
(11,262 |
) |
Time deposits |
|
|
(4,089 |
) |
|
|
(11,577 |
) |
|
|
1,630 |
|
|
|
(14,036 |
) |
Other borrowings |
|
|
16,412 |
|
|
|
(16,052 |
) |
|
|
(3,027 |
) |
|
|
(2,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on interest-bearing liabilities |
|
|
11,744 |
|
|
|
(38,646 |
) |
|
|
(1,063 |
) |
|
|
(27,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
4,774 |
|
|
$ |
18,718 |
|
|
$ |
(1,623 |
) |
|
$ |
21,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of quarters ended September 30, |
|
|
|
2008 Compared to 2007 |
|
|
|
Increase (Decrease) Due to |
|
|
|
|
|
|
|
|
|
|
|
Rate/ |
|
|
|
|
|
|
Volume |
|
|
Rate |
|
|
Volume |
|
|
Total |
|
|
|
( amounts in thousands ) |
|
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities |
|
$ |
1,582 |
|
|
$ |
(41 |
) |
|
$ |
10 |
|
|
$ |
1,551 |
|
Tax-advantaged securities |
|
|
21 |
|
|
|
(151 |
) |
|
|
(327 |
) |
|
|
(457 |
) |
Fed funds sold & interest-bearing
deposits with other institutions |
|
|
(62 |
) |
|
|
(15 |
) |
|
|
13 |
|
|
|
(64 |
) |
Investment in FHLB stock |
|
|
133 |
|
|
|
167 |
|
|
|
20 |
|
|
|
320 |
|
Loans |
|
|
4,034 |
|
|
|
(9,033 |
) |
|
|
(724 |
) |
|
|
(5,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on earning assets |
|
|
5,708 |
|
|
|
(9,073 |
) |
|
|
(1,008 |
) |
|
|
(4,373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits |
|
|
(530 |
) |
|
|
(4,474 |
) |
|
|
243 |
|
|
|
(4,761 |
) |
Time deposits |
|
|
(2,044 |
) |
|
|
(5,281 |
) |
|
|
1,058 |
|
|
|
(6,267 |
) |
Other borrowings |
|
|
7,041 |
|
|
|
(6,143 |
) |
|
|
(1,547 |
) |
|
|
(649 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on interest-bearing liabilities |
|
|
4,467 |
|
|
|
(15,898 |
) |
|
|
(246 |
) |
|
|
(11,677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
1,241 |
|
|
$ |
6,825 |
|
|
$ |
(762 |
) |
|
$ |
7,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $159.2 million for the first nine months of 2008. This
represented a decrease of $5.9 million, or 3.58%, from interest and fees on loans of $165.1 million
for the same period in 2007. The decrease in interest and fees on loans for the first nine months
of 2008 reflects the decrease in rates between periods, offset by increases in the average balance
of loans. The yield on loans decreased to 6.15% for the first nine months of 2008, compared to
6.95% for the same period in 2007.
29
Average loans increased 8.86% from $3.18 billion for the first
nine months of 2007 to $3.46 billion for the first nine months of 2008.
Interest and fees on loans totaled $53.0 million for the third quarter of 2008. This
represented a decrease of $5.7 million, or 9.75%, from interest and fees on loans of $58.7 million
for the same period in 2007. The decrease was primarily due to the decrease in yields on loans,
offset by increases in average loan balances.
In general, we stop accruing interest on a loan after its principal or interest becomes 90
days or more past due. When a loan is placed on nonaccrual, all interest previously accrued but not
collected is charged against earnings. There was no interest income that was accrued and not
reversed on non-performing loans at September 30, 2008 and 2007.
Fees collected on loans are an integral part of the loan pricing decision. Loan fees and the
direct costs associated with the origination of loans are deferred and deducted from the loan
balance. Deferred net loan fees are recognized in interest income over the term of the loan using
the effective-yield method. We recognized loan fee income of $4.2 million for the first nine months
of 2008, as compared to $4.1 million for the same period in 2007, an increase of $87,000 or 2.12%.
Interest on Investments
The second most important component of interest income is interest on investments, which
totaled $90.5 million for the first nine months of 2008. This represented a decrease of $190,000,
or 0.21%, from interest on investments of $90.7 million for the same period in 2007. The decrease
in interest on investments for the nine months of 2008 from the same period last year was primarily
the result of a decrease in the yield on investments offset by an increase in average investments
over the same period last year. 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 decreased from 5.25% for the
nine months of 2007 to 5.20% for the nine months of 2008. Average investment balances for the
first nine months for 2008 increased $60.6 million, or 2.43% over the same period last year.
For the third quarter of 2008, interest income on investments totaled $30.6 million. This
represented an increase of $1.4 million, or 4.62%, over interest on investments of $29.2 million
for the same period in 2007. The increase in interest on investments for the third quarter of 2008
over the same period last year reflected increases in the average balance of investments offset by
decreases in the interest rates. The weighted-average yield (TE) on investments decreased to 5.25%
for the third quarter of 2008, compared to 5.29% for the same period in 2007 as a result of the
decreasing interest rate environment. Average investment balances for the third quarter of 2008
increased $131.0 million, or 5.46% over third quarter 2007.
Provision for Credit Losses
We maintain an allowance for inherent credit losses that is increased by a provision for
credit losses charged against operating results. The provision for credit losses is determined by
management as the amount to be added to the allowance for probable credit losses after net
charge-offs have been deducted to bring the allowance to an adequate level which, in managements
best estimate, is necessary to absorb probable credit losses within the existing loan portfolio.
We made a provision for credit losses of $8.7 million during the first nine months of 2008. We did
not make a provision for credit losses during the same period in 2007. We believe the allowance is
appropriate as of the end of the period covered by this report. We continually assess the quality
of our portfolio to determine whether additional provision for credit losses is necessary. The
ratio of the allowance for credit losses to total loans as of September 30,
30
2008 and 2007 was 1.11%
and 0.92%, respectively. No assurance can be given that economic conditions which adversely affect
the Companys service areas, past credit loss experience, the characteristics of our
loan portfolio or other circumstances will not be reflected in increased provisions for credit
losses in the future. The nature of this process requires considerable judgment. Net charge-offs
totaled $1.7 million for the first nine months of 2008 and net recoveries totaled $20,000 during
the same period of 2007. See Risk Management Credit Risk herein.
Other Operating Income
Other operating income for the Company includes income derived from special services offered
by the Bank, such as CitizensTrust, merchant card, international banking, and other business
services. Also included in other operating income are service charges and fees, primarily from
deposit accounts; gains (net of losses) from the sale of investment securities, other real estate
owned, and fixed assets; and other revenues not included as interest on earning assets.
Other operating income totaled $25.2 million for the first nine months of 2008. This
represents an increase of $1.9 million, or 7.96%, over other operating income of $23.4 million for
the same period in 2007. The increase in other operating income was a result of increases in
service charge on deposit accounts. For the nine months ended September 30, 2008, service charges
on deposit accounts was $11.4 million, an increase of $1.6 million or 15.81%, over service charges
on deposit accounts of $9.8 million in the same period last year. Service charges for demand
deposits (checking) accounts for business customers are generally charged based on an analysis of
their activity and include an earning allowance based on their average balances. Contributing to
the increase in service charges on deposit accounts was the lower interest rate environment that
resulted in a lower account earnings allowance, which offsets services charges.
Other operating income totaled $8.4 million for the quarter ended September 30, 2008. This
represents an increase of $510,000 or 6.49% over total other operating income of $7.9 million for
the quarter ended September 30, 2007. This increase was due to increases in service charge income
of $489,000, or 14.64%, over the same period last year.
Other operating income as a percent of net revenues (net interest income before loan loss
provision plus other operating income) was 15.11% for the first nine months of 2008, as compared
to 16.32% for the same period in 2007.
