e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the fiscal year ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934. |
For the transition period from N/A to N/A
Commission file number 1-10140
CVB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
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California
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95-3629339 |
(State or other jurisdiction of incorporation
or organization)
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(I.R.S. Employer Identification No.) |
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701 N. Haven Avenue, Suite 350 |
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Ontario, California
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91764 |
(Address of Principal Executive Offices)
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(Zip Code) |
Registrants telephone number, including area code (909) 980-4030
Securities registered pursuant to Section 12(b) of the Act:
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Title of class
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Name of Each Exchange on Which Registered |
Common Stock, no par value
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NASDAQ Stock Market, LLC |
Preferred Stock Purchase Rights
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NASDAQ Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). o
Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do
not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of June 30, 2009, the aggregate market value of the common stock held by non-affiliates of
the registrant was approximately $398,384,452.
Number of shares of common stock of the registrant outstanding as of February 15, 2010:
106,288,979.
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DOCUMENTS INCORPORATED BY REFERENCE
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PART OF |
Definitive Proxy Statement for the Annual Meeting of Stockholders which
will be filed within 120 days of the fiscal year ended December 31, 2009
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Part III of Form 10-K |
CVB FINANCIAL CORP.
2009 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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INTRODUCTION
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this report constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, or Exchange Act, and as such involve risk and uncertainties.
These forward-looking statements relate to, among other things, expectations of the environment in
which we operate, projections of future performance, perceived opportunities in the market and
strategies regarding our mission and vision. Our actual results may differ significantly from the
results discussed in such forward-looking statements.
Factors that could cause actual results to differ from those discussed in the forward-looking
statements include but are not limited to:
Local, regional, national and international economic conditions and events and the impact
they may have on us and our customers;
Ability to attract deposits and other sources of liquidity;
Oversupply of inventory and continued deterioration in values of California real estate,
both residential and commercial;
A prolonged slowdown in construction activity;
Accounting adjustments in connection with our acquisition of assets and assumptions of
liabilities from San Joaquin Bank;
Changes in the financial performance and/or condition of our borrowers;
Changes in the level of non-performing assets and charge-offs;
Effects of acquisitions we may make;
The effect of changes in laws and regulations (including laws and regulations concerning
taxes, banking, securities, executive compensation and insurance) with which we and our
subsidiaries must comply;
Changes in estimates of future reserve requirements based upon the periodic review thereof
under relevant regulatory and accounting requirements;
Inflation, interest rate, securities market and monetary fluctuations;
Political instability;
Acts of war or terrorism, or natural disasters, such as earthquakes, or the effects of
pandemic flu;
The timely development and acceptance of new banking products and services and perceived
overall value of these products and services by users;
Changes in consumer spending, borrowing and savings habits;
Technological changes;
The ability to increase market share and control expenses;
Changes in the competitive environment among financial and bank holding companies and
other financial service providers;
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Continued volatility in the credit and equity markets and its effect on the general economy;
The effect of changes in accounting policies and practices, as may be adopted by the
regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial
Accounting Standards Board and other accounting standard setters;
Changes in our organization, management, compensation and benefit plans;
The costs and effects of legal and regulatory developments including the resolution of
legal proceedings or regulatory or other governmental inquiries and the results of
regulatory examinations or reviews; and
Our success at managing the risks involved in the foregoing items.
For additional information concerning risks we face, see Item 1A. Risk Factors and any
additional information we set forth in our periodic reports filed pursuant to the Exchange
Act, including this Annual Report on Form 10-K. We do not undertake any obligation to
update our forward-looking statements to reflect occurrences or unanticipated events or
circumstances arising after the date of such statements except as required by law.
PART I
ITEM 1. BUSINESS
CVB Financial Corp.
CVB Financial Corp. (referred to herein on an unconsolidated basis as CVB and on a
consolidated basis as we or the Company) is a bank holding company incorporated in California
on April 27, 1981 and registered under the Bank Holding Company Act of 1956, as amended (the Bank
Holding Company Act). The Company commenced business on December 30, 1981 when, pursuant to a
reorganization, it acquired all of the voting stock of Chino Valley Bank. On March 29, 1996, Chino
Valley Bank changed its name to Citizens Business Bank (the Bank). The Bank is our principal
asset. The Company has three other 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, CVB Statutory Trust III, and FCB Trust II. CVB Statutory Trusts I and II were created in
December 2003 and CVB Statutory Trust III was created in January 2006 to issue trust preferred
securities in order to raise capital for the Company. The Company acquired FCB Trust II (which was
also created to raise capital) through the acquisition of First Coastal Bancshares (FCB) in June
2007.
CVBs principal business is to serve as a holding company for the Bank and for other banking
or banking related subsidiaries, which the Company may establish or acquire. We have not engaged in
any other material activities to date. As a legal entity separate and distinct from its
subsidiaries, CVBs principal source of funds is, and will continue to be, dividends paid by and
other funds advanced from the Bank and capital raised directly by CVB. Legal limitations are
imposed on the amount of dividends that may be paid and loans that may be made by the Bank to CVB.
See Item 1. Business Supervision and Regulation Dividends and Other Transfers of Funds. At
December 31, 2009, the Company had $6.74 billion in total consolidated assets, $3.97 billion in net
loans and $4.44 billion in deposits.
On October 16, 2009, we acquired substantially all of the assets and assumed substantially all
of the liabilities of San Joaquin Bank (SJB) headquartered in Bakersfield, California, in an
FDIC-assisted transaction. We acquired all five branches of SJB, one of which we intend to
consolidate with our existing Bakersfield business financial center in March 2010. Through this
acquisition, we acquired $489.1 million
in loans, $25.3 million in investment securities, $530.0 million in deposits, and $121.4
million in borrowings. The foregoing amounts are reflected at fair value as of the acquisition
date.
The principal executive offices of CVB and the Bank are located at 701 North Haven Avenue,
Suite 350, Ontario, California. Our phone number is (909) 980-4030.
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Citizens Business Bank
The Bank commenced operations as a California state-chartered bank on August 9, 1974. The
Banks deposit accounts are insured under the Federal Deposit Insurance Act up to applicable
limits. The Bank is not a member of the Federal Reserve System. At December 31, 2009, the Bank had
$6.72 billion in assets, $3.97 billion in net loans and $4.46 billion in deposits.
As of December 31, 2009, we had 46 Business Financial Centers located in the Inland Empire,
Los Angeles County, Orange County and the Central Valley areas of California. Of the 46 offices, we
opened thirteen as de novo branches and acquired the other thirty-three in acquisition
transactions.
We also had five Commercial Banking Centers, of which four were opened in 2008 and one was
opened in 2009. Although able to take deposits, these centers operate primarily as sales offices
and focus on business clients and their principals, professionals, and high net-worth individuals.
One of these centers is located in the San Fernando Valley. The other four centers are located
within a Business Financial Center in each of San Bernardino, Los Angeles, and Orange Counties.
Through our network of banking offices, we emphasize personalized service combined with a full
range of banking and trust services for businesses, professionals and individuals located in the
service areas of our offices. Although we focus the marketing of our services to small-and
medium-sized businesses, a full range of retail banking services are made available to the local
consumer market.
We offer a wide range of deposit instruments. These include checking, savings, money market
and time certificates of deposit for both business and personal accounts. We also serve as a
federal tax depository for our business customers.
We provide a full complement of lending products, including commercial, agribusiness,
consumer, real estate loans and equipment and vehicle leasing. Commercial products include lines of
credit and other working capital financing, accounts receivable lending and letters of credit.
Agribusiness products are loans to finance the operating needs of wholesale dairy farm operations,
cattle feeders, livestock raisers, and farmers. We provide lease financing for municipal
governments. Financing products for consumers include automobile leasing and financing, lines of
credit, and home improvement and home equity lines of credit. Real estate loans include mortgage
and construction loans.
We also offer a wide range of specialized services designed for the needs of our commercial
accounts. These services include cash management systems for monitoring cash flow, a credit card
program for merchants, courier pick-up and delivery, payroll services, remote deposit capture,
electronic funds transfers by way of domestic and international wires and automated clearinghouse,
and on-line account access. We make available investment products to customers, including mutual
funds, a full array of fixed income vehicles and a program to diversify our customers funds in
federally insured time certificates of deposit of other institutions.
We offer a wide range of financial services and trust services through CitizensTrust. These
services include fiduciary services, mutual funds, annuities, 401K plans and individual investment
accounts.
Business Segments
We are a community bank with two reportable operating segments: (i) Business Financial
and Commercial Banking Centers and (ii) Treasury Department. Our Business Financial and Commercial
Banking Centers (Centers) are the focal points for customer sales and services. As such, these
Centers comprise the biggest segment of the Company. Our other reportable segment, Treasury
Department
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manages all of the investments for the Company. All administrative and other smaller
operating departments are combined into the Other category for reporting purposes. See the
sections captioned Results by Segment Operations in Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations and Note 20 Business Segments in the notes to
consolidated financial statements.
Competition
The banking and financial services business is highly competitive. The increasingly
competitive environment faced by banks is a result primarily of changes in laws and regulation,
changes in technology and product delivery systems, and the accelerating pace of consolidation
among financial services providers. We compete for loans, deposits, and customers with other
commercial banks, savings and loan associations, savings banks, securities and brokerage companies,
mortgage companies, insurance companies, finance companies, money market funds, credit unions, and
other nonbank financial service providers. Many competitors are much larger in total assets and
capitalization, have greater access to capital markets, including foreign-ownership, and/or offer a
broader range of financial services.
Economic Conditions, Government Policies, Legislation, and Regulation
Our profitability, like most financial institutions, is primarily dependent on interest rate
differentials. In general, the difference between the interest rates paid by the Bank on
interest-bearing liabilities, such as deposits and other borrowings, and the interest rates
received by the Bank on interest-earning assets, such as loans extended to customers and securities
held in the investment portfolio, will comprise the major portion of our earnings. These rates are
highly sensitive to many factors that are beyond our control, such as inflation, recession and
unemployment, and the impact which future changes in domestic and foreign economic conditions might
have on us cannot be predicted.
Our business is also influenced by the monetary and fiscal policies of the federal government
and the policies of regulatory agencies, particularly the Board of Governors of the Federal Reserve
System (the FRB). The FRB implements national monetary policies (with objectives such as curbing
inflation and combating recession) through its open-market operations in U.S. Government securities
by adjusting the required level of reserves for depository institutions subject to its reserve
requirements, and by varying the target federal funds and discount rates applicable to borrowings
by depository institutions. The actions of the FRB in these areas influence the growth of bank
loans, investments, and deposits and also affect interest earned on interest-earning assets and
paid on interest-bearing liabilities. The nature and impact of any future changes in monetary and
fiscal policies on us cannot be predicted.
From time to time, federal and state legislation is enacted which may have the effect of
materially increasing the cost of doing business, limiting or expanding permissible activities, or
affecting the competitive balance between banks and other financial services providers. Several
proposals for legislation that could substantially intensify the regulation of the financial
services industry (including a possible comprehensive overhaul of the financial institutions
regulatory system, the creation of a new consumer financial protection agency and potential new
restrictions on executive compensation) are expected to be introduced and possibly enacted in the
new Congress or adopted by regulation. We cannot predict whether or when potential legislation or
regulations will be enacted, and if enacted, the effect that it, or any implemented regulations and
supervisory policies, would have on our financial condition or results of
operations. In addition, the outcome of examinations, any litigation or any investigations
initiated by state or federal authorities may result in necessary changes in our operations and
increased compliance costs.
Negative developments beginning in the latter half of 2007 in the sub-prime mortgage market
and the securitization markets for such loans, together with volatility in oil prices and other
factors, have resulted in uncertainty in the financial markets in general and a related general
economic downturn, which continued through 2009 and is anticipated to continue in 2010. Dramatic
declines in the housing market, with decreasing home prices and increasing delinquencies and
foreclosures, have negatively impacted the
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credit performance of mortgage and construction loans
and resulted in significant write-downs of assets by many financial institutions. In addition, the
values of real estate collateral supporting many commercial and residential loans have declined and
may continue to decline and additional weakness in commercial real estate is expected to have an
adverse impact on financial institutions. General downward economic trends, reduced availability of
commercial credit and increasing unemployment have negatively impacted the credit performance of
commercial and consumer credit, resulting in additional write-downs. Concerns over the stability
of the financial markets and the economy have resulted in decreased lending by financial
institutions to their customers and to each other. These economic trends, market turmoil, and
tightening of credit has led to increased commercial and consumer delinquencies, lack of customer
confidence, increased market volatility and widespread reduction in general business
activity. Competition among depository institutions for deposits has increased significantly. Bank
and bank holding company stock prices have been significantly negatively affected as has the
ability of banks and bank holding companies to raise capital or borrow in the debt markets compared
to recent years. Moreover, especially in the current economic environment, bank regulatory
agencies have been very aggressive in responding to concerns and trends identified in examinations,
and this has resulted in the increased issuance of enforcement actions to financial institutions
requiring action to address credit quality, liquidity and risk management and capital adequacy, as
well as other safety and soundness concerns.
Through its authority under the Emergency Economic Stabilization Act of 2008 (the EESA), as
amended by the American Recovery and Reinvestment Act of 2009 (the ARRA), the U.S. Treasury
(Treasury) implemented the TARP Capital Purchase Program (the CPP), a program designed to
bolster eligible healthy institutions by injecting capital into these institutions. We participated
in the CPP in December 2008 so that we could continue to lend and support our current and
prospective clients, especially during this unstable economic environment. Under the terms of our
participation, we received $130 million in exchange for the issuance of preferred stock and a
warrant to purchase common stock and thereby became subject to various requirements, including
certain restrictions on paying dividends on our common stock and repurchasing our equity
securities, unless the U.S. Treasury has consented. Additionally, in order to participate in the
CPP, we were required to adopt certain standards for executive compensation and corporate
governance. We repurchased the preferred stock and the warrant issued to the U.S. Treasury during
2009. See Managements Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Cash Flow and Capital Resources in Part II, Item 7 herein.
Supervision and Regulation
General
We and our subsidiaries are extensively regulated under both federal and state laws.
Regulation and supervision by the federal and state banking agencies is intended primarily for the
protection of depositors and the Deposit Insurance Fund (DIF) administered by the FDIC and not
for the benefit of stockholders. Set forth below is a brief description of key laws and
regulations which relate to our operations. These descriptions are qualified in their entirety by
reference to the applicable laws and regulations. The federal and state agencies regulating the
financial services industry also frequently adopt changes to their regulations.