Other Operating Expenses
Other operating expenses for the Company include expenses for salaries and benefits,
occupancy, equipment, stationary and supplies, professional services, amortization of intangibles,
and other expenses. Other operating expenses totaled $87.8 million for the first nine months of
2008. This represents an increase of $9.9 million, or 12.66% over other operating expenses of $78.0
million for the same period in 2007. These increases in operating expenses were primarily due to
the 4 additional offices acquired through the FCB acquisition in June of 2007 and the new
Commercial Banking Centers, in addition to the overall growth of the Company. We also increased
our provision for unfunded commitments by $1.2 million during the first nine months of 2008. The
increase was primarily due to an increase in loan commitments and more specifically, an increase in
classified loans related to those commitments.
For the third quarter of 2008, other operating expenses totaled $29.1 million. This represents
an increase of $1.8 million, or 6.76%, over other operating expenses of $27.2 million for the same
period last year.
At September 30, 2008, we employed 695 full time equivalent employees, compared to 692 full
time equivalent employees at September 30, 2007.
31
For the most part, other operating expenses reflect the direct expenses and related
administrative expenses associated with staffing, maintaining, promoting, and operating branch
facilities. Our ability to control other operating expenses in relation to asset growth can be
measured in terms of other operating expenses as a percentage of average assets. Operating expenses
measured as a percentage of average assets was 1.84% and 1.72% for the first nine months of 2008
and 2007, respectively.
Our ability to control other operating expenses in relation to the level of net revenue (net
interest income plus other operating income) is measured by the efficiency ratio and indicates the
percentage of net revenue that is used to cover expenses. For the first nine months of 2008, the
efficiency ratio was 55.54%, compared to a ratio of 54.48% for the same period in 2007. For the
third quarter of 2008, the efficiency ratio decreased to 54.43% as compared to 54.91% for the same
period last year.
Income Taxes
The Companys effective tax rate for the three and nine months of 2008 was 28.23% and 27.75%,
compared to 27.88% and 27.52% for the same periods in 2007. The effective tax rates are below the
nominal combined Federal and State tax rates as a result of the increase in tax-preferenced income
from certain investments and municipal loans/leases as a percentage of total income for each
period. The majority of tax preferenced income is derived from municipal securities.
RESULTS BY BUSINESS SEGMENTS
We have two reportable business segments: Business Financial and Commercial Banking Centers,
and Treasury. The results of these two segments are included in the reconciliation between
business segment totals and our consolidated total. Our business segments do not include the
results of administration units that do not meet the definition of an operating segment.
Business Financial and Commercial Banking Centers
Key measures we use to evaluate the Business Financial and Commercial Banking Centers
performance are included in the following table for the three and nine months ended September 30,
2008 and 2007. The table also provides additional significant segment measures useful to
understanding the performance of this segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Three months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Key Measures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
164,504 |
|
|
$ |
174,443 |
|
|
$ |
60,426 |
|
|
$ |
61,628 |
|
Interest expense |
|
|
55,088 |
|
|
|
58,947 |
|
|
|
26,574 |
|
|
|
21,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
109,416 |
|
|
$ |
115,496 |
|
|
$ |
33,852 |
|
|
$ |
40,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
16,068 |
|
|
|
13,586 |
|
|
|
5,471 |
|
|
|
4,628 |
|
Non-interest expense |
|
|
36,135 |
|
|
|
32,695 |
|
|
|
12,173 |
|
|
|
11,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss) |
|
$ |
89,349 |
|
|
$ |
96,387 |
|
|
$ |
27,150 |
|
|
$ |
33,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans |
|
$ |
3,459,916 |
|
|
$ |
3,178,242 |
|
|
$ |
3,556,724 |
|
|
$ |
3,327,462 |
|
Average interest-bearing deposits |
|
$ |
1,994,533 |
|
|
$ |
2,145,299 |
|
|
$ |
1,936,101 |
|
|
$ |
2,200,779 |
|
Yield on loans |
|
|
6.15 |
% |
|
|
6.95 |
% |
|
|
5.92 |
% |
|
|
7.00 |
% |
Rate paid on deposits |
|
|
1.89 |
% |
|
|
3.34 |
% |
|
|
1.52 |
% |
|
|
3.33 |
% |
For the nine months ended September 30, 2008, segment profit decreased by $7.0 million, or
7.30%, compared to the same period last year. This was primarily attributed to the decrease in net
interest income due to decreases in yield on loans and rates paid on deposits. Loan yields
decreased 80 basis points while average loan balances increased by $281.7 million, or 8.86%.
Deposit rates decreased 145 basis points and average interest-bearing deposits decreased by $150.8
million, or 7.03%. Non-interest
32
income increased $2.5 million, or 18.27% for the nine months ended September 30, 2008 as a
result of increases in service charge income. Non-interest expense increased $3.4 million, or
10.52%, due to the operating costs of the new Business Financial and Commercial Banking centers.
For the quarter ending September 30, 2008, segment profit decreased by $6.1 million, or
18.32%, compared to the same period last year, primarily due to a decrease in net interest income
as a result of a smaller credit for funds provided on deposits. Non-interest income increased
$843,000, or 18.22% for the quarter ended September 30, 2008. Non-interest expense increased
$658,000, or 5.71%, over the same period last year.
Treasury
Key measures we use to evaluate the Treasurys performance are included in the following table
for the three and nine months ended September 30, 2008 and 2007. The table also provides
additional significant segment measures useful to understanding the performance of this segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Three months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Key Measures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
90,545 |
|
|
$ |
90,727 |
|
|
$ |
30,620 |
|
|
$ |
29,224 |
|
Interest expense |
|
|
78,164 |
|
|
|
98,935 |
|
|
|
25,568 |
|
|
|
32,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
12,381 |
|
|
$ |
(8,208 |
) |
|
$ |
5,052 |
|
|
$ |
(3,254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
7 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Non-interest expense |
|
|
950 |
|
|
|
857 |
|
|
|
342 |
|
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss) |
|
$ |
11,438 |
|
|
$ |
(9,064 |
) |
|
$ |
4,711 |
|
|
$ |
(3,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average investments |
|
$ |
2,553,506 |
|
|
$ |
2,492,923 |
|
|
$ |
2,533,096 |
|
|
$ |
2,402,052 |
|
Average borrowings |
|
$ |
2,605,543 |
|
|
$ |
2,174,278 |
|
|
$ |
2,715,548 |
|
|
$ |
2,165,624 |
|
Yield on investments-TE |
|
|
5.20 |
% |
|
|
5.25 |
% |
|
|
5.25 |
% |
|
|
5.29 |
% |
Non-tax equivalent yield |
|
|
4.15 |
% |
|
|
4.43 |
% |
|
|
4.18 |
% |
|
|
4.46 |
% |
Rate paid on borrowings |
|
|
4.03 |
% |
|
|
5.00 |
% |
|
|
3.90 |
% |
|
|
5.01 |
% |
For the nine months ended September 30, 2008, segment profit increased by $20.5 million, or
226.19%, over the same period last year. The increase is attributed to an increase in net interest
income due to the fact that a substantial portion of our securities portfolio is fixed rate while
our rate on borrowings decreased 97 basis points from 5.00% in the first nine months of 2007 to
4.03% for the same period in 2008.
For the quarter ended September 30, 2008, segment profit increased by $8.3 million, or
232.15%, over the same period last year, primarily due to decreases in interest expense as a result
of decreases in rates on borrowings, offset by an increase in average borrowings.
There are no provisions for credit losses or taxes in the segments as these are accounted for
at the corporate level.
33
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Three months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Key Measures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
40,291 |
|
|
$ |
48,749 |
|
|
$ |
15,225 |
|
|
$ |
17,058 |
|
Interest expense |
|
|
20,464 |
|
|
|
36,282 |
|
|
|
5,117 |
|
|
|
12,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
19,827 |
|
|
$ |
12,467 |
|
|
$ |
10,108 |
|
|
$ |
4,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Credit Losses |
|
|
8,700 |
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
Non-interest income |
|
|
9,141 |
|
|
|
9,770 |
|
|
|
2,901 |
|
|
|
3,234 |
|
Non-interest expense |
|
|
50,749 |
|
|
|
44,411 |
|
|
|
16,542 |
|
|
|
15,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss |
|
$ |
(30,481 |
) |
|
$ |
(22,174 |
) |
|
$ |
(7,533 |
) |
|
$ |
(7,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys administration and other operating departments reported pre-tax loss of $30.5
million for the first nine months of 2008. This represents an increase of $8.3 million or 37.46%,
from a pre-tax loss of $22.2 million for the same period in 2007. The increase in pre-tax loss is
primarily attributed to the increase in provision for credit losses and increase in non-interest
expense year over year. Non-interest expense for the first nine months of 2008 increased $6.3
million from the first nine months of 2007 primarily due to increases of $3.0 million in salaries
and related costs, $1.2 million in our provision for unfunded commitments, $1.2 million in our FDIC
insurance assessments, $0.5 million in professional fees and $0.4 million in intangible
amortization as a result of the FCB acquisition.
For the quarter ended September 30, 2008, pre-tax loss increased $212,000, or 2.90% over the
same period last year. The increase in pre-tax loss is primarily attributed to the decreases in
interest income and interest expense offset by an increase in provision for credit losses and
non-interest expense. Non-interest expense for the quarter ended September 30, 2008 increased $1.2
million from the same period of 2007 primarily due to increases of $1.5 million in salaries and
related costs offset by decreases in professional fees and intangible amortization.
ANALYSIS OF FINANCIAL CONDITION
The Company reported total assets of $6.42 billion at September 30, 2008. This represented an
increase of $127.8 million, or 2.03%, over total assets of $6.29 billion at December 31, 2007.
Earning assets totaled $6.04 billion at September 30, 2008. This represented an increase of $109.6
million, or 1.85%, over total earning assets of $5.93 billion at December 31, 2007. Total
liabilities were $5.98 billion at September 30, 2008, up $118.0 million, or 2.01%, from total
liabilities of $5.87 billion at December 31, 2007. Total equity increased $9.9 million, or 2.32%,
to $434.8 million at September 30, 2008, compared with total equity of $424.9 million at December
31, 2007.
Investment Securities
The Company reported total investment securities of $2.40 billion at September 30, 2008. This
represented an increase of $4.0 million, or 0.16%, from total investment securities of $2.39
billion at December 31, 2007. Investment securities comprise 39.62% of the Companys total earning
assets at September 30, 2008.
In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, securities held as available-for-sale are reported at fair value for financial
reporting purposes. The related unrealized gains or losses, net of income taxes, are recorded in
stockholders equity. At September 30, 2008, securities held as available-for-sale had a fair value
of $2.39 billion, representing 99.7% of total investment securities, with an amortized cost of
$2.42 billion. At September 30, 2008, the net unrealized holding loss on securities
available-for-sale was $28.0 million and that
resulted in
34
accumulated other comprehensive income of $16.2 million (net of $11.8 million in
deferred taxes). At December 31, 2007, the Company reported net unrealized gain on investment
securities available-for-sale of $7.1 million and accumulated other comprehensive income of $4.1
million (net of deferred taxes of $3.0 million).
Table 3 sets forth investment securities available-for-sale at September 30, 2008 and December
31, 2007.
Table 3 Composition of Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Holding |
|
|
Holding |
|
|
|
|
|
|
Total |
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Fair Value |
|
|
Percent |
|
|
|
(Amounts in thousands) |
|
Investment Securities Available-for-Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency & government-sponsored
enterprises |
|
|
39,193 |
|
|
|
474 |
|
|
|
|
|
|
|
39,667 |
|
|
|
1.66 |
% |
Mortgage-backed securities |
|
|
1,131,934 |
|
|
|
3,870 |
|
|
|
(10,075 |
) |
|
|
1,125,729 |
|
|
|
47.15 |
% |
CMOs / REMICs |
|
|
574,522 |
|
|
|
3,175 |
|
|
|
(4,618 |
) |
|
|
573,079 |
|
|
|
24.01 |
% |
Municipal bonds |
|
|
669,776 |
|
|
|
8,342 |
|
|
|
(29,149 |
) |
|
|
648,969 |
|
|
|
27.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities |
|
$ |
2,415,425 |
|
|
$ |
15,861 |
|
|
$ |
(43,842 |
) |
|
$ |
2,387,444 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Holding |
|
|
Holding |
|
|
|
|
|
|
Total |
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Fair Value |
|
|
Percent |
|
|
|
(Amounts in thousands) |
|
Investment Securities Available-for-Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
992 |
|
|
$ |
6 |
|
|
$ |
|
|
|
$ |
998 |
|
|
|
0.04 |
% |
Government agency & government-sponsored
enterprises |
|
|
50,192 |
|
|
|
698 |
|
|
|
(55 |
) |
|
|
50,835 |
|
|
|
2.13 |
% |
Mortgage-backed securities |
|
|
1,028,272 |
|
|
|
4,542 |
|
|
|
(9,753 |
) |
|
|
1,023,061 |
|
|
|
42.80 |
% |
CMOs / REMICs |
|
|
620,526 |
|
|
|
3,154 |
|
|
|
(874 |
) |
|
|
622,806 |
|
|
|
26.05 |
% |
Municipal bonds |
|
|
683,464 |
|
|
|
12,629 |
|
|
|
(3,227 |
) |
|
|
692,866 |
|
|
|
28.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities |
|
$ |
2,383,446 |
|
|
$ |
21,029 |
|
|
$ |
(13,909 |
) |
|
$ |
2,390,566 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average yield (TE) on the investment portfolio at September 30, 2008 was 4.68%
with a weighted-average life of 5.1 years. This compares to a yield of 4.68% at December 31, 2007
with a weighted-average life of 4.7 years and a yield of 4.91% at September 30, 2007 with a
weighted-average life of 4.7 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 71% 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 available-for-sale CMO/REMIC issues held are rated AA or better by either Standard &
Poors or Moodys, as of September 30, 2008 and December 31, 2007.
35
Composition of the Fair Value and Gross Unrealized Losses of Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
Holding |
|
|
|
|
|
|
Holding |
|
|
|
|
|
|
Holding |
|
Description of Securities |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-To-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO |
|
$ |
4,771 |
|
|
$ |
2,350 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,771 |
|
|
$ |
2,350 |
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
$ |
646,878 |
|
|
$ |
6,566 |
|
|
$ |
194,490 |
|
|
$ |
3,509 |
|
|
$ |
841,368 |
|
|
$ |
10,075 |
|
CMO/REMICs |
|
|
250,247 |
|
|
|
4,574 |
|
|
|
2,133 |
|
|
|
44 |
|
|
|
252,380 |
|
|
|
4,618 |
|
Municipal bonds |
|
|
380,000 |
|
|
|
24,694 |
|
|
|
43,139 |
|
|
|
4,455 |
|
|
|
423,139 |
|
|
|
29,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,277,125 |
|
|
$ |
35,834 |
|
|
$ |
239,762 |
|
|
$ |
8,008 |
|
|
$ |
1,516,887 |
|
|
$ |
43,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of the Fair Value and Gross Unrealized Losses of Securities Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
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 |
|
$ |
|
|
|
$ |
|
|
|
$ |
10,434 |
|
|
$ |
55 |
|
|
$ |
10,434 |
|
|
$ |
55 |
|
Mortgage-backed securities |
|
|
26,109 |
|
|
|
30 |
|
|
|
703,159 |
|
|
|
9,723 |
|
|
|
729,268 |
|
|
|
9,753 |
|
CMO/REMICs |
|
|
26,131 |
|
|
|
32 |
|
|
|
140,779 |
|
|
|
842 |
|
|
|
166,910 |
|
|
|
874 |
|
Municipal bonds |
|
|
196,945 |
|
|
|
2,108 |
|
|
|
78,479 |
|
|
|
1,119 |
|
|
|
275,424 |
|
|
|
3,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
249,185 |
|
|
$ |
2,170 |
|
|
$ |
932,851 |
|
|
$ |
11,739 |
|
|
$ |
1,182,036 |
|
|
$ |
13,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008 and December 31, 2007. The Company has
reviewed individual securities 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 fair value; and iv) general
market conditions which reflect prospects for the economy as a whole, including interest rates and
sector credit spreads.