The Company
As a bank holding company, we are subject to regulation and examination by the FRB under the
Bank Holding Company Act of 1956, as amended (the BHCA). Under the BHCA, the Company is subject
to the Federal Reserves regulations and its authority to:
Require periodic reports and such additional information as the Federal Reserve may require;
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Require bank holding companies to maintain increased levels of capital (See Regulatory
Capital below);
Require that bank holding companies serve as a source of financial and managerial strength
to subsidiary banks and commit resources as necessary to support each subsidiary bank. A
bank holding companys failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and
unsound banking practice or a violation of Federal Reserve regulations or both;
Restrict the ability of bank holding companies to obtain dividends on other distributions
from their subsidiary banks;
Terminate an activity or terminate control of or liquidate or divest certain subsidiaries,
affiliates or investments if the Federal Reserve believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or
stability of any bank subsidiary;
Require the prior approval of senior executive officer or director changes;
Regulate provisions of certain bank holding company debt, including the authority to
impose interest ceilings and reserve requirements on such debt and require prior approval to
purchase or redeem our securities in certain situations;
Approve acquisitions and mergers with banks and consider certain competitive, management,
financial and other factors in granting these approvals in addition to similar California or
other state banking agency approvals which may also be required.
Nonbanking and Financial Activities Subject to certain prior notice or FRB
approval requirements, bank holding companies may engage in any, or acquire shares of companies
engaged in, those nonbanking activities determined by the FRB to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. Companies which elect to be
treated as financial holding companies may also engage in broader securities, insurance, merchant
banking and other activities that are determined to be financial in nature or are incidental or
complementary to activities that are financial in nature without prior FRB approval. Pursuant to
the Gramm-Leach-Bliley Act of 1999 (GLBA), in order to elect and retain financial holding company
status, all depository institution subsidiaries of a bank holding company must be well capitalized,
well managed, and, except in limited circumstances, be in satisfactory compliance with the
Community Reinvestment Act (CRA). Failure to sustain compliance with these requirements or
correct any non-compliance within a fixed time period could lead to divestiture of subsidiary banks
or require all activities to conform to those permissible for a bank holding company. We have not
currently elected to be treated as a financial holding company.
The Company is also a bank holding company within the meaning of the California
Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may
be required to file reports with, the California Department of Financial Institutions (DFI).
Securities Registration Our securities are registered with the Securities Exchange
Commission (SEC) under the Exchange Act of 1934, as amended (the Exchange Act). As such, we
are subject to the information, proxy solicitation, insider trading, corporate governance, and
other requirements and restrictions of the Exchange Act.
The Sarbanes-Oxley Act The Company is subject to the accounting oversight and corporate
governance requirements of the Sarbanes-Oxley Act of 2002, including:
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required executive certification of financial presentations; |
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increased requirements for board audit committees and their members; |
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enhanced disclosure of controls and procedures and internal control over
financial reporting; |
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enhanced controls over, and reporting of, insider trading; and |
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increased penalties for financial crimes and forfeiture of executive bonuses in
certain circumstances. |
The Bank
The federal and California regulatory structure gives the bank regulatory agencies extensive
discretion in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. The regulatory agencies have adopted
guidelines to assist in identifying and addressing potential safety and soundness concerns before
an institutions capital becomes impaired. The guidelines establish operational and managerial
standards generally relating to: (1) internal controls, information systems, and internal audit
systems; (2) loan documentation; (3) credit underwriting; (4) interest-rate exposure; (5) asset
growth and asset quality; and (6) compensation, fees, and benefits. Further, the regulatory
agencies have adopted safety and soundness guidelines for asset quality and for evaluating and
monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital
and reserves. If, as a result of an examination, the DFI or the FDIC should determine that the
financial condition, capital resources, asset quality, earnings prospects, management, liquidity,
or other aspects of the Banks operations are unsatisfactory or that the Bank or its management is
violating or has violated any law or regulation, the DFI and the FDIC, and separately the FDIC as
insurer of the Banks deposits, have residual authority to:
Require affirmative action to correct any conditions resulting from any
violation or practice;
Direct an increase in capital and the maintenance of higher specific minimum
capital ratios, which may preclude the Bank from being deemed well capitalized and
restrict its ability to accept certain brokered deposits;
Restrict the Banks growth geographically, by products and services, or by mergers
and acquisitions;
Enter into informal or formal enforcement orders, including memoranda of
understanding, written agreements and consent or cease and desist orders or prompt
corrective action orders to take corrective action and cease unsafe and unsound
practices;
Require prior approval of senior executive officer or director changes; remove
officers and directors and assess civil monetary penalties; and
Take possession of and close and liquidate the Bank.
Permissible Activities and Subsidiaries California law permits state chartered commercial
banks to engage in any activity permissible for national banks. Therefore, the Bank may form
subsidiaries to engage in the many so-called closely related to banking or nonbanking
activities commonly conducted by national banks in operating subsidiaries or conduct such
activities themselves.
Interstate Banking and Branching Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, bank holding companies and banks generally have the ability to acquire or
merge with banks in other states; and, subject to certain state restrictions, banks may also
acquire or establish new branches outside their home state. Interstate branches are subject to
certain laws of the states in which they are located. The Bank presently does not have any
interstate branches.
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Federal Home Loan Bank System The Bank is a member of the Federal Home Loan Bank
(FHLB) of San Francisco. Among other benefits, each FHLB serves as a reserve or central bank for
its members within its assigned region and makes available loans or advances to its members. Each
FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. As an
FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. At
December 31, 2009, the Bank was in compliance with the FHLBs stock ownership requirement and our
investment in FHLB capital stock totaled $97.6 million. We received $195,000 and $4.6 million from
the FHLB in dividends on FHLB capital stock for the year ended December 31, 2009 and 2008,
respectively. There can be no assurance that the FHLB will pay dividends at the same rate it has
paid in the past, or that it will pay any dividends in the future.
Federal Reserve System The Federal Reserve Board requires all depository institutions to
maintain interest bearing reserves at specified levels against their transaction accounts. At
December 31, 2009, the Bank was in compliance with these requirements.
Dividends and Other Transfers of Funds
Dividends from the Bank constitute the principal source of income to the Company. The Bank is
subject to various statutory and regulatory restrictions on its ability to pay dividends. Under
such restrictions, the amount available for payment of dividends to the Company by the Bank totaled
$108.8 million at December 31, 2009. In addition, the banking agencies have the authority to
prohibit or limit the Bank from paying dividends, depending upon the Banks financial condition, if
such payment is deemed to constitute an unsafe or unsound practice. Furthermore, under the federal
Prompt Corrective Action regulations, the FRB or the FDIC may prohibit a bank holding company from
paying any dividends if the holding companys bank subsidiary is classified as undercapitalized.
See Capital Standards.
Additionally, it is FRB policy that bank holding companies should generally pay dividends on
equity securities and distributions on trust preferred securities only out of income available over
the past year, and only if prospective earnings retention is consistent with the organizations
expected future needs and financial condition. It is also Fed policy that bank holding companies
should not maintain dividend levels that undermine the companys ability to be a source of strength
to its banking subsidiaries or which could raise supervisory concerns. Additionally, in
consideration of the current financial and economic environment, the FRB has indicated that bank
holding companies should carefully review their dividend policy and has discouraged payment ratios
that are at maximum allowable levels unless both asset quality and capital are very strong.
Capital Standards
Bank holding companies and banks are subject to various regulatory capital requirements
administered by state and federal banking agencies. Capital adequacy guidelines and, additionally
for banks, prompt corrective action regulations, involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by regulators about
components, risk weighting and other factors. Federal banking agencies have the authority to
change capital adequacy guidelines. At December 31, 2009, the Companys and the Banks capital
ratios exceed the minimum capital adequacy guideline percentage requirements of the federal banking
agencies and the prompt corrective action regulations for well capitalized institutions. See
Note 17 to the consolidated financial statements for further information regarding the regulatory
capital guidelines as well as the Companys and the Banks actual capitalization as of December 31,
2009.
The federal banking agencies have adopted risk-based minimum capital adequacy guidelines for
bank holding companies and banks which are intended to provide a measure of capital that reflects
the degree
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of risk associated with a banking organizations operations for both transactions
reported on the balance sheet as assets and transactions which are recorded as off-balance sheet
items. The risk-based capital ratio is determined by classifying assets and certain off-balance
sheet financial instruments into weighted categories, with higher levels of capital being required
for those categories perceived as representing greater risk. Bank holding companies and banks
engaged in significant trading activity may also be subject to the market risk capital guidelines
and be required to incorporate additional market and interest rate risk components into their
risk-based capital standards. Under the capital adequacy guidelines, a banking organizations
total capital is divided into tiers. Tier I capital includes common equity and trust-preferred
securities, subject to certain criteria and quantitative limits. Tier II capital includes hybrid
capital instruments, other qualifying debt instruments, a limited amount of the allowance for loan
and lease losses, and a limited amount of unrealized holding gains on equity securities. Tier III
capital consists of qualifying unsecured debt. The sum of Tier II and Tier III capital may not
exceed the amount of Tier I capital. The risk-based capital guidelines require a minimum ratio of
qualifying total capital to risk-weighted assets of 8% and a minimum ratio of Tier I capital to
risk-weighted assets of 4%.
Bank holding companies and banks are also required to comply with minimum leverage ratio
requirements. The leverage ratio is the ratio of a banking organizations Tier 1 capital to its
total adjusted quarterly average assets (as defined for regulatory purposes). The requirements
necessitate a minimum leverage ratio of 4.0%, unless a different minimum is specified by an
appropriate regulatory authority. For a depository institution to be considered well capitalized
under the regulatory framework for prompt corrective action, its leverage ratio must be at least
5.0%.
The following table presents the amounts of regulatory capital and the capital ratios for the
Company, compared to its minimum regulatory capital requirements as of December 31, 2009:
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Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
( amounts in thousands ) |
|
|
|
|
|
|
|
|
|
Leverage ratio |
|
$ |
655,569 |
|
|
|
9.6 |
% |
|
$ |
272,303 |
|
|
|
4.0 |
% |
|
$ |
383,266 |
|
|
|
5.6 |
% |
Tier 1 risk-based ratio |
|
$ |
655,569 |
|
|
|
14.9 |
% |
|
$ |
175,992 |
|
|
|
4.0 |
% |
|
$ |
479,577 |
|
|
|
10.9 |
% |
Total risk-based ratio |
|
$ |
716,182 |
|
|
|
16.3 |
% |
|
$ |
351,500 |
|
|
|
8.0 |
% |
|
$ |
364,682 |
|
|
|
8.3 |
% |
11
The following table presents the amounts of regulatory capital and the capital ratios for the
Bank, compared to its minimum regulatory capital requirements as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
Actual |
|
|
Required |
|
|
Excess |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
( amounts in thousands ) |
|
|
|
|
|
|
|
|
|
Leverage ratio |
|
$ |
652,992 |
|
|
|
9.6 |
% |
|
$ |
272,080 |
|
|
|
4.0 |
% |
|
$ |
380,912 |
|
|
|
5.6 |
% |
Tier 1 risk-based ratio |
|
$ |
652,992 |
|
|
|
14.9 |
% |
|
$ |
175,300 |
|
|
|
4.0 |
% |
|
$ |
477,692 |
|
|
|
10.9 |
% |
Total risk-based ratio |
|
$ |
708,457 |
|
|
|
16.2 |
% |
|
$ |
349,855 |
|
|
|
8.0 |
% |
|
$ |
358,602 |
|
|
|
8.2 |
% |
Basel and Basel II Capital Requirements
The current risk-based capital guidelines which apply to the Company and the Bank are based
upon the 1988 capital accord of the International Basel Committee on Banking Supervision, a
committee of central banks and bank supervisors and regulators from the major industrialized
countries that develops broad policy guidelines for use by each countrys supervisors in
determining the supervisory policies they apply. A new international accord, referred to as Basel
II, became mandatory for large or core international banks outside the U.S. in 2009 (total assets
of $250 billion or more or consolidated foreign exposures of $10 billion or more) and emphasizes
internal assessment of credit, market and operational risk, as well as supervisory assessment and
market discipline in determining minimum capital requirements. It is optional for other banks. The
Basel Committee is currently reconsidering regulatory-capital standards, supervisory and
risk-management requirements and additional disclosures to further strengthen the Basel II
framework in response to recent worldwide economic developments. It is expected the Basel Committee
may reinstitute a minimum leverage ratio requirement. The U.S. banking agencies have indicated
separately that they will retain the minimum leverage requirement for all U.S. banks. It also is
possible that a new tangible common equity ratio standard will be added.
Prompt Corrective Action
The FDIA provides a framework for regulation of depository institutions and their affiliates,
including parent holding companies, by their federal banking regulators. Among other things, it
requires the relevant federal banking regulator to take prompt corrective action with respect to
a depository institution if that institution does not meet certain capital adequacy standards,
including requiring the prompt submission of an acceptable capital restoration plan. Supervisory
actions by the appropriate federal banking regulator under the prompt corrective action rules
generally depend upon an institutions classification within five capital categories as defined in
the regulations. The relevant capital measures are the total capital ratio, the Tier 1 capital
ratio and the leverage ratio. However, the federal banking agencies have also adopted non-capital
safety and soundness standards to assist examiners in identifying and addressing potential safety
and soundness concerns before capital becomes impaired. These include operational and managerial
standards relating to: (i) internal controls, information systems and internal audit systems,
(ii) loan documentation, (iii) credit underwriting, (iv) asset quality and growth, (v) earnings,
(vi) risk management, and (vii) compensation and benefits.
A depository institutions capital tier under the prompt corrective action regulations will
depend upon how its capital levels compare with various relevant capital measures and the other
factors established by the regulation. A bank will be: (i) well capitalized if the institution
has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0%
or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written
directive by any such regulatory authority to meet and maintain a specific capital level for any
capital measure; (ii) adequately capitalized if the institution has a total risk-based capital
ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage
ratio of 4.0% or greater and is not well capitalized; (iii) undercapitalized if the institution
has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of
less than 4.0%
12
or a
leverage ratio of less than 4.0%; (iv) significantly undercapitalized if the institution has
a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than
3.0% or a leverage ratio of less than 3.0%; and (v) critically undercapitalized if the
institutions tangible equity is equal to or less than 2.0% of average quarterly tangible assets.
An institution may be downgraded to, or deemed to be in, a capital category that is lower than
indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if
it receives an unsatisfactory examination rating with respect to certain matters.
The FDIA generally prohibits a depository institution from making any capital distributions
(including payment of a dividend) or paying any management fee to its parent holding company if the
depository institution would thereafter be undercapitalized. Undercapitalized institutions are
subject to growth limitations and are required to submit a capital restoration plan. The agencies
may not accept such a plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository institutions capital.
In addition, for a capital restoration plan to be acceptable, the depository institutions parent
holding company must guarantee that the institution will comply with such capital restoration plan.
The bank holding company must also provide appropriate assurances of performance. The aggregate
liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of
the depository institutions total assets at the time it became undercapitalized and (ii) the
amount which is necessary (or would have been necessary) to bring the institution into compliance
with all capital standards applicable with respect to such institution as of the time it fails to
comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated
as if it is significantly undercapitalized. Significantly undercapitalized depository
institutions may be subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce total assets,
and cessation of receipt of deposits from correspondent banks. Critically undercapitalized
institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well
capitalized insured depository institution as adequately capitalized. The FDIA provides that an
institution may be reclassified if the appropriate federal banking agency determines (after notice
and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the
institution to be engaging in an unsafe or unsound practice. The appropriate agency is also
permitted to require an adequately capitalized or undercapitalized institution to comply with the
supervisory provisions as if the institution were in the next lower category (but not treat a
significantly undercapitalized institution as critically undercapitalized) based on supervisory
information other than the capital levels of the institution.
Premiums for Deposit Insurance
The FDIC insures our customer deposits through the Deposit Insurance Fund (the DIF) up to
prescribed limits for each depositor. Pursuant to the EESA, the maximum deposit insurance amount
has been increased from $100,000 to $250,000 through the end of 2013. The amount of FDIC
assessments paid by each DIF member institution is based on its relative risk of default as
measured by regulatory capital ratios and other supervisory factors. During 2008 and 2009, there
have been higher levels of bank failures which has dramatically increased resolution costs of the
FDIC and depleted the deposit insurance fund. In order to maintain a strong funding position and
restore reserve ratios of the deposit insurance fund, the FDIC has increased assessment rates of
insured institutions and may continue to do so in the future. On May 30, 2009, the FDIC imposed
special assessments on financial institutions to increase reserves in the deposit insurance fund;
the Banks assessment was $3.0 million. As of December 31, 2009, the Banks assessment rate was
between 5 and 7 cents per $100 in assessable deposits. On November 12, 2009, the FDIC adopted a
requirement for institutions to prepay in 2009 their estimated quarterly risk-based assessments for
the fourth quarter of 2009 and for all of 2010, 2011 and 2012.
We prepaid $22.4 million in the fourth quarter of 2009 in accordance with this requirement.
We are generally unable to control the amount of premiums that we are required to pay for FDIC
insurance. If there are additional bank or financial institution failures or if the FDIC otherwise
determines, we may be required to pay even higher FDIC premiums than the recently increased levels.
13
These announced increases and any future increases in FDIC insurance premiums may have a material and
adverse affect on our earnings. Further, all FDIC-insured institutions are required to pay
assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation
(FICO), an agency of the Federal government established to recapitalize the predecessor to the
DIF. The FICO assessment rates, which are determined quarterly, averaged 0.0140% of insured
deposits in fiscal 2009. These assessments will continue until the FICO bonds mature in 2017.
The FDIC implemented two temporary programs under the Temporary Liquidity Guaranty Program
(TLGP) to provide deposit insurance for the full amount of most non-interest bearing transaction
accounts through June 30, 2010 and to guarantee certain unsecured debt of financial institutions
and their holding companies through June 2012. The Bank is participating in the deposit insurance
program.
The FDIC may terminate a depository institutions deposit insurance upon a finding that the
institutions financial condition is unsafe or unsound or that the institution has engaged in
unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the
banks depositors. The termination of deposit insurance for a bank would also result in the
revocation of the banks charter by the DFI.
Loans-to-One Borrower Limitations
With certain limited exceptions, the maximum amount of obligations, secured or unsecured, that
any borrower (including certain related entities) may owe to a California state bank at any one
time may not exceed 25% of the sum of the shareholders equity, allowance for loan losses, capital
notes and debentures of the bank. Unsecured obligations may not exceed 15% of the sum of the
shareholders equity, allowance for loan losses, capital notes and debentures of the bank. The
Bank has established internal loan limits which are lower than the legal lending limits for a
California bank.
Extensions of Credit to Insiders and Transactions with Affiliates
The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or
extensions of credit to:
|
. |
|
a bank or bank holding companys executive officers, directors and principal
shareholders (i.e., in most cases, those persons who own, control or have power to vote
more than 10% of any class of voting securities); |
|
|
. |
|
any company controlled by any such executive officer, director or shareholder;
or |
|
|
. |
|
any political or campaign committee controlled by such executive officer,
director or principal shareholder. |
Such loans and leases:
|
. |
|
must comply with loan-to-one-borrower limits; |
|
|
. |
|
require prior full board approval when aggregate extensions of credit to the
person exceed specified amounts; |
|
|
. |
|
must be made on substantially the same terms (including interest rates and
collateral) and follow credit-underwriting procedures no less stringent than those
prevailing at the time for comparable transactions with non-insiders; |
|
|
. |
|
must not involve more than the normal risk of repayment or present other
unfavorable features; and |
|
|
. |
|
in the aggregate limit not exceed the banks unimpaired capital and unimpaired
surplus. |
California has laws and the DFI has regulations which adopt and also apply Regulation O to the
Bank.
14
The Bank also is subject to certain restrictions imposed by Federal Reserve Act Sections 23A
and 23B and FRB Regulation W on any extensions of credit to, or the issuance of a guarantee or
letter of credit on behalf of, any affiliates, the purchase of, or investments in, stock or other
securities thereof, the taking of such securities as collateral for loans, and the purchase of
assets of any affiliates. Affiliates include parent holding companies, sister banks, sponsored and
advised companies, financial subsidiaries and investment companies whereby the Banks affiliate
serves as investment advisor. Sections 23A and 23B and Regulation W generally:
|
. |
|
prevent any affiliates from borrowing from the Bank unless the loans are
secured by marketable obligations of designated amounts; |
|
|
. |
|
limit such loans and investments to or in any affiliate individually to 10.0%
of the Banks capital and surplus; |
|
|
. |
|
limit such loans and investments to or in any affiliate in the aggregate to
20.0% of the Banks capital and surplus; and |
|
|
. |
|
requires such loans and investments to or in any affiliate to be on terms and
under conditions substantially the same or at least as favorable to the Bank as those
prevailing for comparable transactions with nonaffiliated parties. |
Additional restrictions on transactions with affiliates may be imposed on the Bank under the
FDIA prompt corrective action provisions and the supervisory authority of the federal and state
banking agencies.
USA PATRIOT Act and Anti-Money Laundering Compliance
The USA PATRIOT Act of 2001 and its implementing regulations significantly expanded the
anti-money laundering and financial transparency laws, including the Bank Secrecy Act. The Bank has
adopted comprehensive policies and procedures to address the requirements of the USA PATRIOT Act.
Material deficiencies in anti-money laundering compliance can result in public enforcement actions
by the banking agencies, including the imposition of civil money penalties and supervisory
restrictions on growth and expansion. Such enforcement actions could also have serious reputation
consequences for the Company and the Bank.
Operations and Consumer Compliance Laws
The Bank must comply with numerous federal anti-money laundering and consumer protection
statutes and implementing regulations, including the, the Bank Secrecy Act, the Community
Reinvestment Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the National Flood
Insurance Act and various federal and state privacy protection laws. Noncompliance with these laws
could subject the Bank to lawsuits and could also result in administrative penalties, including,
fines and reimbursements. The Bank and the Company are also subject to federal and state laws
prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair
competition.
Regulation of Nonbank Subsidiaries
Nonbank subsidiaries are subject to additional or separate regulation and supervision by other
state, federal and self-regulatory bodies.
Employees
At February 15, 2010, we employed 825 persons, 583 on a full-time and 242 on a part-time
basis. We believe that our employee relations are satisfactory.
15
Available Information
Reports filed with the Securities and Exchange Commission (the Commission) include our proxy
statements, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K. These reports and other information on file can be inspected and copied on official business
days between 10:00 a.m. and 3:00 p.m. at the public reference facilities of the Commission on file
at 100 F Street, N.E., Washington D.C., 20549. The public may obtain information on the operation
of the public reference rooms by calling the SEC at 1-800-SEC-0330. The Commission maintains a Web
Site that contains the reports, proxy and information statements and other information we file with
them. The address of the site is http://www.sec.gov. The Company also maintains an Internet website
at http://www.cbbank.com. We make available, free of charge through our website, our Proxy
Statement, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and current Report on Form
8-K, and any amendment there to, as soon as reasonably practicable after we file such reports with
the SEC. None of the information contained in or hyperlinked from our website is incorporated into
this Form 10-K.
Executive Officers of the Company
The following sets forth certain information regarding our executive officers as of February
15, 2010:
Executive Officers:
|
|
|
|
|
|
|
Name |
|
Position |
|
Age |
Christopher D. Myers
|
|
President and Chief Executive Officer of the Company and the Bank
|
|
|
47 |
|
Edward J. Biebrich Jr.
|
|
Chief
Financial Officer of the Company and Executive Vice President and
Chief Financial Officer of the Bank
|
|
|
66 |
|
James F. Dowd
|
|
Executive Vice President/Credit Management Division of the Bank
|
|
|
57 |
|
Todd E. Hollander
|
|
Executive Vice President/Sales Division of the Bank
|
|
|
43 |
|
David C. Harvey
|
|
Executive Vice President/Chief Operations Officer
|
|
|
42 |
|
Christopher A. Walters
|
|
Executive Vice President/CitizensTrust Division of the Bank
|
|
|
46 |
|
Mr. Myers assumed the position of President and Chief Executive Officer of the Company and the
Bank on August 1, 2006. Prior to that, Mr. Myers served as Chairman of the Board and Chief
Executive Officer of Mellon First Business Bank from 2004 to 2006. From 1996 to 2003, Mr. Myers
held several management positions with Mellon First Business Bank, including Executive Vice
President, Regional Vice President, and Vice President/Group Manager.
Mr. Biebrich assumed the position of Chief Financial Officer of the Company and Executive Vice
President/Chief Financial Officer of the Bank on February 2, 1998.
Mr. Dowd assumed the position of Executive Vice President and Chief Credit Officer of the Bank
on June 30, 2008. From 2006 to 2008, he served as Executive Vice President and Chief Credit
Officer for Mellon First Business Bank. From 1991 to 2006, Mr. Dowd held several management
positions with City National Bank, including Senior Vice President and Manager of Special Assets,
Deputy Chief Credit Officer, and Interim Chief Credit Officer.
16
Mr. Hollander assumed the position of Executive Vice President of the Bank on May 15, 2008.
From 2005 to 2008, he served as Executive Vice President for the Community Banking Group of
California National Bank. From 2003 to 2005, he served as Executive Vice President for the
Commercial Banking Group of U.S. Bank. From 1990 to 2003, Mr. Hollander held various management
positions with Wells Fargo & Company, Inc. including Executive Vice President, Senior Vice
President, and Vice President of the Business Banking Group.
Mr. Harvey assumed the position of Executive Vice President of the Bank on December 31, 2009.
From 2000 to 2008, he served as Senior Vice President and Operations Manager at Bank of the West.
From 2008 to 2009 he served as Executive Vice President and Commercial and Treasury Services
Manager at Bank of the West.
Mr. Walters assumed the position of Executive Vice President of the Bank on June 27, 2007.
From 2005 to 2006, he served as Senior Vice President for Atlantic Trust. From 2002 to 2004, he
was Director of Private Banking for Citigroup. From 1994 to 2002, he served as a member of the
Executive Committee and held a variety of management positions for Mellon Private Wealth
Management.
17
ITEM 1A. RISK FACTORS
Risk
Factors That May Affect Future Results Together with the other information on the risks
we face and our management of risk contained in this Annual Report or in our other SEC filings, the
following presents significant risks which may affect us. Events or circumstances arising from one
or more of these risks could adversely affect our business, financial condition, operating results
and prospects and the value and price of our common stock could decline. The risks identified
below are not intended to be a comprehensive list of all risks we face and additional risks that we
may currently view as not material may also impair our business operations and results.
Risk Relating to Recent Economic Conditions and Government Response Efforts
Difficult economic and market conditions have adversely affected our industry
Dramatic declines in the housing market, with decreasing home prices and increasing
delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and
construction loans and resulted in significant write-downs of assets by many financial
institutions. General downward economic trends, reduced availability of commercial credit and
increasing unemployment have negatively impacted the credit performance of commercial and consumer
credit, resulting in additional write-downs. Concerns over the stability of the financial markets
and the economy have resulted in decreased lending by financial institutions to their customers and
to each other. These economic conditions, market turmoil, and tightening of credit has led to
increased commercial and consumer deficiencies, lack of customer confidence, increased market
volatility and widespread reduction in general business activity. Financial institutions have
experienced decreased access to deposits and borrowings. The resulting economic pressure on
consumers and businesses and the lack of confidence in the economy and financial markets may
adversely affect our business, financial condition, results of operations and stock price. A
worsening of these conditions would likely exacerbate the adverse effects of these difficult market
conditions on us and others in the financial institutions industry. In particular, we may face the
following risks in connection with these events:
|
|
|
We potentially face increased regulation of our industry. Compliance with such
regulation may increase our costs and limit our ability to pursue business
opportunities. |
|
|
|
|
The process we use to estimate losses inherent in our credit exposure requires
difficult, subjective and complex judgments, including forecasts of economic conditions
and how these economic conditions might impair the ability of our borrowers to repay
their loans. The level of uncertainty concerning economic conditions may adversely
affect the accuracy of our estimates which may, in turn, impact the reliability of the
process. |
|
|
|
|
The value of the portfolio of investment securities that we hold may be adversely
affected. |
|
|
|
|
We may be required to pay significantly higher FDIC premiums because market
developments have significantly depleted the insurance fund of the FDIC and reduced the
ratio of reserves to insured deposits. |
If economic conditions do not significantly improve, or current levels of market disruption
and volatility continue or worsen, there can be no assurance that we will not experience an adverse
effect, which may be material, on our business, financial condition and results of operations.
Legislative and regulatory initiatives to address difficult market and economic conditions may
not stabilize the U.S. banking system, including EESA and ARRA. Future legislation and regulations
may be adopted which could result in a comprehensive overhaul of the U.S. banking system. There can
be no assurance, however, as to the actual impact that legislation and regulations will have on the
financial markets, including the extreme levels of volatility and limited credit availability
currently being
18
experienced. The failure of legislation and regulations to help stabilize the financial markets and
a continuation or worsening of current financial market conditions could have a material, adverse
effect on our business, financial condition, results of operations, access to credit or the value
of our securities.