CMO Held-to-Maturity We have one investment security classified as held-to-maturity. This
security was issued by Countrywide Financial and is collateralized by Alt-A mortgages. The
mortgages are primarily fixed-rate, 30-year loans, originated in early 2006 with average FICO
scores of 715 and an average LTV of 71% at origination. The security was a senior security in the
securitization, was rated triple AAA at origination and was supported by subordinate securities.
This security is classified as held-
to-maturity as we have both the intent and ability to hold this debt security to maturity as
the amount of the security, $7.1 million, is not significant to our liquidity needs. We acquired
this security in February
36
2008 at a price of 98.25%. The significant decline in the fair value of
the security first appeared recently in August 2008 as the current financial crisis in the markets
occurred and the market for securities collateralized by Alt-A mortgages diminished.
As of September 30, 2008, the unrealized loss on this security was $2.4 million and the fair
value quoted on the security was 66% of the current par value. One rating agency has not
downgraded the security from AAA, one rating agency has downgraded the security from AAA to AA
during the third quarter of 2008 and another rating agency downgraded the security to BB in
October, 2008. We evaluated the security for an other than temporary decline in fair value as of
September 30, 2008 under the requirements of FAS 115. We believe the decline in fair value below
cost on the security is not other than temporary based on a detailed model of the securitization
performed by an outside third party which indicates we will receive all of our principal and
interest on the security based on what we believe are the probable assumptions related to the
housing market, the losses expected on the underlying mortgages, and the credit support available
to the security, as well as, all other information available on the security and underlying
collateral. Furthermore, the recent decline in value does not appear to be related to a decline in
the outlook for the underlying housing market as the housing market has been under stress for most
of this year but appears to be more related to the recent crisis in the financial markets and the
extreme lack of liquidity in the overall market and in the mortgage debt market, in particular.
Government Agency & Government-Sponsored Enterprises The government agency bonds are backed
by the full faith and credit of Agencies of the U.S. Government. These securities are bullet
securities, that is, they have a defined maturity date on which the principal is paid. The
contractual term of these investments provides that the Bank will receive the face value of the
bond at maturity which will equal the amortized cost of the bond. Interest is received throughout
the life of the security. At September 30, 2008, there was no unrealized loss.
Mortgaged-Backed Securities and CMO/REMICs Almost all of the mortgage-backed and CMO/REMICs
securities are issued by the government-sponsored enterprises such as Ginnie Mae, Fannie Mae and
Freddie Mac. These securities are collateralized or backed by the underlying mortgages. All
mortgage-backed securities are rated AAA with average life of approximately 3.8 years. The
contractual cash flows of 97.2% of these investments are guaranteed by U.S. government-sponsored
agencies. The remaining 2.8% are issued by banks. 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, 2008 is $3.5 million. This loss is
comprised of three main blocks of securities: FNMAs with a loss of $1.4 million, Freddie Mac with
a loss of $2.1 million and non-government sponsored enterprises such as financial institutions with
a loss of $43,000. Because we believe the decline in fair value is attributable to the changes in
interest rates and the U.S. Government has secured the debt of FNMA and Freddie Mac through a
conservatorship, 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, 2008.
Municipal Bonds The municipal bonds in the Banks portfolio are all investment grade bonds,
except for two bonds rated BB. Although these bonds are below investment grade, they are general
obligation bonds and the underlying municipalities are not exhibiting financial problems. All of
our municipal bonds are insured by the largest bond insurance companies with maturities of
approximately 8.4 years. The unrealized loss greater than 12 months on these securities at
September 30, 2008 is $4.5 million. As with the other securities in the portfolio, we believe this
loss is due to the interest rate environment and 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 fair 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,
2008.
37
We are continually monitoring the quality of our municipal bond portfolio in light of the
current financial problems exhibited by certain monoline insurance companies. While most of our
securities are insured by these companies, we feel that there is minimal risk of loss due to the
problems these insurers are having. Many of the securities that would not be rated without
insurance are pre-refunded and/or are general obligation bonds. Based on our monitoring of the
municipal marketplace, to our knowledge, none of the municipalities are exhibiting financial
problems that would lead us to believe there is a loss in any given security.
Although we determined that these securities are not are other-than-temporarily impaired, we
will continue to monitor the portfolio in the light of economic, credit and market factors. In
addition, we will look at the potential for improving the overall performance of the portfolio and
the income of the Company. Accordingly, subsequent changes in some of these factors may indicate
that we should sell some of these securities even though we have disclosed that we currently intend
to hold these securities to maturity.
At September 30, 2008 and December 31, 2007, investment securities having an amortized cost of
approximately $2.32 billion and $2.29 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, 2008, we reported total loans, net of deferred loan fees, of $3.60 billion.
This represents an increase of $100.2 million, or 2.87%, from total loans, net of deferred loan
fees, of $3.50 billion at December 31, 2007. Total loans, net of deferred loan fees, comprise
59.49% of our total earning assets.
Table 4 Distribution of Loan Portfolio by Type (dollar amount in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
Commercial and Industrial |
|
$ |
356,973 |
|
|
|
9.9 |
% |
|
$ |
365,214 |
|
|
|
10.4 |
% |
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
359,859 |
|
|
|
10.0 |
% |
|
|
308,354 |
|
|
|
8.8 |
% |
Commercial Real Estate |
|
|
1,932,778 |
|
|
|
53.6 |
% |
|
|
1,805,946 |
|
|
|
51.5 |
% |
SFR Mortgage |
|
|
341,389 |
|
|
|
9.5 |
% |
|
|
365,849 |
|
|
|
10.4 |
% |
Consumer |
|
|
61,710 |
|
|
|
1.7 |
% |
|
|
58,999 |
|
|
|
1.7 |
% |
Municipal lease finance receivables |
|
|
173,600 |
|
|
|
4.8 |
% |
|
|
156,646 |
|
|
|
4.5 |
% |
Auto and equipment leases, net of unearned discount |
|
|
47,753 |
|
|
|
1.3 |
% |
|
|
58,505 |
|
|
|
1.7 |
% |
Dairy and Livestock |
|
|
331,333 |
|
|
|
9.2 |
% |
|
|
387,488 |
|
|
|
11.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans |
|
|
3,605,395 |
|
|
|
100.0 |
% |
|
|
3,507,001 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Deferred net loan fees |
|
|
(10,058 |
) |
|
|
|
|
|
|
(11,857 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, net of deferred loan fees |
|
$ |
3,595,337 |
|
|
|
|
|
|
$ |
3,495,144 |
|
|
|
|
|
Less: Allowance for credit losses |
|
|
(40,058 |
) |
|
|
|
|
|
|
(33,049 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans |
|
$ |
3,555,279 |
|
|
|
|
|
|
$ |
3,462,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans are loans and leases to commercial entities to finance capital
purchases or improvements, or to provide cash flow for operations. Real estate loans are loans
secured by trust deeds on real property, including property under construction, commercial property
and single family and multifamily residences. Consumer loans include installment loans to consumers
as well as home equity loans and other loans secured by junior liens on real property. Municipal
lease finance receivables provide financing to municipalities, school districts, and other special
districts. Auto and equipment leases provide financing to both commercial entities as well as
consumers. Dairy and
38
livestock loans are loans to finance the operating needs of wholesale dairy
farm operations, cattle feeders, livestock raisers, and farmers.