U.S. and international financial markets and economic conditions could adversely affect our
liquidity, results of operations and financial condition
As
described in Business Economic Conditions, Government Policies, Legislation and
Regulation, recent turmoil and downward economic trends have been particularly acute in the
financial sector. Although the Company and the Bank remain well capitalized and have not suffered
any significant liquidity issues as a result of these recent events, 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 continue to realize the impact of an economic
slowdown and recession including high unemployment rates. In view of the concentration of our
operations and the collateral securing our loan portfolio in Central and Southern California, we
may be particularly susceptible to the adverse economic conditions in the state of California,
where our business is concentrated. 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.
We may be required to make additional provisions for credit losses and charge off additional
loans in the future, which could adversely affect our results of operations
For the year ended December 31, 2009, we recorded an $80.5 million provision for credit losses
and charged off $26.3 million, net of $803,000 in recoveries. There has been a significant slowdown
in the real estate markets in portions of Los Angeles, Riverside, San Bernardino and Orange
counties and the Central Valley area of California where a majority of our loan customers,
including our largest borrowing relationships, are based. This slowdown reflects declining prices
in real estate, excess inventories of homes and increasing vacancies in commercial and industrial
properties, all of which have contributed to financial strain on real estate developers and
suppliers. In addition, the Federal Reserve Board and other government officials have expressed
concerns about banks concentration in commercial real estate lending and the ability of commercial
real estate borrowers to perform pursuant to the terms of their loans. As of December 31, 2009, we
had $2.6 billion in real estate loans (including $2.3 billion in commercial real estate loans) and
$401.5 million in construction loans. Continuing deterioration in the real estate market, and in
particular the commercial real estate market, could affect the ability of our loan customers,
including our largest borrowing relationships, to service their debt, which could result in loan
charge-offs and provisions for credit losses in the future, which could have a material adverse
effect on our financial condition, net income and capital.
Declines in commodity prices may adversely affect our results of operations.
As of December 31, 2009, approximately twelve percent (12%) of our loan portfolio was
comprised of dairy and livestock loans. Recent declines in commodity prices, including milk
prices, could adversely impact the ability of those to whom we have made dairy and livestock loans
to perform under the terms of their borrowing arrangements with us. In particular, declines in
commodity prices could result in additional loan charge-offs and provisions for credit losses in
the future, which could have a material adverse effect on our financial condition, net income and
capital.
Risks Related to Our Market and Business
Our allowance for credit losses may not be adequate to cover actual losses
A significant source of risk arises from the possibility that we could sustain losses because
borrowers, guarantors, and related parties may fail to perform in accordance with the terms of
their loans and leases. The underwriting and credit monitoring policies and procedures that we have
adopted to address this risk
may not prevent unexpected losses that could have a material adverse effect on our business,
financial
19
condition, results of operations and cash flows. We maintain an allowance for credit
losses to provide for loan and lease defaults and non-performance. The allowance is also
appropriately increased for new loan growth. While we believe that our allowance for credit losses
is adequate to cover inherent losses, we cannot assure you that we will not increase the allowance
for credit losses further or that regulators will not require us to increase this allowance.
Liquidity risk could impair our ability to fund operations and jeopardize our financial
condition
Liquidity is essential to our business. An inability to raise funds through deposits,
borrowings, the sale of loans and other sources could have a material adverse effect on our
liquidity. Our access to funding sources in amounts adequate to finance our activities could be
impaired by factors that affect us specifically or the financial services industry in general.
Factors that could detrimentally impact our access to liquidity sources include a decrease in the
level of our business activity due to a market downturn or adverse regulatory action against us.
Our ability to acquire deposits or borrow could also be impaired by factors that are not specific
to us, such as a severe disruption of the financial markets or negative views and expectations
about the prospects for the financial services industry as a whole as the recent turmoil faced by
banking organizations in the domestic and worldwide credit markets deteriorates.
Our loan portfolio is predominantly secured by real estate and thus we have a higher degree of
risk from a downturn in our real estate markets
A further downturn in our real estate markets could hurt our business because many of our
loans are secured by real estate. Real estate values and real estate markets are generally affected
by changes in national, regional or local economic conditions, fluctuations in interest rates and
the availability of loans to potential purchasers, changes in tax laws and other governmental
statutes, regulations and policies and acts of nature, such as earthquakes and national disasters
particular to California. Substantially all of our real estate collateral is located in California.
If real estate values, including values of land held for development, continue to decline, the
value of real estate collateral securing our loans, including loans to our largest borrowing
relationships, could be significantly reduced. Our ability to recover on defaulted loans by
foreclosing and selling the real estate collateral would then be diminished and we would be more
likely to suffer losses on defaulted loans. Additional risks associated with our construction loan
portfolio include failure of contractors to complete construction on a timely basis or at all,
market deterioration during construction, cost overruns and failure to sell or lease the security
underlying the construction loans so as to generate the cash flow anticipated by our borrower.
Continued declines in real estate values coupled with the current economic downturn and an
associated increase in unemployment may result in higher than expected loan delinquencies or
problem assets, a decline in demand for our products and services, or a lack of growth or decrease
in deposits, which may cause us to incur losses, adversely affect our capital or hurt our business.
We are exposed to risk of environmental liabilities with respect to properties to which we
take title
In the course of our business, we may foreclose and take title to real estate, and could be
subject to environmental liabilities with respect to these properties. We may be held liable to a
governmental entity or to third parties for property damage, personal injury, investigation and
clean-up costs incurred by these parties in connection with environmental contamination, or may be
required to investigate or clean-up hazardous or toxic substances, or chemical releases at a
property. The costs associated with investigation or remediation activities could be substantial.
In addition, if we are the owner or former owner of a contaminated site, we may be subject to
common law claims by third parties based on damages and costs resulting from environmental
contamination emanating from the property. If we become subject to significant environmental
liabilities, our business, financial condition, results of operations and prospects could be
adversely affected.
20
We may experience goodwill impairment
If our estimates of segment fair value change due to changes in our businesses or other
factors, we may determine that impairment charges on goodwill recorded as a result of acquisitions
are necessary. Estimates of fair value are determined based on our earnings, the fair value of our
Company as determined by our stock price, and company comparisons. If the fair value of the
Company declines, we may need to recognize goodwill impairment in the future which would have a
material adverse affect on our results of operations and capital levels.
Our business is subject to interest rate risk and variations in interest rates may negatively
affect our financial performance
A substantial portion of our income is derived from the differential or spread between the
interest earned on loans, securities and other interest-earning assets, and interest paid on
deposits, borrowings and other interest-bearing liabilities. Because of the differences in the
maturities and repricing characteristics of our interest-earning assets and interest-bearing
liabilities, changes in interest rates do not produce equivalent changes in interest income earned
on interest-earning assets and interest paid on interest-bearing liabilities. At December 31, 2009
our balance sheet was liability sensitive and, as a result, our net interest margin tends to
decline in a rising interest rate environment and expand in a declining interest rate environment.
Accordingly, fluctuations in interest rates could adversely affect our interest rate spread and, in
turn, our profitability. In addition, loan origination volumes are affected by market interest
rates. Rising interest rates, generally, are associated with a lower volume of loan originations
while lower interest rates are usually associated with higher loan originations. Conversely, in
rising interest rate environments, loan repayment rates may decline and in falling interest rate
environments, loan repayment rates may increase. In addition, in a rising interest rate
environment, we may need to accelerate the pace of rate increases on our deposit accounts as
compared to the pace of future increases in short-term market rates. Accordingly, changes in
levels of market interest rates could materially and adversely affect our net interest spread,
asset quality and loan origination volume.
We are subject to extensive government regulation that could limit or restrict our activities,
which, in turn, may hamper our ability to increase our assets and earnings
Our operations are subject to extensive regulation by federal, state and local governmental
authorities and are subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of our operations. Because our business is highly
regulated, the laws, rules, regulations and supervisory guidance and policies applicable to us are
subject to regular modification and change. Perennially various laws, rules and regulations are
proposed, which, if adopted, could impact our operations by making compliance much more difficult
or expensive, restricting our ability to originate or sell loans or further restricting the amount
of interest or other charges or fees earned on loans or other products.
The short term and long term impact of the new Basel II capital standards and the forthcoming
new capital rules to be proposed for non-Basel II U.S. banks is uncertain
As a result of the recent deterioration in the global credit markets and the potential impact
of increased liquidity risk and interest rate risk, it is unclear what the short term impact of the
implementation of Basel II may be or what impact a pending alternative standardized approach to
Basel II option for non-Basel II U.S. banks may have on the cost and availability of different
types of credit and the potential compliance costs of implementing the new capital standards.
Failure to manage our growth may adversely affect our performance
Our financial performance and profitability depend on our ability to manage past and possible
future growth. Future acquisitions and our continued growth may present operating, integration and
other issues
that could have a material adverse effect on our business, financial condition, results of
operations and cash flows.
21
We may engage in FDIC-assisted transactions, which could present additional risks to our
business.
On October 16, 2009, we acquired substantially all of the assets and assumed substantially all
of the liabilities of San Joaquin Bank from the FDIC. We may have opportunities to acquire the
assets and liabilities of additional failed banks in FDIC-assisted transactions. Although these
FDIC-assisted transactions typically provide for FDIC assistance to an acquiror to mitigate certain
risks, such as sharing exposure to loan losses and providing indemnification against certain
liabilities of the failed institution, we are (and would be in future transactions) subject to many
of the same risks we would face in acquiring another bank in a negotiated transaction, including
risks associated with maintaining customer relationships and failure to realize the anticipated
acquisition benefits in the amounts and within the timeframes we expect. In addition, because
these acquisitions are structured in a manner that would not allow us the time and access to
information normally associated with preparing for and evaluating a negotiated acquisition, we may
face additional risks in FDIC-assisted transactions, including additional strain on management
resources, management of problem loans, problems related to integration of personnel and operating
systems and impact to our capital resources requiring us to raise additional capital. We cannot
assure you that we will be successful in overcoming these risks or any other problems encountered
in connection with FDIC-assisted transactions. Although we have entered into a loss sharing
agreement with the FDIC in connection with our acquisition of loans from San Joaquin Bank, we
cannot guarantee that we will be able to adequately manage the loan portfolio within the limits of
the loss protections provided by the FDIC from the San Joaquin Bank acquisition or any other
FDIC-assisted acquisition we may make. Our inability to overcome these risks could have a material
adverse effect on our business, financial condition and net income
We face strong competition from financial services companies and other companies that offer
banking services
We conduct most of our operations in California. The banking and financial services businesses
in California are highly competitive and increased competition in our primary market area may
adversely impact the level of our loans and deposits. Ultimately, we may not be able to compete
successfully against current and future competitors. These competitors include national banks,
regional banks and other community banks. We also face competition from many other types of
financial institutions, including savings and loan associations, finance companies, brokerage
firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In
particular, our competitors include major financial companies whose greater resources may afford
them a marketplace advantage by enabling them to maintain numerous locations and mount extensive
promotional and advertising campaigns. Areas of competition include interest rates for loans and
deposits, efforts to obtain loan and deposit customers and a range in quality of products and
services provided, including new technology driven products and services. If we are unable to
attract and retain banking customers, we may be unable to continue our loan growth and level of
deposits.
We rely on communications, information, operating and financial control systems technology
from third-party service providers, and we may suffer an interruption in those systems
We rely heavily on third-party service providers for much of our communications, information,
operating and financial control systems technology, including our internet banking services and
data processing systems. Any failure or interruption of these services or systems or breaches in
security of these systems could result in failures or interruptions in our customer relationship
management, general ledger, deposit, servicing and/or loan origination systems. The occurrence of
any failures or interruptions may require us to identify alternative sources of such services, and
we cannot assure you that we could negotiate
terms that are as favorable to us, or could obtain services with similar functionality as
found in our existing systems without the need to expend substantial resources, if at all.
22
We are dependent on key personnel and the loss of one or more of those key personnel may
materially and adversely affect our prospects
Competition for qualified employees and personnel in the banking industry is intense and there
are a limited number of qualified persons with knowledge of, and experience in, the California
community banking industry. The process of recruiting personnel with the combination of skills and
attributes required to carry out our strategies is often lengthy. In addition, legislation and
regulations which impose restrictions on executive compensation may make it more difficult for us
to retain and recruit key personnel. Our success depends to a significant degree upon our ability
to attract and retain qualified management, loan origination, finance, administrative, marketing
and technical personnel and upon the continued contributions of our management and personnel. In
particular, our success has been and continues to be highly dependent upon the abilities of key
executives, including our President and Chief Executive Officer, and certain other employees. In
addition, our success has been and continues to be highly dependent upon the services of our
directors, many of whom are at or nearing retirement age, and we may not be able to identify and
attract suitable candidates to replace such directors.
Managing reputational risk is important to attracting and maintaining customers, investors and
employees
Threats to our reputation can come from many sources, including adverse sentiment about
financial institutions generally, unethical practices, employee misconduct, failure to deliver
minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent
activities of our customers. We have policies and procedures in place to protect our reputation and
promote ethical conduct, but these policies and procedures may not be fully effective. Negative
publicity regarding our business, employees, or customers, with or without merit, may result in the
loss of customers, investors and employees, costly litigation, a decline in revenues and increased
governmental regulation.
Federal and state laws and regulations may restrict our ability to pay dividends
The ability for the Bank to pay dividends to us and for us to pay dividends to our
shareholders is limited by applicable federal and California law and regulations. See
BusinessSupervision and Regulation and Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Cash Flow.
The price of our common stock may be volatile or may decline
The trading price of our common stock may fluctuate widely as a result of a number of factors,
many of which are outside our control. In addition, the stock market is subject to fluctuations in
the share prices and trading volumes that affect the market prices of the shares of many companies.
These broad market fluctuations could adversely affect the market price of our common stock. Among
the factors that could affect our stock price are:
|
|
|
actual or anticipated quarterly fluctuations in our operating results and financial
condition; |
|
|
|
|
changes in revenue or earnings estimates or publication of research reports and
recommendations by financial analysts; |
|
|
|
|
failure to meet analysts revenue or earnings estimates; |
|
|
|
|
speculation in the press or investment community; |
|
|
|
|
strategic actions by us or our competitors, such as acquisitions or restructurings; |
|
|
|
|
actions by institutional shareholders; |
|
|
|
|
fluctuations in the stock price and operating results of our competitors; |
23
|
|
|
general market conditions and, in particular, developments related to market
conditions for the financial services industry; |
|
|
|
|
proposed or adopted regulatory changes or developments; |
|
|
|
|
pending investigations, proceedings or litigation that involve or affect us; or |
|
|
|
|
domestic and international economic factors unrelated to our performance. |
The stock market and, in particular, the market for financial institution stocks, has
experienced significant volatility recently. As a result, the market price of our common stock may
be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and
cause significant price variations to occur. The trading price of the shares of our common stock
and the value of our other securities will depend on many factors, which may change from time to
time, including, without limitation, our financial condition, performance, creditworthiness and
prospects, future sales of our equity or equity related securities, and other factors identified
above in Cautionary Note Regarding Forward-Looking Statement. The capital and credit markets have
been experiencing volatility and disruption for more than two years. In some cases, the markets
have produced downward pressure on stock prices and credit availability for certain issuers without
regard to those issuers underlying financial strength. A significant decline in our stock price
could result in substantial losses for individual shareholders and could lead to costly and
disruptive securities litigation.