Our loan portfolio is from a variety of areas throughout our marketplace. The following is
the breakdown of our loans by region.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
Loans by County |
|
(amounts in thousands) |
|
Percent |
Los Angeles County |
|
$ |
1,210,349 |
|
|
|
33.6 |
% |
Inland Empire |
|
|
791,802 |
|
|
|
22.0 |
% |
Central Valley |
|
|
603,848 |
|
|
|
16.7 |
% |
Orange County |
|
|
543,670 |
|
|
|
15.1 |
% |
Other Areas |
|
|
455,726 |
|
|
|
12.6 |
% |
|
|
|
|
|
$ |
3,605,395 |
|
|
|
100.0 |
% |
|
|
|
Of particular concern in the current credit and economic environments is our real estate and
real estate construction loans. Our real estate loans are comprised of single-family residences,
multifamily residences, industrial, office and retail. We strive to have a maximum loan-to-value
ratio of 65-75%. This table breaks down our real estate portfolio, with the exception of
construction loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
(amounts in |
|
|
|
|
|
Owner- |
Real Estate Loans |
|
thousands) |
|
Percent |
|
Occupied (1) |
Single Family-Direct |
|
$ |
59,738 |
|
|
|
2.6 |
% |
|
|
100.0 |
% |
Single Family-Mortgage Pools |
|
|
281,661 |
|
|
|
12.4 |
% |
|
|
100.0 |
% |
Multifamily |
|
|
115,205 |
|
|
|
5.1 |
% |
|
|
22.5 |
% |
Industrial |
|
|
655,206 |
|
|
|
28.9 |
% |
|
|
38.2 |
% |
Office |
|
|
397,626 |
|
|
|
17.5 |
% |
|
|
25.1 |
% |
Retail |
|
|
210,257 |
|
|
|
9.2 |
% |
|
|
13.8 |
% |
Medical |
|
|
103,455 |
|
|
|
4.5 |
% |
|
|
44.6 |
% |
Secured by Farmland |
|
|
149,856 |
|
|
|
6.6 |
% |
|
|
0.0 |
% |
Other |
|
|
301,163 |
|
|
|
13.2 |
% |
|
|
53.7 |
% |
|
|
|
|
|
|
|
|
|
$ |
2,274,167 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents percentage of owner-occupied in each real estate loan category |
In the table above, Single Family-Direct represents those single-family residence loans that
we have made directly to our customers. These loans total $59.7 million. In addition, we have
purchased pools of owner-occupied single-family loans from real estate lenders, Single
Family-Mortgage Pools, totaling $280.9 million. These loans were purchased with average FICO
scores predominantly ranging from 700 to over 800 and overall loan-to-value ratios of 60% to 80%.
These pools were purchased to diversify our loan portfolio since we make few single-family loans.
Due to market conditions, we have not purchased any mortgage pools since August 2007.
As of September 30, 2008, the Company had $359.9 million in construction loans. This
represents 10.0% of total loans outstanding of $3.6 billion. Of this $359.9 million in
construction loans, approximately 32%, or $115.9 million, were for single-family residences,
residential land loans, and multi-family land development loans. The remaining construction loans,
totaling $243.9 million, were related to commercial construction, which have continued to perform
well. Our construction loans are located throughout our marketplace as can be seen in the
following table.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
SFR & Multifamily |
|
|
Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Loans |
|
Development |
|
|
|
|
|
Construction |
|
|
|
|
|
Total |
|
|
|
|
Inland Empire |
|
$ |
12,931 |
|
|
|
27.5 |
% |
|
$ |
13,592 |
|
|
|
19.7 |
% |
|
$ |
26,523 |
|
|
|
22.8 |
% |
Orange County |
|
|
5,196 |
|
|
|
11.0 |
% |
|
|
7,567 |
|
|
|
11.0 |
% |
|
|
12,763 |
|
|
|
11.0 |
% |
Los Angeles County |
|
|
|
|
|
|
|
|
|
|
29,521 |
|
|
|
42.9 |
% |
|
|
29,521 |
|
|
|
25.5 |
% |
Central Valley |
|
|
22,769 |
|
|
|
48.4 |
% |
|
|
3,349 |
|
|
|
4.9 |
% |
|
|
26,118 |
|
|
|
22.5 |
% |
San Diego County |
|
|
3,891 |
|
|
|
8.3 |
% |
|
|
11,384 |
|
|
|
16.5 |
% |
|
|
15,275 |
|
|
|
13.2 |
% |
Other (includes out-of-state) |
|
|
2,247 |
|
|
|
4.8 |
% |
|
|
3,465 |
|
|
|
5.0 |
% |
|
|
5,712 |
|
|
|
4.9 |
% |
|
|
|
|
|
$ |
47,034 |
|
|
|
100.0 |
% |
|
$ |
68,878 |
|
|
|
100.0 |
% |
|
$ |
115,912 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development |
|
|
|
|
|
Construction |
|
|
|
|
|
Total |
|
|
|
|
Inland Empire |
|
$ |
7,730 |
|
|
|
23.0 |
% |
|
$ |
90,033 |
|
|
|
42.7 |
% |
|
$ |
97,763 |
|
|
|
40.1 |
% |
Orange County |
|
|
|
|
|
|
|
|
|
|
23,622 |
|
|
|
11.2 |
% |
|
|
23,622 |
|
|
|
9.7 |
% |
Los Angeles County |
|
|
5,946 |
|
|
|
17.8 |
% |
|
|
37,858 |
|
|
|
18.0 |
% |
|
|
43,804 |
|
|
|
18.0 |
% |
Central Valley |
|
|
12,801 |
|
|
|
38.3 |
% |
|
|
34,858 |
|
|
|
16.6 |
% |
|
|
47,659 |
|
|
|
19.5 |
% |
Other (includes out-of-state) |
|
|
6,977 |
|
|
|
20.9 |
% |
|
|
24,122 |
|
|
|
11.5 |
% |
|
|
31,099 |
|
|
|
12.7 |
% |
|
|
|
|
|
$ |
33,454 |
|
|
|
100.0 |
% |
|
$ |
210,493 |
|
|
|
100.0 |
% |
|
$ |
243,947 |
|
|
|
100.0 |
% |
|
|
|
Of the total SFR and multifamily loans, $36.1 million are for multifamily and the remainder
represents single-family loans.
Non-performing Assets
We had non-performing assets of $18.6 million at September 30, 2008. Non-performing assets
represent 0.52% of total loans and OREO and 0.29% of total assets at September 30, 2008. We had
non-performing assets of $1.4 million at December 31, 2007. Non-performing assets include
non-performing loans plus other real estate owned (foreclosed property). Non-performing loans
include non-accrual loans and loans past due 90 or more days and still accruing interest.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(amounts in thousands) |
|
Non-accrual loans |
|
$ |
16,637 |
|
|
$ |
1,435 |
|
Other real estate owned (OREO) |
|
|
1,927 |
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
18,564 |
|
|
$ |
1,435 |
|
|
|
|
|
|
|
|
Percentage of nonperforming assets
to total loans outstanding & OREO |
|
|
0.52 |
% |
|
|
0.04 |
% |
|
|
|
|
|
|
|
Percentage of nonperforming assets
to total assets |
|
|
0.29 |
% |
|
|
0.02 |
% |
|
|
|
|
|
|
|
We had loans with a balance of $19.1 million classified as impaired at September 30, 2008.
This balance includes the non-performing loans of $16.6 million and one restructured loan with a
balance of $2.5 million as of September 30, 2008. At December 31, 2007, we had one impaired loan
with a balance of $1.1 million. Impaired loans measured 0.53% of gross loans as of September 30,
2008.
At September 30, 2008, we held $1.9 million as OREO, which represents three foreclosed
properties. This balance consists primarily of $1.1 million representing a foreclosed condominium
construction project. A majority of the loan was charged-off in the fourth quarter of 2007. The
subject loan was
40
participated with another financial institution and the resulting OREO asset is
owned jointly with that financial institution. The balance also includes $315,000 for one single
family residence from our mortgage pools and $475,000 for one residential construction loan. The
single family residence OREO was sold in October.
There was no OREO at December 31, 2007.
The table below provides trends in our non-performing assets and delinquencies during 2008.
Non-Performing Assets & Delinquency Trends
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2007 |
|
Non-Performing Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Construction and Residential Land |
|
$ |
8,020 |
|
|
$ |
9,802 |
|
|
$ |
1,535 |
|
|
$ |
1,137 |
|
Residential Mortgage |
|
|
2,062 |
|
|
|
1,672 |
|
|
|
1,153 |
|
|
|
298 |
|
Commercial |
|
|
6,243 |
|
|
|
551 |
|
|
|
19 |
|
|
|
|
|
Consumer |
|
|
312 |
|
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,637 |
|
|
$ |
12,337 |
|
|
$ |
2,707 |
|
|
$ |
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Loans |
|
|
0.46 |
% |
|
|
0.35 |
% |
|
|
0.08 |
% |
|
|
0.04 |
% |
Past Due 30+ Days |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Construction and Residential Land |
|
$ |
|
|
|
$ |
|
|
|
$ |
768 |
|
|
$ |
|
|
Commercial Construction |
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage |
|
|
481 |
|
|
|
483 |
|
|
|
1,180 |
|
|
|
460 |
|
Commercial |
|
|
1,871 |
|
|
|
483 |
|
|
|
15,709 |
|
|
|
1,713 |
|
Consumer |
|
|
55 |
|
|
|
|
|
|
|
533 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,907 |
|
|
$ |
966 |
|
|
$ |
18,190 |
|
|
$ |
2,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Loans |
|
|
0.14 |
% |
|
|
0.03 |
% |
|
|
0.53 |
% |
|
|
0.06 |
% |
OREO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Construction |
|
$ |
1,612 |
|
|
$ |
1,137 |
|
|
$ |
1,137 |
|
|
$ |
|
|
Residential Mortgage |
|
$ |
315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,927 |
|
|
$ |
1,137 |
|
|
$ |
1,137 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Performing, Past Due & OREO |
|
$ |
23,471 |
|
|
$ |
14,440 |
|
|
$ |
22,034 |
|
|
$ |
3,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Loans |
|
|
0.65 |
% |
|
|
0.41 |
% |
|
|
0.65 |
% |
|
|
0.10 |
% |
At December 31, 2007, we had $1.4 million in non-performing loans. As of March 31, 2008, we
had $2.7 million in non-performing loans which increased to $12.3 million in non-performing loans
at June 30, 2008 and further increased to $16.6 million at September 30, 2008 or 0.46% of total
loans. At September 30, 2008, the non-performing loans consist of $8.0 million in residential
construction and residential land loans, $2.1 million in single family mortgage loans, $6.2 million
in commercial loans and $312,000 in consumer loans.
Of the $8.0 million in residential construction and residential land loans, six loans are for
single family development projects in the Inland Empire to two borrower groups. The outstanding
balances, on these loans, range from $202,000 to $1.9 million.
The $2.1 million single family mortgage loans consists of four single family residences from
our pool of approximately 750 mortgage loans purchased over the past five years. We feel that we
have sufficient equity, even after the market downturn, that our losses should not be significant.
41
Of the $6.2 million in commercial loans, $5.7 million consists of two loans to a single
borrower and are secured by both commercial and residential real estate located in the Inland
Empire.
The consumer loan consists of one equity line of credit.
The economic downturn has had an impact on our market area and on our loan portfolio. With
the exception of assets discussed above, we are not aware of any other loans as of September 30,
2008 for which known credit problems of the borrower would cause serious doubts as to the ability
of such borrowers to comply with their present loan repayment terms, or any known events that would
result in the loan being designated as non-performing at some future date. We can anticipate that
there will be some losses in the loan portfolio given the current state of the economy. However,
we cannot predict the extent to which the deterioration in general economic conditions, real estate
values, increase in general rates of interest, change in the financial conditions or business of a
borrower may adversely affect a borrowers ability to pay. See Risk Management Credit Risk
herein.
Deposits
The primary source of funds to support earning assets (loans and investments) is the
generation of deposits from our customer base. The ability to grow the customer base and
subsequently deposits is a crucial element in the performance of the Company.
At September 30, 2008, total deposits were $3.20 billion, representing a decrease of $168.8
million, or 5.02%, from total deposits of $3.36 billion at December 31, 2007. The decrease is
primarily due to competition for low cost deposits in our local markets. The composition of
deposits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
(Amounts in thousands) |
|
|
|
|
|
Non-interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
1,302,205 |
|
|
|
40.7 |
% |
|
$ |
1,295,959 |
|
|
|
38.5 |
% |
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Deposits |
|
|
1,178,582 |
|
|
|
36.9 |
% |
|
|
1,278,035 |
|
|
|
38.0 |
% |
Time deposits |
|
|
714,754 |
|
|
|
22.4 |
% |
|
|
790,355 |
|
|
|
23.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
3,195,541 |
|
|
|
100.0 |
% |
|
$ |
3,364,349 |
|
|
|
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 $1.30 billion at
September 30, 2008, representing an increase of $6.2 million, or 0.48%, over total demand deposits
of $1.30 billion at December 31, 2007. Non-interest-bearing demand deposits represented 40.7% of
total deposits as of September 30, 2008 and 38.5% of total deposits as of December 31, 2007.
Savings deposits, which include savings, interest-bearing demand, and money market accounts,
totaled $1.18 billion at September 30, 2008, representing a decrease of $99.5 million, or 7.78%,
from savings deposits of $1.28 billion at December 31, 2007.
Time deposits totaled $714.8 million at September 30, 2008. This represented a decrease of
$75.6 million, or 9.57%, from total time deposits of $790.4 million at December 31, 2007.
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
42
borrowed funds, as a percent of average total funding (total deposits plus demand notes
plus borrowed funds) was 43.37% as of September 30, 2008, as compared to 41.02% as of December 31,
2007.
During 2008 and 2007, we entered into short-term borrowing agreements (borrowings with
maturities of one year or less) with the Federal Home Loan Bank (FHLB) and other institutions. The
Bank had outstanding balances of $1.05 billion under these agreements at September 30, 2008 and
December 31, 2007. The weighted average annual interest rate was 3.80% and 4.48% at September 30,
2008 and December 31, 2007, respectively. The FHLB holds certain investment securities and loans of
the Bank as collateral for these borrowings.
In June 2006, the Company purchased securities totaling $250.0 million. This purchase was
funded by a repurchase agreement of $250.0 million with a double cap embedded in the repurchase
agreement. The interest rate on this agreement is fixed at 4.95% and the maturity is September 30,
2012. In November 2006, we began a repurchase agreement product with our customers. This product,
known as Citizens Sweep Manager, sells our investment securities overnight to our customers under
an agreement to repurchase them the next day. As of September 30, 2008 and December 31, 2007,
total customer repurchases were $361.0 million and $336.3 million, respectively, with weighted
average annual interest rates of 1.78% and 3.51%. As of September 30, 2008 and December 31, 2007,
total funds borrowed under these agreements were $611.0 million and $586.3 million, respectively.
We also entered into long-term borrowing agreements (borrowings with maturities of one year or
longer) with the FHLB. We had outstanding balances of $950.0 million and $700.0 million under these
agreements at September 30, 2008 and December 31, 2007, respectively. The weighted average annual
interest rate was 4.09% and 4.88% at September 30, 2008 and December 31, 2007, respectively. The
FHLB holds certain investment securities and loans of the Bank as collateral for these borrowings.
The Bank acquired subordinated debt of $5.0 million from the acquisition of FCB in September
2007 which is included in long-term borrowings in Item 1 Financial Statements. The debt has a
variable interest rate which resets quarterly at three-month LIBOR plus 1.65%. The debt matures on
January 7, 2016, but becomes callable on January 7, 2011.
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, 2008 and December 31, 2007 the amounts held by
the Bank in the TT&L Note Option Program were $3.7 million and $540,000, collateralized by
securities, respectively. Amounts are payable on demand. The Bank borrows at a variable rate of 36
and 86 basis points less than the average weekly federal funds rate, which was 2.40% and 5.03% at
September 30, 2008 and December 31, 2007, respectively.
At September 30, 2008, borrowed funds totaled $2.62 billion, representing an increase of
$281.0 million, or 12.00%, over total borrowed funds of $2.34 billion at December 31, 2007.
Aggregate Contractual Obligations
The following table summarizes our contractual commitments as of September 30, 2008:
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
3,195,541 |
|
|
$ |
3,176,976 |
|
|
$ |
14,880 |
|
|
$ |
674 |
|
|
$ |
3,011 |
|
FHLB and Other Borrowings |
|
|
2,621,305 |
|
|
|
1,416,305 |
|
|
|
750,000 |
|
|
|
450,000 |
|
|
|
5,000 |
|
Junior Subordinated Debentures |
|
|
115,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,055 |
|
Deferred Compensation |
|
|
8,502 |
|
|
|
846 |
|
|
|
1,667 |
|
|
|
1,604 |
|
|
|
4,385 |
|
Operating Leases |
|
|
26,935 |
|
|
|
5,388 |
|
|
|
8,436 |
|
|
|
6,083 |
|
|
|
7,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,967,338 |
|
|
$ |
4,599,515 |
|
|
$ |
774,983 |
|
|
$ |
458,361 |
|
|
$ |
134,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits represent non-interest bearing, money market, savings, NOW, certificates of deposits,
brokered and all other deposits.