Anti-takeover provisions and federal law may limit the ability of another party to acquire us,
which could cause our stock price to decline
Various provisions of our articles of incorporation and by-laws and certain other actions we
have taken could delay or prevent a third-party from acquiring us, even if doing so might be
beneficial to our shareholders. These include, among other things, a shareholder rights plan and
the authorization to issue blank check preferred stock by action of the board of directors acting
alone, thus without obtaining shareholder approval. The Bank Holding Company Act of 1956, as
amended, and the Change in Bank Control Act of 1978, as amended, together with federal regulations,
require that, depending on the particular circumstances, either Federal Reserve approval must be
obtained or notice must be furnished to the Federal Reserve and not disapproved prior to any person
or entity acquiring control of a state member bank, such as the Bank. These provisions may
prevent a merger or acquisition that would be attractive to shareholders and could limit the price
investors would be willing to pay in the future for our common stock.
Changes in stock market prices could reduce fee income from our brokerage, asset management
and investment advisory businesses
We earn substantial wealth management fee income for managing assets for our clients and also
providing brokerage and investment advisory services. Because investment management and advisory
fees are often based on the value of assets under management, a fall in the market prices of those
assets could reduce our fee income. Changes in stock market prices could affect the trading
activity of investors, reducing commissions and other fees we earn from our brokerage business.
We may face other risks
From time to time, we detail other risks with respect to our business and/or financial results
in our filings with the Securities and Exchange Commission.
For further discussion on additional areas of risk, see Item 7. Managements Discussion and
Analysis of Financial Condition and the Results of Operations Risk Management.
24
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
The principal executive offices of the Company and the Bank are located in Ontario,
California, and are owned by the Company.
At December 31, 2009, the Bank occupied the premises for 42 of its Business Financial and
Commercial Banking Centers under leases expiring at various dates from 2010 through 2020, at which
time we can exercise options that could extend certain leases through 2026. We own the premises for
nine of our offices which include seven Business Financial Centers, and our Corporate Headquarters
and Operations Center, both located in Ontario, California.
At December 31, 2009, our consolidated investment in premises and equipment, net of
accumulated depreciation and amortization totaled $41.4 million. Our total occupancy expense,
exclusive of furniture and equipment expense, for the year ended December 31, 2009, was $11.6
million. We believe that our existing facilities are adequate for our present purposes. The Company
believes that if necessary, it could secure suitable alternative facilities on similar terms
without adversely affecting operations. For additional information concerning properties, see Notes
7 and 12 of the Notes to the Consolidated Financial Statements included in this report. See Item
8. Financial Statements and Supplemental Data.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company and the Bank are parties to claims and legal proceedings arising
in the ordinary course of business. After taking into consideration information furnished by
counsel, we believe that the ultimate aggregate liability represented thereby, if any, will not
have a material adverse effect on our consolidated financial position or results of operations.
ITEM 4. RESERVED
25
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq Global Select National Market under the symbol
CVBF. The following table presents the high and low sales prices and dividend information for
our common stock during each quarter for the past two years. The Company had approximately 1,912
shareholders of record as of February 15, 2010.
|
|
|
|
|
|
|
|
|
|
|
Two Year Summary of Common Stock Prices |
Quarter |
|
|
|
|
|
|
Ended |
|
High |
|
Low |
|
Dividends |
3/31/2008
|
|
$ |
11.45 |
|
|
$ |
8.40 |
|
|
$0.085 Cash Dividend |
6/30/2008
|
|
$ |
12.62 |
|
|
$ |
9.18 |
|
|
$0.085 Cash Dividend |
9/30/2008
|
|
$ |
20.00 |
|
|
$ |
7.12 |
|
|
$0.085 Cash Dividend |
12/31/2008
|
|
$ |
14.75 |
|
|
$ |
8.58 |
|
|
$0.085 Cash Dividend |
|
|
|
|
|
|
|
|
|
|
|
3/31/2009
|
|
$ |
12.11 |
|
|
$ |
5.31 |
|
|
$0.085 Cash Dividend |
6/30/2009
|
|
$ |
7.77 |
|
|
$ |
5.69 |
|
|
$0.085 Cash Dividend |
9/30/2009
|
|
$ |
8.70 |
|
|
$ |
4.90 |
|
|
$0.085 Cash Dividend |
12/31/2009
|
|
$ |
9.00 |
|
|
$ |
6.93 |
|
|
$0.085 Cash Dividend |
For information on the statutory and regulatory limitations on the ability of the Company
to pay dividends to its shareholders and on the Bank to pay dividends to the Company, see Item 1.
Business-Supervision and RegulationDividends and Other Transfers of Funds and Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity
and Cash Flow.
Issuer Purchases of Equity Securities
On July 16, 2008, our Board of Directors approved a program to repurchase up to 5,390,482
shares of our common stock. This program was combined with the 4,609,518 shares remaining from our
previous stock repurchase program, approved in August 2007. As of December 31, 2009, we have the
authority to repurchase up to 10,000,000 shares of our common stock (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. We made no repurchases
of our common stock during the year ended December 31, 2009. There is no expiration date for our
current stock repurchase program.
Performance Graph
The following Performance Graph and related information shall not be deemed soliciting
material or be filed with the Securities and Exchange Commission, nor shall such information be
incorporated by reference into any future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that the Company specifically
incorporates it by reference into such filing.
The following graph compares the yearly percentage change in CVB Financial Corp.s cumulative
total shareholder return (stock price appreciation plus reinvested dividends) on common stock (i)
the cumulative total return of the Nasdaq National Market; and (ii) a published index comprised by
Hemscott, Inc. of banks and bank holding companies in the Pacific region (the industry group line
depicted below). The graph assumes an initial investment of $100 on December 31, 2003, and
reinvestment of dividends through December 31, 2009. Points on the graph represent the performance
as of the last business day of each of the years indicated. The graph is not necessarily indicative
of future price performance.
26
COMPARISON
OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG CVB FINANCIAL CORP., NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company/Index/Market |
|
|
2004 |
|
|
|
2005 |
|
|
|
2006 |
|
|
|
2007 |
|
|
|
2008 |
|
|
|
2009 |
|
|
|
CVB Financial Corporation |
|
|
$ |
100.00 |
|
|
|
$ |
97.25 |
|
|
|
$ |
88.55 |
|
|
|
$ |
71.76 |
|
|
|
$ |
85.71 |
|
|
|
$ |
65.28 |
|
|
|
NASDAQ Market Index |
|
|
$ |
100.00 |
|
|
|
$ |
102.20 |
|
|
|
$ |
112.68 |
|
|
|
$ |
124.57 |
|
|
|
$ |
74.71 |
|
|
|
$ |
108.56 |
|
|
|
Hemscott Group Index |
|
|
$ |
100.00 |
|
|
|
$ |
104.73 |
|
|
|
$ |
109.26 |
|
|
|
$ |
78.40 |
|
|
|
$ |
53.72 |
|
|
|
$ |
48.91 |
|
|
|
27
ITEM 6. SELECTED FINANCIAL DATA
The following table reflects selected financial information at and for the five years ended
December 31. Throughout the past five years, the Company has acquired other banks. This may affect
the comparability of the data.
Item 6. Selected Financial Data
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
( Amounts and numbers in thousands except per share amounts) |
|
Interest Income |
|
$ |
310,759 |
|
|
$ |
332,518 |
|
|
$ |
341,277 |
|
|
$ |
316,091 |
|
|
$ |
246,884 |
|
Interest Expense |
|
|
88,495 |
|
|
|
138,839 |
|
|
|
180,135 |
|
|
|
147,464 |
|
|
|
77,436 |
|
|
|
|
Net Interest Income |
|
|
222,264 |
|
|
|
193,679 |
|
|
|
161,142 |
|
|
|
168,627 |
|
|
|
169,448 |
|
|
|
|
Provision for Credit Losses |
|
|
80,500 |
|
|
|
26,600 |
|
|
|
4,000 |
|
|
|
3,000 |
|
|
|
|
|
Other Operating Income |
|
|
81,071 |
|
|
|
34,457 |
|
|
|
31,325 |
|
|
|
33,258 |
|
|
|
27,505 |
|
Other Operating Expenses |
|
|
133,586 |
|
|
|
115,788 |
|
|
|
105,404 |
|
|
|
95,824 |
|
|
|
90,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
89,249 |
|
|
|
85,748 |
|
|
|
83,063 |
|
|
|
103,061 |
|
|
|
106,900 |
|
Income Taxes |
|
|
23,830 |
|
|
|
22,675 |
|
|
|
22,479 |
|
|
|
32,481 |
|
|
|
36,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS |
|
$ |
65,419 |
|
|
$ |
63,073 |
|
|
$ |
60,584 |
|
|
$ |
70,580 |
|
|
$ |
70,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Common Share (1) |
|
$ |
0.56 |
|
|
$ |
0.75 |
|
|
$ |
0.72 |
|
|
$ |
0.84 |
|
|
$ |
0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share (1) |
|
$ |
0.56 |
|
|
$ |
0.75 |
|
|
$ |
0.72 |
|
|
$ |
0.83 |
|
|
$ |
0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Declared Per Common Share |
|
$ |
0.340 |
|
|
$ |
0.340 |
|
|
$ |
0.340 |
|
|
$ |
0.355 |
|
|
$ |
0.420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends paid on Common Shares |
|
|
32,228 |
|
|
|
28,317 |
|
|
|
28,479 |
|
|
|
27,876 |
|
|
|
27,963 |
|
Dividend Pay-Out Ratio (3) |
|
|
49.26 |
% |
|
|
44.90 |
% |
|
|
47.01 |
% |
|
|
39.50 |
% |
|
|
39.60 |
% |
Weighted Average Common Shares (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
92,955,172 |
|
|
|
83,120,817 |
|
|
|
83,600,316 |
|
|
|
84,154,216 |
|
|
|
84,139,254 |
|
Diluted |
|
|
93,055,801 |
|
|
|
83,335,503 |
|
|
|
84,005,941 |
|
|
|
84,813,875 |
|
|
|
84,911,893 |
|
Common Stock Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at year end (1) |
|
|
106,231,511 |
|
|
|
83,270,263 |
|
|
|
83,164,906 |
|
|
|
84,281,722 |
|
|
|
84,073,227 |
|
Book Value Per Share (1) |
|
$ |
6.01 |
|
|
$ |
5.92 |
|
|
$ |
5.11 |
|
|
$ |
4.60 |
|
|
$ |
4.07 |
|
Financial Position: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
6,739,769 |
|
|
$ |
6,649,651 |
|
|
$ |
6,293,963 |
|
|
$ |
6,092,248 |
|
|
$ |
5,422,283 |
|
Investment Securities available-for-sale |
|
|
2,108,463 |
|
|
|
2,493,476 |
|
|
|
2,390,566 |
|
|
|
2,582,902 |
|
|
|
2,369,892 |
|
Net Non-Covered Loans |
|
|
3,499,455 |
|
|
|
3,682,878 |
|
|
|
3,462,095 |
|
|
|
3,042,459 |
|
|
|
2,640,660 |
|
Covered Loans (6) |
|
|
455,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
4,438,654 |
|
|
|
3,508,156 |
|
|
|
3,364,349 |
|
|
|
3,406,808 |
|
|
|
3,424,045 |
|
Borrowings |
|
|
1,488,250 |
|
|
|
2,345,473 |
|
|
|
2,339,809 |
|
|
|
2,139,250 |
|
|
|
1,496,000 |
|
Junior Subordinated debentures |
|
|
115,055 |
|
|
|
115,055 |
|
|
|
115,055 |
|
|
|
108,250 |
|
|
|
82,476 |
|
Stockholders Equity |
|
|
638,228 |
|
|
|
614,892 |
|
|
|
424,948 |
|
|
|
387,325 |
|
|
|
342,189 |
|
Equity-to-Assets Ratio (2) |
|
|
9.47 |
% |
|
|
9.25 |
% |
|
|
6.75 |
% |
|
|
6.36 |
% |
|
|
6.31 |
% |
Financial Performance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income to Beginning Equity |
|
|
10.64 |
% |
|
|
14.84 |
% |
|
|
15.64 |
% |
|
|
20.63 |
% |
|
|
22.13 |
% |
Net Income to Average Equity (ROE) |
|
|
10.00 |
% |
|
|
13.75 |
% |
|
|
15.00 |
% |
|
|
19.45 |
% |
|
|
20.77 |
% |
Net Income to Average Assets (ROA) |
|
|
0.98 |
% |
|
|
0.99 |
% |
|
|
1.00 |
% |
|
|
1.22 |
% |
|
|
1.44 |
% |
Net Interest Margin (TE) (4) |
|
|
3.75 |
% |
|
|
3.41 |
% |
|
|
3.03 |
% |
|
|
3.30 |
% |
|
|
3.86 |
% |
Efficiency Ratio (5) |
|
|
59.95 |
% |
|
|
57.45 |
% |
|
|
55.93 |
% |
|
|
48.18 |
% |
|
|
45.72 |
% |
Credit Quality (Non-covered Loans): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses |
|
$ |
108,924 |
|
|
$ |
53,960 |
|
|
$ |
33,049 |
|
|
$ |
27,737 |
|
|
$ |
23,204 |
|
Allowance/Net Non-Covered Loans |
|
|
3.02 |
% |
|
|
1.44 |
% |
|
|
0.95 |
% |
|
|
0.90 |
% |
|
|
0.87 |
% |
Total Non-Covered Non-Accrual Loans |
|
$ |
69,779 |
|
|
$ |
17,684 |
|
|
$ |
1,435 |
|
|
$ |
|
|
|
$ |
|
|
Non-Covered Non-Accrual Loans/Total Non-Covered Loans |
|
|
1.93 |
% |
|
|
0.47 |
% |
|
|
0.04 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Allowance/Non-Covered Non-Accrual Loans |
|
|
156.10 |
% |
|
|
305.13 |
% |
|
|
2,303 |
% |
|
|
|
|
|
|
|
|
Net (Recoveries)/Charge-offs |
|
$ |
25,536 |
|
|
$ |
5,689 |
|
|
$ |
1,358 |
|
|
$ |
(1,533 |
) |
|
$ |
46 |
|
Net (Recoveries)/Charge-Offs/Average Loans |
|
|
0.68 |
% |
|
|
0.16 |
% |
|
|
0.04 |
% |
|
|
-0.05 |
% |
|
|
0.00 |
% |
Regulatory Capital Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio |
|
|
9.6 |
% |
|
|
9.8 |
% |
|
|
7.6 |
% |
|
|
7.8 |
% |
|
|
7.7 |
% |
Tier 1 Capital |
|
|
14.9 |
% |
|
|
14.2 |
% |
|
|
11.0 |
% |
|
|
12.2 |
% |
|
|
11.3 |
% |
Total Capital |
|
|
16.3 |
% |
|
|
15.5 |
% |
|
|
12.0 |
% |
|
|
13.0 |
% |
|
|
12.0 |
% |
For the Bank: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio |
|
|
9.6 |
% |
|
|
9.7 |
% |
|
|
7.1 |
% |
|
|
7.0 |
% |
|
|
7.3 |
% |
Tier 1 Capital |
|
|
14.9 |
% |
|
|
13.9 |
% |
|
|
10.5 |
% |
|
|
11.0 |
% |
|
|
10.8 |
% |
Total Capital |
|
|
16.2 |
% |
|
|
15.2 |
% |
|
|
11.3 |
% |
|
|
11.8 |
% |
|
|
11.5 |
% |
|
|
|
(1) |
|
All per share information has been retroactively adjusted to reflect the 10% stock dividend
declared December 20, 2006 and paid January 19, 2007 and the 5-for-4 stock split declared on
December 21, 2005, which became effective January 10, 2006. Cash dividends declared per share are
not restated in accordance with generally accepted accounting principles. |
|
(2) |
|
Stockholders equity divided by total assets. |
|
(3) |
|
Cash dividends on common stock divided by net
earnings. |
|
(4) |
|
Net interest income (TE) divided by
total average earning assets |
|
(5) |
|
Noninterest expense divided by total revenue (net interest income, after provision for credit
losses, and other operating income). |
|
(6) |
|
Covered loans are those loans acquired from SJB and covered by a loss sharing agreement with
the FDIC. |
28
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
GENERAL
Managements discussion and analysis is written to provide greater detail of the results of
operations and the financial condition of CVB Financial Corp. and its subsidiaries. This analysis
should be read in conjunction with the audited financial statements contained within this report
including the notes thereto.