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, repurchase agreements 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,
will become callable in whole or in part in 2008. CVB Statutory Trust III, which matures in 2036,
will become callable in whole or in part in 2011. It also represents FCB Capital Trust II which
matures in 2033 and becomes callable in 2008.
Deferred compensation primarily 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.
Off-Balance Sheet Arrangements
At September 30, 2008, we had commitments to extend credit of approximately $757.0 million and
obligations under letters of credit of $61.7 million and available lines of credit totaling $811.7
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. The Company has a reserve for
undisbursed commitments of $4.0 million as of September 30, 2008 and $2.9 million as of December
31, 2007.
Standby letters of credit written are conditional commitments issued by the Bank to guarantee
the financial performance of a customer to a third party. Those guarantees are primarily issued to
support private borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers. When deemed
necessary, the Bank holds appropriate collateral supporting those commitments.
The following table summarizes the off-balance sheet arrangements at September 30, 2008:
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity by Period |
|
|
|
|
|
|
|
Less Than |
|
|
One Year |
|
|
Four Year |
|
|
After |
|
|
|
|
|
|
|
One |
|
|
to Three |
|
|
to Five |
|
|
Five |
|
|
|
Total |
|
|
Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
2008 |
|
(Amounts in thousands) |
|
Commitment to extend credit |
|
|
756,994 |
|
|
|
253,287 |
|
|
|
49,167 |
|
|
|
52,553 |
|
|
|
401,987 |
|
Obligations under letters of credit |
|
|
61,699 |
|
|
|
41,079 |
|
|
|
14,734 |
|
|
|
5,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
818,693 |
|
|
$ |
294,366 |
|
|
$ |
63,901 |
|
|
$ |
58,439 |
|
|
$ |
401,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Cash Flow
Since the primary sources and uses of funds for the Bank are deposits and loans, the
relationship between gross loans and total deposits provides a useful measure of the 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 2008, the Banks loan to deposit ratio averaged 106.38%, compared to an average ratio of 92.53%
for the same period in 2007. The slowdown in deposit growth and increase in loan balances has
caused this ratio to increase.
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 cash flow 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, 2008, approximately $116.8 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 $66.3 million for the nine months of 2008,
compared to $58.9 million for the same period last year.
Net cash used in investing activities totaled $154.4 million for the first nine months of
2008, compared to net cash provided by investing activities of $161.1 million for the same period
in 2007. The increase in cash used in 2008 was primarily the result of the increase in purchases of
mortgage-backed securities.
Net cash provided by financing activities totaled $91.0 million for the first nine months of
2008, compared to net cash used in financing activities of $240.5 million for the same period last
year.
At September 30, 2008, cash and cash equivalents totaled $92.4 million. This represented a
decrease of $33.6 million, or 26.64%, from a total of $126.0 million at September 30, 2007 and an
increase of $2.9 million, or 3.28%, from a total of $89.5 million at December 31, 2007.
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. We
will continue to assess our need for capital and sources for that capital, including participation
in the U.S. Department of Treasurys Capital Purchase Program.
45
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, 2008, the Bank and the Company exceeded
the minimum risk-based capital ratios and leverage ratios required to be considered Well
Capitalized.
The Companys equity capital was $434.8 million at September 30, 2008. This represented an
increase of $9.9 million or 2.32% from equity capital of $424.9 million at December 31, 2007. The
increase was due primarily to the net earnings for the first nine months of 2008 in the amount of
$50.8 million offset by the unrealized loss on securities available-for-sale, net of tax, of $20.4
million and payment of dividends in the amount of $21.2 million. The Companys 2007 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, 2008, and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required |
|
|
|
|
|
|
|
|
|
Minimum |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Capital Ratios |
|
Ratios |
|
|
Company |
|
|
Bank |
|
|
Company |
|
|
Bank |
|
Risk-based capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I |
|
|
4.00 |
% |
|
|
11.41 |
% |
|
|
11.17 |
% |
|
|
10.97 |
% |
|
|
10.39 |
% |
Total |
|
|
8.00 |
% |
|
|
12.54 |
% |
|
|
12.18 |
% |
|
|
11.94 |
% |
|
|
11.24 |
% |
Leverage ratio |
|
|
4.00 |
% |
|
|
7.77 |
% |
|
|
7.60 |
% |
|
|
7.56 |
% |
|
|
7.13 |
% |
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
46
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.
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 uncollectible 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 ensure an appropriate level of allowance is present
or established.
Central to the first phase of our credit risk management is its loan risk rating system. The
originating credit officer assigns borrowers an initial risk rating, which is reviewed and possibly
changed by Credit Management, 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. The Impaired and Doubtful loans are analyzed on an
individual basis for allowance amounts. The other categories have formulae used to determine the
needed allowance amount.
The Bank obtains a quarterly independent credit review by engaging an outside party to review
our loans. The purpose of this review is to determine the loan rating and if there is any
deterioration in the credit quality of the portfolio.
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.
47
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 collectability. 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.
In the second major element of the analysis which considers all known relevant internal and
external factors that may affect a loans collectability, we perform an evaluation of various
conditions, the effects of which are not directly measured in the determination of the formula and
specific allowances. The evaluation of the inherent loss with respect to these conditions is
subject to a higher degree of uncertainty because they are not identified with specific problem
credits or portfolio segments. The conditions evaluated in connection with the second element of
the analysis of the allowance include, but are not limited to the following conditions that existed
as of the balance sheet date:
|
|
|
then-existing general economic and business conditions affecting the key lending areas
of the Company, |
|
|
|
|
then-existing economic and business conditions of areas outside the lending areas, such
as other sections of the United States, Asia and Latin America, |
|
|
|
|
credit quality trends (including trends in non-performing loans expected to result from
existing conditions), |
|
|
|
|
collateral values |
|
|
|
|
loan volumes and concentrations, |
|
|
|
|
seasoning of the loan portfolio, |
|
|
|
|
specific industry conditions within portfolio segments, |
|
|
|
|
recent loss experience in particular segments of the portfolio, |
|
|
|
|
duration of the current business cycle, |
|
|
|
|
bank regulatory examination results and |
|
|
|
|
findings of the 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. We recorded an $8.7 million provision for credit losses during the first nine months of 2008. There was no
provision for credit losses during the first nine months of 2007.
48
TABLE 7 Summary of Credit Loss Experience
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(amounts in thousands) |
|
|
Amount of Total Loans at End of Period (1) |
|
$ |
3,595,337 |
|
|
$ |
3,311,749 |
|
|
|
|
|
|
|
|
Average Total Loans Outstanding (1) |
|
$ |
3,459,916 |
|
|
$ |
3,178,242 |
|
|
|
|
|
|
|
|
Allowance for Credit Losses: |
|
|
|
|
|
|
|
|
Beginning of Period |
|
$ |
33,049 |
|
|
$ |
27,737 |
|
Loans Charged-Off: |
|
|
|
|
|
|
|
|
Real Estate Loans |
|
|
888 |
|
|
|
|
|
Commercial and Industrial |
|
|
546 |
|
|
|
123 |
|
Lease Financing Receivables |
|
|
318 |
|
|
|
182 |
|
Consumer Loans |
|
|
240 |
|
|
|
40 |
|
|
|
|
|
|
|
|
Total Loans Charged-Off |
|
|
1,992 |
|
|
|
345 |
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
Real Estate Loans |
|
|
192 |
|
|
|
3 |
|
Commercial and Industrial |
|
|
20 |
|
|
|
338 |
|
Lease Financing Receivables |
|
|
10 |
|
|
|
4 |
|
Consumer Loans |
|
|
79 |
|
|
|
20 |
|
|
|
|
|
|
|
|
Total Loans Recovered |
|
|
301 |
|
|
|
365 |
|
|
Net Loans Charged-Off/(Recovered) |
|
|
1,691 |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
Provision Charged to Operating Expense |
|
|
8,700 |
|
|
|
|
|
Acquisition of First Coastal Bank |
|
|
|
|
|
|
2,671 |
|
|
|
|
|
|
|
|
Allowance for Credit Losses at End of period |
|
$ |
40,058 |
|
|
$ |
30,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Net of deferred loan fees |
|
|
|
|
|
|
|
|
|
Net Loans Charged-Off (Recovered) to Average Total Loans |
|
|
0.05 |
% |
|
|
-0.00 |
% |
Net Loans Charged-Off (Recovered) to Total Loans at End of Period |
|
|
0.05 |
% |
|
|
-0.00 |
% |
Allowance for Credit Losses to Average Total Loans |
|
|
1.16 |
% |
|
|
0.96 |
% |
Allowance for Credit Losses to Total Loans at End of Period |
|
|
1.11 |
% |
|
|
0.92 |
% |
Net Loans Charged-Off (Recovered) to Allowance for Credit Losses |
|
|
4.22 |
% |
|
|
-0.07 |
% |
Net Loans Charged-Off (Recovered) to Provision for Credit Losses |
|
|
19.44 |
% |
|
|
|
|
While we believe that the allowance at September 30, 2008, 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 or
conditions, including those identified above, will not be reflected in increased provisions or
credit losses in the future.
49
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
In the normal course of our business activities, we are exposed to market risks, including
price and liquidity risk. Market risk is the potential of loss from adverse changes in market rates
and prices, such as interest rates (interest rate risk). Liquidity risk arises from the possibility
that we may not be able to satisfy current or future commitments or that we may be more reliant on
alternative funding sources such as long-term debt. Financial products that expose us to market
risk include securities, loans, deposits, debts and derivative financial instruments.
Counterparty Risk
Recent developments in the financial markets have placed an increased awareness of
Counterparty Risks. These risks occur when a financial institution has an indebtedness or
potential for indebtedness to another financial institution. We have assessed our Counterparty
Risk at the end of the third quarter with the following results:
|
|
|
We have $250 million in a repurchase agreement with an embedded double cap. This
transaction was conducted in September 2006 to protect against rising interest rates. The
repurchase agreement is with JP Morgan. The Moodys public debt rating for this
institution is Aaa. |
|
|
|
|
We do not have any investments in the preferred stock of any other company. |
|
|
|
|
We do not have in our investment portfolio any trust preferred securities of any other
company. |
|
|
|
|
All of our investments securities are either municipal securities or securities backed
by mortgages, FNMA, FHLMC or FHLB. |
|
|
|
|
All of our commercial line insurance policies are with companies with the highest AM
Best ratings of AXV or above. |
|
|
|
|
We have no significant Counterparty exposure related to derivatives such as interest
rate swaps. |
|
|
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|
We have no significant exposure to our Cash Surrender Value of Life insurance since all
of the insurance companies carry an AM Best rating of A or greater. |
|
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|
We have $182.1 million in Fed Funds lines of credit with other banks. All of these
banks are major U.S. banks. We rely on these funds for overnight borrowings. |
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.
50
The interest rates paid on deposit accounts do not always move in unison with the rates
charged on loans. In addition, the magnitude of changes in the rates charged on loans is not always
proportionate to the magnitude of changes in the rates paid for deposits. Consequently, changes in
interest rates do not necessarily result in an increase or decrease in the net interest margin
solely as a result of the differences between repricing opportunities of earning assets or
interest-bearing liabilities. In general, whether we report a positive gap in the short-term period
or negative gap in the long-term period does not necessarily indicate that, if interest rates
decreased, net interest income would increase, or if interest rates increased, net interest income
would decrease.
Approximately $1.7 billion, or 71.16%, of the total investment portfolio at September 30, 2008
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.
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, 2008:
|
|
|
|
|
|
|
|
|
|
Estimated Net |
|
|
Simulated |
|
Interest Income |
|
|
Rate Changes |
|
Sensitivity |
|
|
+ 200 basis points |
|
|
(4.31%) |
|
|
|
- 200 basis points |
|
|
3.22% |
|
|
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
51
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. We
utilize a third party audit firm to provide internal audit services.
The key to monitoring transaction risk is in the design, documentation and implementation of
well-defined procedures. All transaction related procedures include steps to report events that
might increase transaction risk. Dual controls are also a form of monitoring.
Compliance Risk
Compliance risk is the risk to earnings or capital arising from violations of, or
non-conformance with, laws, rules, regulations, prescribed practices, or ethical standards.
Compliance risk also arises in situations where the laws or rules governing certain Bank products
or activities of the 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
52
is in-depth audits performed by an external firm and the other is periodic monitoring performed
by the Compliance Officer.
The Bank utilizes 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.
The Bank recognizes that customer complaints can often identify weaknesses in our compliance
program which could expose the Bank to risk. Therefore, all complaints are given prompt attention.
Our 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.
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.
53
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.
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.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation of the
effectiveness of the 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.
54
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 1A. RISK FACTORS
U.S. and international financial markets and economic conditions could adversely
affect our liquidity, results of operations and financial condition - As described in
Managements Discussion and Analysis of Financial Condition and Results of Operations
Recent Developments, global capital markets and economic conditions continue to be
adversely affected and the resulting disruption has been particularly acute in the
financial sector. The Company remains well capitalized and has not suffered any
significant liquidity issues as a result of these recent events; however, the cost and
availability of funds may be adversely affected by illiquid credit markets and the demand
for our products and services may decline as our borrowers and customers realize the
impact of an economic slowdown and recession. In addition, the severity and duration of
these adverse conditions is unknown and may exacerbate our exposure to credit risk and
adversely affect the ability of borrowers to perform under the terms of their lending
arrangements with us. Accordingly, continued turbulence in the U.S. and international
markets and economy may adversely affect our liquidity, financial condition, results of
operations and profitability.
There were no other 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, 2007, during the nine
months ended September 30, 2008. 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
On July 16, 2008, our Board of Directors approved a new program to repurchase up to
5,390,482 shares of its common stock. This program was combined with the 4,609,518 shares
remaining from our previous stock repurchase program, approved in August 2007.
Accordingly, commencing as of July 16, 2008, we have the authority to repurchase up to
10,000,000 shares (such number will not be adjusted for stock splits, stock dividends, and
the like) in the open market or in privately negotiated transactions, at times and at
prices considered appropriate by us, depending upon prevailing market conditions and other
corporate and legal considerations. There is no expiration date for our current stock
repurchase program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
55
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. |
56
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 6, 2008 |
/s/ Edward J. Biebrich Jr.
|
|
|
Edward J. Biebrich Jr. |
|
|
Chief Financial Officer |
|
57
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 6, 2008 |
/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 6, 2008 |
/s/ Edward J. Biebrich, Jr.
|
|
|
Edward J. Biebrich, Jr. |
|
|
Chief Financial Officer |
|
2
exv32w1
Exhibit 32.1
CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CVB Financial Corp. (the Company) on Form 10-Q
for the period ended September 30, 2008, as filed with the Securities and Exchange Commission on
the date hereof (the Report), I, Christopher D. Myers, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, to the best of my knowledge that:
|
(1) |
|
The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
|
|
(2) |
|
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
|
|
|
|
|
|
|
|
Date: November 6, 2008 |
/s/ Christopher D. Myers
|
|
|
Christopher D. Myers |
|
|
Chief Executive Officer |
|
3
exv32w2
Exhibit 32.2
CERTIFICATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CVB Financial Corp. (the Company) on Form 10-Q
for the period ended September 30, 2008, as filed with the Securities and Exchange Commission on
the date hereof (the Report), I, Edward J. Biebrich, Jr., Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, to the best of my knowledge that:
|
(1) |
|
The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
|
|
(2) |
|
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
|
|
|
|
|
|
|
|
Date: November 6, 2008 |
/s/ Edward J. Biebrich Jr.
|
|
|
Edward J. Biebrich Jr. |
|
|
Chief Financial Officer |
|
|
4