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 First Coastal Bancshares (FCB) in June 2007, we acquired FCB Capital 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.
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 and borrowings, and salaries and benefits
expense. As such our net income is subject to fluctuations in interest rates which impact our
income statement. We are also subject to competition from other financial institutions, which may
affect our pricing of products and services, and the fees and interest rates we can charge on them.
Economic conditions in our California service area impact our business. We have seen a
significant decline in the housing market resulting in slower growth in construction loans.
Unemployment is high in our market areas and areas of our marketplace have been significantly
impacted by adverse economic conditions, both nationally and in California. Approximately 21% of
our total non-covered loan portfolio of $3.6 billion is located in the Inland Empire region of
California. The balance of the portfolio is from outside of this region. Our provision for credit
losses for 2009, which was significantly higher than our provision for credit losses for 2008,
reflects an increase in our classified loans, as we continued to see the impact of deteriorating
economic conditions on our loan portfolio. Continued weaknesses in the local and state economy,
including the effects of the high unemployment rate, 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 both acquisitions and organic growth. Since
2000, we have acquired five banks and a leasing company, and we have opened four de novo branches:
Bakersfield, Fresno, Madera, and Stockton, California. We also opened five Commercial Banking
Centers since 2008. In October 2009, we acquired San Joaquin Bank in an FDIC-assisted acquisition.
Through this acquisition, we acquired $489.1 million in loans, $25.3 million in investment
securities, $530.0 million in deposits, and $121.4 million in borrowings. The foregoing amounts
are reflected at fair value as of the acquisition date. The acquisition has been accounted for
under the purchase accounting method which resulted in an after-tax gain of $12.3 million which is
included in 2009 earnings. The gain is based on fair values. The
determination of fair values and calculation of after-tax gain is described more fully in Note 2
Federally Assisted Acquisition of San Joaquin Bank in the notes to the consolidated financial
statements.
We will continue to consider both organic growth and acquisition opportunities in the future,
including FDIC-assisted acquisitions, which will enable us to meet our business objectives and
enhance shareholder value.
29
In connection with the acquisition of San Joaquin Bank, the Bank entered into a loss sharing
agreement with the FDIC, whereby the FDIC will cover a substantial portion of any future losses on
certain acquired assets from San Joaquin Bank. The acquired assets subject to the loss sharing
agreement are referred to herein collectively as covered assets, which consist of OREO and loans.
The loans we acquired are referred to herein as covered loans. Under the terms of such loss
sharing agreement, the FDIC will absorb 80% of losses and share in 80% of loss recoveries up to
$144.0 million with respect to covered assets, after a first loss amount of $26.7 million, which is
assumed by the Company. The FDIC will reimburse the Bank for 95% of losses and share in 95% of
loss recoveries in excess of $144.0 million with respect to covered assets. The loss sharing
agreement is in effect for 5 years for commercial loans and 10 years for single-family residential
loans from the October 16, 2009 acquisition date and the loss recovery provisions are in effect for
8 and 10 years, respectively for commercial and single-family residential loans from the
acquisition date.
Our net interest income before provision for credit losses of $222.3 million in 2009,
increased by $28.6 million or 14.76%, compared to net interest income before provision for credit
losses of $193.7 million for 2008. The Bank has always had an excellent base of interest free
deposits primarily due to our specialization in businesses and professionals as customers. As of
December 31, 2009, 35.2% of our deposits are interest-free. This has allowed us to have a low cost
of deposits, currently 0.63% for 2009, which contributed to a reduction in interest expense for
2009 compared to the same period last year.
Our net income increased to $65.4 million in 2009 compared with $63.1 million in 2008, an
increase of $2.3 million or 3.72%. The increase of $2.3 million in net income is primarily the
result of a substantial decrease in interest expense, offset by a decline in interest income, and a
$53.9 million increase in our provision for credit losses.
Diluted earnings per common share decreased $0.19, from $0.75 in 2008 to $0.56 in 2009 as a
result of TARP preferred stock dividends, which amounted to $4.3 million in the aggregate in 2009
and an increase in the number of our outstanding shares of common stock as a result of our
completion of an underwritten stock offering in July, 2009 in which we received $132.5 million in
gross proceeds ($126.1 million net proceeds). The net proceeds were used, along with other funds,
to repurchase the preferred stock and outstanding warrant issued to the United States Treasury as
part of our participation in the Capital Purchase Program.
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 assessment, 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 and lease 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
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation -
Risk Management.
30
Investment Portfolio: The investment portfolio is an integral part of our financial
performance. We invest primarily in fixed income securities. Accounting estimates are used in the
presentation of the investment portfolio and these estimates do impact the presentation of our
financial condition and results of operations. We classify securities as held-to-maturity those
debt securities that we have the positive intent and ability to hold to maturity. Securities
classified as trading are those securities that are bought and held principally for the purpose of
selling them in the near term. All other debt and equity securities are classified as
available-for-sale. Securities held-to-maturity are accounted for at cost and adjusted for
amortization of premiums and accretion of discounts. Trading securities are accounted for at fair
value with the unrealized holding gains and losses being included in current earnings. Securities
available-for-sale are accounted for at fair value, with the net unrealized gains and losses, net
of income tax effects, presented as a separate component of stockholders equity. At each reporting
date, 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. 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 arrived at by use of internal and external valuation techniques. The excess
purchase price is allocated to assets and liabilities respectively, resulting in 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.
Acquired Loans: Loans acquired from SJB were recorded at fair value as of the acquisition
date. In estimating the fair value, the portfolio was segregated into two groups: credit-impaired
covered loans and other covered loans. Credit-impaired loans are those loans showing evidence
of credit deterioration since origination and it is probable, at the date of acquisition, that the
Company will not collect all contractually required principal and interest payments. For the
credit-impaired loans, the fair value was estimated by using observable market data for similar
types of loans. For the other covered loans, the fair value was estimated by calculating the
undiscounted expected cash flows based on estimated levels of prepayments, default factors, and
loss severities and discounting the expected cash flows at a market rate. Significant estimates are
used in calculating the fair value of acquired loans; as a result, actual results may be different than
estimates.
Fair Value of Financial Instruments: We use fair value measurements to record fair value
adjustments to certain financial instruments and to determine fair value disclosures. Investments
securities available-for-sale and interest-rate swaps are financial instruments recorded at fair
value on a recurring basis. Additionally, from time to time, we may be required to record at fair
value other financial assets on a non-recurring basis, such as impaired loans and OREO. These
nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market
accounting or write-downs of individual assets. Further, we include in the Notes to Financial
Statements information about the extent to which fair value is used to measure assets and
liabilities, the valuation methodologies used and its impact to earnings. Additionally, for
financial instruments not recorded at fair value we disclose the estimate of their fair value.
ANALYSIS OF THE RESULTS OF OPERATIONS
The following table summarizes net earnings, earnings per common share, and key financial
ratios for the periods indicated.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
(Dollars in thousands, |
|
|
except per share amounts) |
Net earnings |
|
$ |
65,419 |
|
|
$ |
63,073 |
|
|
$ |
60,584 |
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1) |
|
$ |
0.56 |
|
|
$ |
0.75 |
|
|
$ |
0.72 |
|
Diluted (1) |
|
$ |
0.56 |
|
|
$ |
0.75 |
|
|
$ |
0.72 |
|
Return on average assets |
|
|
0.98 |
% |
|
|
0.99 |
% |
|
|
1.00 |
% |
Return on average shareholders equity |
|
|
10.00 |
% |
|
|
13.75 |
% |
|
|
15.00 |
% |
|
|
|
(1) |
|
Of the decrease in earnings and diluted earnings per common share for 2009, $0.14 is due
to the preferred stock dividend and discount amortization and $0.07 is due to the increase in
weighted common shares outstanding as a result of our capital offering. |
Earnings
We reported net earnings of $65.4 million for the year ended December 31, 2009. This
represented an increase of $2.3 million, or 3.72%, over net earnings of $63.1 million for the year
ended December 31, 2008. Net earnings for 2008 increased $2.5 million to $63.1 million, or 4.11%,
from net earnings of $60.6 million for the year ended December 31, 2007. Basic and diluted earnings
per common share were $0.56 in 2009, as compared to $0.75 in 2008, and $0.72 in 2007.
The increase in net earnings for 2009 compared to 2008 was primarily the result of an increase
in net interest income before provision for credit losses, gain on sale of investment securities
and gain on acquisition of SJB, offset by an increase in loan loss provision and other operating
expenses. The increase in net earnings for 2008 compared to 2007 was primarily the result of an
increase in net interest income and other operating income, offset by an increase in loan loss
provision and other operating expenses. The net earnings in 2009 and 2008 reflect the decrease in
interest rates during those years and the impact on our net interest margin.
For 2009, our return on average assets was 0.98%, compared to 0.99% for 2008, and 1.00% for
2007. Our return on average stockholders equity was 10.00% for 2009, compared to a return of
13.75% for 2008, and 15.00% for 2007. The decrease in return on average assets is due to an
increase in total average assets over 2008. The decrease in return on average stockholders equity
is due to the outstanding preferred stock during 2009 and increase in common stock from the capital
stock offering in 2009.
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 net interest income during changing interest rate
environments will have a significant impact on our overall performance. Our balance sheet is
currently liability-sensitive; meaning interest-bearing liabilities will generally reprice more
quickly than earning assets. Therefore, our net interest margin is likely to decrease in sustained
periods of rising interest rates and increase in sustained periods of declining interest rates. We
manage net interest income through affecting changes in the mix of earning assets as well as the
mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in
proportion to earning assets, and in the growth of earning assets.
32
Our net interest income, before provision for credit losses totaled $222.3 million for 2009.
This represented an increase of $28.6 million, or 14.76%, over net interest income of $193.7
million for 2008. Net interest income for 2008 increased $32.5 million, or 20.19%, over net
interest income of $161.1 million for 2007. The increase in net interest income of $28.6 million
for 2009 resulted from a decrease of $50.3 million in interest expense overshadowed by a decrease
of $21.7 million in interest income. The decrease in interest expense of $50.3 million resulted
from the decrease in average rate paid on interest-bearing liabilities to 1.97% in 2009 from 3.01%
in 2008, and a decrease in average interest-bearing liabilities of $116.9 million. The decrease of
$21.7 million in interest income resulted from the decrease in the average yield on
interest-earning assets to 5.17% in 2009 from 5.71% in 2008, offset by an increase of $194.3
million in average interest-earning assets. Our loan portfolio includes loans with interest
rate floors which mitigate the risk of significant future decline.
The increase in net interest income before provision for credit losses of $32.5 million for
2008 as compared to 2007 resulted from a decrease of $41.3 million in interest expense which
overshadowed an $8.8 million decrease in interest income. The decrease in interest expense of $41.3
million resulted from the decrease in average rate paid on interest-bearing liabilities to 3.01% in
2008 from 4.11% in 2007, offset by an increase of average interest-bearing liabilities of $259.1
million. The decrease of $8.8 million in interest income resulted from the decrease in the average
yield on interest-earning assets to 5.71% in 2008 from 6.17% in 2007, offset by an increase of
$341.6 million in average interest-earning assets.
Interest income totaled $310.8 million for 2009. This represented a decrease of $21.8 million,
or 6.54%, compared to total interest income of $332.5 million for 2008. For 2008, total interest
income decreased $8.8 million, or 2.57%, from total interest income of $341.3 million for 2007.
The decrease in total interest income during 2009 and 2008 was primarily due to the decrease in
interest rates, partially offset by the growth in average earning assets.
Interest income includes dividends earned on our investment in FHLB capital stock. For the
year ended December 31, 2009, 2008 and 2007, our interest income from dividends earned on FHLB
stock totaled $195,000, $4.6 million and $4.2 million, respectively. The FHLB announced that there
can be no assurance that the FHLB will pay dividends at the same rate it has paid in the past, or
that it will pay any dividends in the future, which, in both cases, would adversely affect our
interest income as compared to prior periods.
Interest expense totaled $88.5 million for 2009. This represented a decrease of $50.3 million,
or 36.26%, from total interest expense of $138.8 million for 2008. For 2008, total interest expense
decreased $41.3 million, or 22.93%, from total interest expense of $180.1 million for 2007. The
decrease in interest expense during 2009 and 2008 was due to the decrease in interest rates on
deposits and borrowed funds, partially offset by the change in average borrowed funds.
Table 1 represents the composition of average interest-earning assets and average
interest-bearing liabilities by category for the periods indicated, including the changes in
average balance, composition, and yield/rate between these respective periods:
33
TABLE 1 Distribution of Average Assets, Liabilities, and Stockholders Equity; Interest
Rates and Interest Differentials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve-month period ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
1,651,983 |
|
|
$ |
76,771 |
|
|
|
4.67 |
% |
|
$ |
1,766,754 |
|
|
$ |
86,930 |
|
|
|
4.97 |
% |
|
$ |
1,722,605 |
|
|
$ |
85,899 |
|
|
|
4.99 |
% |
Tax preferenced (1) |
|
|
675,799 |
|
|
|
27,356 |
|
|
|
5.71 |
% |
|
|
675,309 |
|
|
|
28,371 |
|
|
|
5.91 |
% |
|
|
666,278 |
|
|
|
29,231 |
|
|
|
5.88 |
% |
Investment in FHLB stock |
|
|
93,989 |
|
|
|
195 |
|
|
|
0.21 |
% |
|
|
89,601 |
|
|
|
4,552 |
|
|
|
5.08 |
% |
|
|
80,789 |
|
|
|
4,229 |
|
|
|
5.23 |
% |
Federal Funds Sold & Interest Bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with other institutions |
|
|
76,274 |
|
|
|
358 |
|
|
|
0.47 |
% |
|
|
1,086 |
|
|
|
39 |
|
|
|
3.59 |
% |
|
|
1,876 |
|
|
|
109 |
|
|
|
5.81 |
% |
Loans HFS |
|
|
153 |
|
|
|
5 |
|
|
|
3.27 |
% |
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
Loans (2) (3) |
|
|
3,735,339 |
|
|
|
206,074 |
|
|
|
5.52 |
% |
|
|
3,506,510 |
|
|
|
212,626 |
|
|
|
6.06 |
% |
|
|
3,226,086 |
|
|
|
221,809 |
|
|
|
6.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets |
|
|
6,233,537 |
|
|
|
310,759 |
|
|
|
5.17 |
% |
|
|
6,039,260 |
|
|
|
332,518 |
|
|
|
5.71 |
% |
|
|
5,697,634 |
|
|
|
341,277 |
|
|
|
6.17 |
% |
Total Non Earning Assets |
|
|
408,945 |
|
|
|
|
|
|
|
|
|
|
|
355,653 |
|
|
|
|
|
|
|
|
|
|
|
382,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
6,642,482 |
|
|
|
|
|
|
|
|
|
|
$ |
6,394,913 |
|
|
|
|
|
|
|
|
|
|
$ |
6,080,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Deposits (4) |
|
$ |
1,366,355 |
|
|
$ |
10,336 |
|
|
|
0.76 |
% |
|
$ |
1,238,810 |
|
|
$ |
16,413 |
|
|
|
1.32 |
% |
|
$ |
1,288,745 |
|
|
$ |
31,764 |
|
|
|
2.46 |
% |
Time Deposits |
|
|
1,195,378 |
|
|
|
14,620 |
|
|
|
1.22 |
% |
|
|
769,827 |
|
|
|
19,388 |
|
|
|
2.52 |
% |
|
|
844,667 |
|
|
|
37,533 |
|
|
|
4.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits |
|
|
2,561,733 |
|
|
|
24,956 |
|
|
|
0.97 |
% |
|
|
2,008,637 |
|
|
|
35,801 |
|
|
|
1.78 |
% |
|
|
2,133,412 |
|
|
|
69,297 |
|
|
|
3.25 |
% |
Other Borrowings |
|
|
1,927,923 |
|
|
|
63,539 |
|
|
|
3.30 |
% |
|
|
2,597,943 |
|
|
|
103,038 |
|
|
|
3.97 |
% |
|
|
2,214,108 |
|
|
|
110,838 |
|
|
|
5.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
4,489,656 |
|
|
|
88,495 |
|
|
|
1.97 |
% |
|
|
4,606,580 |
|
|
|
138,839 |
|
|
|
3.01 |
% |
|
|
4,347,520 |
|
|
|
180,135 |
|
|
|
4.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
1,431,204 |
|
|
|
|
|
|
|
|
|
|
|
1,268,548 |
|
|
|
|
|
|
|
|
|
|
|
1,285,857 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
67,741 |
|
|
|
|
|
|
|
|
|
|
|
61,119 |
|
|
|
|
|
|
|
|
|
|
|
43,285 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
653,881 |
|
|
|
|
|
|
|
|
|
|
|
458,666 |
|
|
|
|
|
|
|
|
|
|
|
403,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
6,642,482 |
|
|
|
|
|
|
|
|
|
|
$ |
6,394,913 |
|
|
|
|
|
|
|
|
|
|
$ |
6,080,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
222,264 |
|
|
|
|
|
|
|
|
|
|
$ |
193,679 |
|
|
|
|
|
|
|
|
|
|
$ |
161,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread tax equivalent |
|
|
|
|
|
|
|
|
|
|
3.20 |
% |
|
|
|
|
|
|
|
|
|
|
2.70 |
% |
|
|
|
|
|
|
|
|
|
|
2.06 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.57 |
% |
|
|
|
|
|
|
|
|
|
|
3.22 |
% |
|
|
|
|
|
|
|
|
|
|
2.86 |
% |
Net interest margin tax equivalent |
|
|
|
|
|
|
|
|
|
|
3.75 |
% |
|
|
|
|
|
|
|
|
|
|
3.41 |
% |
|
|
|
|
|
|
|
|
|
|
3.03 |
% |
Net interest margin excluding loan fees |
|
|
|
|
|
|
|
|
|
|
3.52 |
% |
|
|
|
|
|
|
|
|
|
|
3.13 |
% |
|
|
|
|
|
|
|
|
|
|
2.76 |
% |
Net interest margin excluding loan fees tax equivalent |
|
|
|
|
|
|
|
|
|
|
3.70 |
% |
|
|
|
|
|
|
|
|
|
|
3.32 |
% |
|
|
|
|
|
|
|
|
|
|
2.93 |
% |
|
|
|
(1) |
|
Non tax-equivalent rate was 4.06% for 2009, 4.20% for 2008 and 4.39% for 2007 |
|
(2) |
|
Loan fees are included in total interest income as follows, (000)s omitted: 2009, $3,197; 2008,
$5,399 and 2007, $5,584 |
|
(3) |
|
Non performing loans are included in net loans as follows: 2009, $69.8 million
non-covered loans and $163.2 million covered loans; 2008, $17.7 million, 2007 $1,435 |
|
(4) |
|
Includes interest bearing demand and money market accounts |
As stated above, the net interest margin measures net interest income as a percentage of
average earning assets. Our tax effected (TE) net interest margin was 3.75% for 2009, compared to
3.41% for 2008, and 3.03% for 2007. The increase in the net interest margin in 2009 and 2008 was
primarily the result of the changing 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 less the
cost of average interest-bearing liabilities. The net interest spread is an indication of our
ability to manage interest rates received on loans and investments and paid on deposits and
borrowings in a competitive and changing interest rate environment. Our net interest spread (TE)
was 3.20% for 2009, 2.70% for 2008, and 2.06% for 2007. The increase in the net interest spread
for 2009 as compared to 2008 resulted from a 104 basis point decrease in the cost of
interest-bearing liabilities offset by a 54 basis point decrease in the yield on earning assets,
thus generating a 50 basis point increase in the net interest spread. The decrease in rates during
2009 had a smaller impact on our assets since a majority of our assets are fixed rate; while
deposits and borrowings benefited from the rate decrease. The increase in the net interest spread
for 2008 as compared to 2007 resulted from a 110 basis point decrease in the cost of
interest-bearing liabilities offset by a 46 basis point decrease in the yield on earning assets,
thus generating a 64 basis point increase in the net interest spread.
The yield (TE) on earning assets decreased to 5.17% for 2009, from 5.71% for 2008, and
reflects a decreasing interest rate environment and a change in the mix of earning assets.
Investments as a percent of earning assets decreased to 37.34% in 2009 from 40.44% in 2008. The
yield on loans for 2009 decreased to 5.52% as compared to 6.06% for 2008. The yield on investments
for 2009 decreased slightly to 4.98% as compared to 5.23% in 2008. The yield on loans for 2008
decreased to 6.06% as compared to 6.88% for 2007. The yield on investments for 2008 decreased
slightly to 5.23% as compared to 5.24% in 2007.
34
The cost of average interest-bearing liabilities decreased to 1.97% for 2009 as compared to
3.01% for 2008 and 4.11% for 2007. These variations reflected the decreasing interest rate
environment in 2009 and 2008, as well as the change in the mix of interest-bearing liabilities.
Borrowings as a percent of interest-bearing liabilities decreased to 42.94% for 2009 as compared to
56.40% for 2008 and 50.93% for 2007. Borrowings typically have a higher cost than interest-bearing
deposits. The cost of interest-bearing deposits for 2009 was 0.97% as compared to 1.78% for 2008
and 3.25% for 2007, reflecting a decreasing interest rate environment in 2009 and 2008. The cost of
borrowings for 2009 was 3.30% as compared to 3.97% for 2008, and 5.01% for 2007, also reflecting
the same fluctuating interest rate environment. The FDIC has approved the payment of interest on
certain demand deposit accounts. This could have a negative impact on our net interest margin, net
interest spread, and net earnings, should this be implemented fully. Currently, the only deposits
for which we pay interest on are NOW, Money Market and TCD Accounts.
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
years 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 interest rate and
volume changes are calculated by multiplying the change in rate times the change in volume.
TABLE 2 Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of twelve months ended December 31, |
|
|
|
2009 Compared to 2008 |
|
|
2008 Compared to 2007 |
|
|
|
Increase (Decrease) Due to |
|
|
Increase (Decrease) Due to |
|
|
|
|
|
|
|
|
|
|
|
Rate/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/ |
|
|
|
|
|
|
Volume |
|
|
Rate |
|
|
Volume |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Volume |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( amounts in thousands ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities |
|
$ |
(5,359 |
) |
|
$ |
(5,251 |
) |
|
$ |
477 |
|
|
$ |
(10,133 |
) |
|
$ |
1,457 |
|
|
$ |
(344 |
) |
|
$ |
(82 |
) |
|
$ |
1,031 |
|
Tax-advantaged securities |
|
|
(62 |
) |
|
|
(986 |
) |
|
|
7 |
|
|
|
(1,041 |
) |
|
|
581 |
|
|
|
200 |
|
|
|
(1,641 |
) |
|
|
(860 |
) |
Fed funds sold & interest-bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deposits with other institutions |
|
|
2,699 |
|
|
|
(34 |
) |
|
|
(2,346 |
) |
|
|
319 |
|
|
|
(46 |
) |
|
|
(42 |
) |
|
|
18 |
|
|
|
(70 |
) |
Investment in FHLB stock |
|
|
223 |
|
|
|
(4,364 |
) |
|
|
(216 |
) |
|
|
(4,357 |
) |
|
|
461 |
|
|
|
(121 |
) |
|
|
(17 |
) |
|
|
323 |
|
Loans HFS |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
0 |
|
Loans |
|
|
13,829 |
|
|
|
(18,883 |
) |
|
|
(1,499 |
) |
|
|
(6,553 |
) |
|
|
19,293 |
|
|
|
(26,454 |
) |
|
|
(2,022 |
) |
|
|
(9,183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on earning assets |
|
|
11,330 |
|
|
|
(29,518 |
) |
|
|
(3,572 |
) |
|
|
(21,760 |
) |
|
|
21,746 |
|
|
|
(26,761 |
) |
|
|
(3,744 |
) |
|
|
(8,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits |
|
|
1,679 |
|
|
|
(6,918 |
) |
|
|
(804 |
) |
|
|
(6,043 |
) |
|
|
(1,228 |
) |
|
|
(14,692 |
) |
|
|
528 |
|
|
|
(15,392 |
) |
Time deposits |
|
|
10,695 |
|
|
|
(9,980 |
) |
|
|
(5,517 |
) |
|
|
(4,802 |
) |
|
|
(3,323 |
) |
|
|
(16,218 |
) |
|
|
1,437 |
|
|
|
(18,104 |
) |
Other borrowings |
|
|
(26,969 |
) |
|
|
(17,648 |
) |
|
|
5,118 |
|
|
|
(39,499 |
) |
|
|
19,277 |
|
|
|
(21,835 |
) |
|
|
(5,242 |
) |
|
|
(7,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on interest-bearing liabilities |
|
|
(14,595 |
) |
|
|
(34,546 |
) |
|
|
(1,203 |
) |
|
|
(50,344 |
) |
|
|
14,726 |
|
|
|
(52,745 |
) |
|
|
(3,277 |
) |
|
|
(41,296 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
25,925 |
|
|
$ |
5,028 |
|
|
$ |
(2,369 |
) |
|
$ |
28,584 |
|
|
$ |
7,020 |
|
|
$ |
25,984 |
|
|
$ |
(467 |
) |
|
$ |
32,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Fees on Loans
Our major source of revenue is interest and fees on loans, which totaled $206.1 million for
2009. This represented a decrease of $6.5 million, or 3.08%, from interest and fees on loans of
$212.6 million for 2008. For 2008, interest and fees on loans decreased $9.2 million, or 4.14%,
from interest and fees on loans of $221.8 million for 2007. The decrease in interest and fees on
loans for 2009 and 2008 reflects the decreases in loan yields, offset by the increases in average
loan balances. The yield on loans decreased to 5.52% for 2009, compared to 6.06% for 2008 and
6.88% 2007.
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 non-accrual, all interest previously accrued but
not collected is charged against earnings. There was no interest income that was accrued and not
reversed on non-accrual loans at December 31, 2009, 2008, and 2007. For 2009, 2008 and 2007, we
had $69.8 million, $17.7 million and $1.4 million of non-covered non-accrual loans, respectively.
Had non-covered non-accrual loans for which interest was no longer accruing complied with the
original terms and conditions, interest income would have been $4.1 million, $370,000 and $90,000
greater for 2009, 2008 and 2007, respectively.
35
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 total loans on
our balance sheet. 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 $3.2 million for 2009, $5.4
million for 2008 and $5.6 million for 2007. The decrease in loan fee income during 2009 was due to
a decrease in loan originations as a result of weakening economy and diminished loan demand.
Interest on Investments
Another component of interest income is interest on investments, which totaled $104.7 million
for 2009. This represented a decrease of $15.2 million, or 12.69%, from interest on investments of
$119.9 million for 2008. For 2008, interest on investments increased $423,000, or 0.35%, over
interest on investments of $119.5 million for 2007. The decrease in interest on investments for
2009 as compared to 2008 reflected the decreases in average balances and decrease in yield on
investments. The interest rate environment and the investment strategies we employ directly affect
the yield on the investment portfolio. We continually adjust our investment strategies in response
to the changing interest rate environments 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 on investments was 4.98% for 2009, compared to 5.23% for 2008 and 5.24% for
2007.
Interest on Deposits
Interest on deposits totaled $25.0 million for 2009. This represented a decrease of $10.8
million, or 30.29%, from interest on deposits of $35.8 million for 2008. The decrease is due to
the decrease in interest rates on deposits offset by an increase in average interest-bearing
deposit balances. The cost of interest-bearing deposits decreased to 0.97% in 2009 from 1.78% in
2008 and average interest-bearing deposits increased $553.1 million, or 27.54% from 2008. Interest
on deposits decreased in 2008 by $33.5 million, from interest on deposits of $69.3 million during
2007. Our cost of total deposits was 0.63%, 1.09%, 2.03% for the years ended December 31, 2009,
2008, and 2007, respectively.
Interest on Borrowings
Interest on borrowings totaled $59.6 million for 2009. This represents a decrease of $36.5
million, or 37.97%, from interest on borrowings of $96.0 million for 2008. The decrease is
primarily due to the decrease in average borrowings and decrease in interest rates on borrowings.
Average borrowings decreased $670.0 million during 2009 compared to 2008. As a result of the
increase in deposits, it was possible for us to reduce our reliance on borrowed funds. Interest
rates on borrowings decreased 58 basis points during 2009 to 3.29% from 3.87% during 2008.
Interest on borrowings decreased $7.3 million for 2008, from $103.3 million for 2007. The decrease
from 2007 to 2008 is primarily due to the decrease in interest rates on borrowings, offset by an
increase in average borrowings.
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. Provision for credit losses is determined by
management as the amount to be added to the allowance for 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. The nature of this
process requires considerable judgment. As such, we made a provision for credit losses on
non-covered loans of $80.5 million in 2009, $26.6 million in 2008 and $4.0 million in 2007. The
increase in allowance during 2009 and 2008 was due to the increase in classified loans and the
increase in qualitative factors which is consistent with the current economic environment. We
believe the allowance is currently appropriate. The ratio of the allowance for credit losses to
total non-
covered loans as of December 31, 2009, 2008, and 2007 was 3.02%, 1.44% and
36
0.95%,
respectively. No assurance can be given that economic conditions which adversely affect the
Companys service areas or other circumstances will not be reflected in increased provisions for
credit losses in the future. The net charge-offs totaled $25.5 million in 2009, $5.7 million in
2008, and $1.4 million in 2007. See Risk Management Credit Risk herein.
SJB loans acquired in the FDIC-assisted transaction were initially recorded at their fair
value and are covered by a loss sharing agreement with the FDIC. Due to the timing of the
acquisition and the October 16, 2009 fair value estimate, there was no provision for credit losses
on the covered SJB loans.
Other Operating Income
The components of other operating income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Service charges on deposit accounts |
|
$ |
14,889 |
|
|
$ |
15,228 |
|
|
$ |
13,381 |
|
CitizensTrust |
|
|
6,657 |
|
|
|
7,926 |
|
|
|
7,226 |
|
Bankcard services |
|
|
2,338 |
|
|
|
2,329 |
|
|
|
2,530 |
|
BOLI Income |
|
|
2,792 |
|
|
|
5,000 |
|
|
|
3,839 |
|
Other |
|
|
5,150 |
|
|
|
3,974 |
|
|
|
4,349 |
|
Gain on sale of securities |
|
|
28,446 |
|
|
|
|
|
|
|
|
|
Impairment charge on investment security |
|
|
(323 |
) |
|
|
|
|
|
|
|
|
Gain on SJB acquisition |
|
|
21,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income |
|
$ |
81,071 |
|
|
$ |
34,457 |
|
|
$ |
31,325 |
|
|
|
|
|
|
|
|
|
|
|
Other operating income, totaled $81.1 million for 2009. This represents an increase of
$46.6 million, or 135.28%, over other operating income of $34.5 million in 2008. The increase is
due to gain on sale of securities and gain on SJB acquisition, offset by decreases in income from
CitizensTrust and Bank-Owned Life Insurance (BOLI). During 2008, other operating income increased
$3.1 million, or 10.00%, from other operating income of $31.3 million for 2007.
During 2009, we sold certain securities with relatively short maturities and recognized a gain
on sale of securities of $28.4 million. We also recognized an other-than-temporary impairment on a
private-label mortgage-backed investment security. The total impairment of $2.0 million was
reduced by $1.7 million for the non-credit portion which was reflected in other comprehensive
income. The remaining $323,000 loss was recognized as an offset to other operating income.
During the fourth quarter of 2009, we recorded a pre-tax bargain purchase gain of $21.1
million in connection with our acquisition of SJB. For a detailed discussion on this acquisition
and calculation of the gain see Note 2 Federally Assisted Acquisition of San Joaquin Bank in the
notes to the consolidated financial statements. This gain represents about 26% other operating
income.
CitizensTrust consists of Trust Services and Investment Services income. Trust Services
provides a variety of services, which include asset management services (both full management
services and custodial services), estate planning, retirement planning, private and corporate
trustee services, and probate services. Investment Services provides mutual funds, certificates of
deposit, and other non-insured investment products. CitizensTrust generated fees of $6.7 million in
2009. This represents a decrease of $1.3 million, or 16.01% from fees generated of $7.9 million in
2008. The decrease is primarily due to the elimination of Diversifier Fee income, as customer
deposits were converted from a product that placed deposits outside of the Bank to a product that
keeps deposits within the Bank. Fees generated by CitizensTrust represented 8.21% of other
operating income in 2009, as compared to 23.00% in 2008 and 23.07% in 2007.
37
The Bank invests in Bank-Owned Life Insurance (BOLI). BOLI involves the purchasing of life
insurance by the Bank on a chosen 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 operating income
and are not subject to income tax. Bank Owned Life Insurance income totaled $2.8 million in 2009.
This represents a decrease of $2.2 million, or 44.16%, from BOLI income generated of $5.0 million
for 2008. BOLI income for 2008 includes a $1.0 million death settlement. The remaining decrease in
BOLI income during 2009 reflects a decrease in yield on BOLI assets. BOLI income in 2008 increased
$1.2 million, or 30.25% over BOLI income generated of $3.8 million for 2007, due to the $1.0
million death settlement received.
Other fees and income, which includes wire fees, other business services, international
banking fees, check sale, ATM fees, miscellaneous income, etc, generated fees totaling $5.2 million
in 2009. This represented an increase of $1.2 million, or 29.59% from other fees and income
generated of $4.0 million in 2008. The increase is primarily due to the accretion of FDIC loss
sharing asset of $1.4 million.
Other operating income as a percent of net revenues (net interest income before loan loss
provision plus other operating income) was 26.73% for 2009, as compared to 15.10% for 2008 and
16.28% for 2007.
Other Operating Expenses
The components of other operating expenses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands, |
|
|
|
except per share amounts) |
|
Salaries and employee benefits |
|
$ |
62,985 |
|
|
$ |
61,271 |
|
|
$ |
55,303 |
|
Occupancy |
|
|
11,649 |
|
|
|
11,813 |
|
|
|
10,540 |
|
Equipment |
|
|
6,712 |
|
|
|
7,162 |
|
|
|
7,026 |
|
Stationery and supplies |
|
|
6,829 |
|
|
|
6,913 |
|
|
|
6,712 |
|
Professional services |
|
|
6,965 |
|
|
|
6,519 |
|
|
|
6,274 |
|
Promotion |
|
|
6,528 |
|
|
|
6,882 |
|
|
|
5,953 |
|
Amortization of Intangibles |
|
|
3,163 |
|
|
|
3,591 |
|
|
|
2,969 |
|
Other |
|
|
28,755 |
|
|
|
11,637 |
|
|
|
10,627 |
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses |
|
$ |
133,586 |
|
|
$ |
115,788 |
|
|
$ |
105,404 |
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses totaled $133.6 million for 2009. This represents an increase of
$17.8 million, or 15.37%, over other operating expenses of $115.8 million for 2008. During 2008,
other operating expenses increased $10.4 million, or 9.85%, over other operating expenses of $105.4
million for 2007.
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 2.01% for 2009, compared to 1.81% for 2008, and
1.73% for 2007.
Our ability to control other operating expenses in relation to the level of total 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 2009, the efficiency ratio was
59.95%, compared to 57.45% for 2008 and 55.93% for 2007. The increase in 2008 and 2007 is due to
increases in salaries and related expenses and other expenses as discussed below.
38
Salaries and related expenses comprise the greatest portion of other operating expenses.
Salaries and related expenses totaled $63.0 million for 2009. This represented an increase of $1.7
million, or 2.80%, over salaries and related expenses of $61.3 million for 2008. In 2008, salary
and related expenses increased $6.0 million, or 10.79%, over salaries and related expenses of $55.3
million for 2007. At December 31, 2009, we employed 831 persons, 583 on a full-time and 248 on a
part-time basis. This compares to 778 persons, 540 on a full-time and 238 on a part-time basis at
December 31, 2008 and 766 persons, 541 on a full-time and 225 on a part-time basis at December 31,
2007. Salaries and related expenses as a percent of average assets increased to 0.95% for 2009,
compared to 0.96% for 2008, and 0.91% for 2007.
Professional services totaled $7.0 million for 2009, $6.5 million for 2008, and $6.3 million
for 2007. The increases were primarily due to professional expenses incurred in conjunction with
the capital stock offering and SJB acquisition.
Other operating expenses totaled $28.8 million for 2009. This represented an increase of $17.1
million, or 147.1%, over expense of $11.6 million for 2008. The increase was primarily due to the
following: (1) an increase of $7.7 million was due to FDIC deposit insurance which includes a $3.0
million FDIC special assessment, (2) an increase of $4.4 million was due to prepayment penalties on
the restructure of FHLB advances, (3) an increase of $2.5 million in the provision for unfunded
commitments, and (4) an increase of $1.1 million in OREO expense. For 2008, other operating
expenses increased $1.0 million, or 9.50%, over expense of $10.6 million in 2007.
Income Taxes
Our effective tax rate for 2009 was 26.70%, compared to 26.44% for 2008, and 27.06% for 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 SEGMENT OPERATIONS
We have two reportable business segments, which are (i) Business Financial and Commercial
Banking Centers and (ii) 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 years ended December 31, 2009, 2008 and 2007.
The table also provides additional significant segment measures useful to understanding the
performance of this segment.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Key Measures: |
|
(Dollars in thousands) |
|
Statement of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
213,106 |
|
|
$ |
189,128 |
|
|
$ |
234,142 |
|
Interest expense |
|
|
40,987 |
|
|
|
52,140 |
|
|
|
77,848 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
172,119 |
|
|
$ |
136,988 |
|
|
$ |
156,294 |
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
19,537 |
|
|
|
21,593 |
|
|
|
18,148 |
|
Non-interest expense |
|
|
47,860 |
|
|
|
48,108 |
|
|
|
44,558 |
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit |
|
$ |
143,796 |
|
|
$ |
110,473 |
|
|
$ |
129,884 |
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
Average loans |
|
$ |
3,735,339 |
|
|
$ |
3,506,510 |
|
|
$ |
3,226,086 |
|
Average interest-bearing deposits |
|
$ |
2,561,734 |
|
|
$ |
2,008,637 |
|
|
$ |
2,133,412 |
|
Yield on loans |
|
|
5.52 |
% |
|
|
6.06 |
% |
|
|
6.88 |
% |
Rate paid on deposits |
|
|
0.97 |
% |
|
|
1.78 |
% |
|
|
3.25 |
% |
For the year ended December 31, 2009, segment profits increased by $33.3 million, or
30.16%, compared to the year ended December 31, 2008. This was primarily due to an increase in
interest income of $24.0 million offset by a decrease in interest expense of $11.2 million. The
increase in interest income includes a credit for funds provided which is eliminated in the
consolidated total. The credit for funds provided increases as deposit balances increase. During
2009 average total deposits increased $715.8 million, or 21.84%, compared to 2008. The decrease in
interest expense is due to a decrease in rates paid on deposits offset by increases in average
interest-bearing deposits.
For the year ended December 31, 2008, segment profits decreased by 19.4 million, or 14.94%
compared to the year ended December 31, 2007. Interest income decreased $45.0 million, or 19.23%,
when compared with interest income during 2007, primarily due to decreases in interest rates during
2008, offset by increases in average loan balances. Interest expense decreased $25.7 million, or
33.02%, compared to interest expense during 2007, primarily due to decreases in interest rates and
average interest-bearing deposits.
Treasury
Key measures we use to evaluate the Treasurys performance are included in the following table
for the years ended December 31, 2009, 2008 and 2007. The table also provides additional
significant segment measures useful to understanding the performance of this segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Key Measures: |
|
(Dollars in thousands) |
|
Statement of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
104,778 |
|
|
$ |
119,975 |
|
|
$ |
119,544 |
|
Interest expense |
|
|
83,649 |
|
|
|
99,714 |
|
|
|
129,698 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
21,129 |
|
|
$ |
20,261 |
|
|
$ |
(10,154 |
) |
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
28,124 |
|
|
|
6 |
|
|
|
1 |
|
Non-interest expense |
|
|
5,945 |
|
|
|
1,285 |
|
|
|
1,148 |
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss) |
|
$ |
43,308 |
|
|
$ |
18,982 |
|
|
$ |
(11,301 |
) |
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
Average investments |
|
$ |
2,498,045 |
|
|
$ |
2,532,750 |
|
|
$ |
2,471,548 |
|
Average borrowings |
|
$ |
1,812,868 |
|
|
$ |
2,482,888 |
|
|
$ |
2,102,030 |
|
Yield on investments-TE |
|
|
4.98 |
% |
|
|
5.23 |
% |
|
|
5.24 |
% |
Non-tax equivalent yield |
|
|
4.06 |
% |
|
|
4.20 |
% |
|
|
4.39 |
% |
Rate paid on borrowings |
|
|
3.29 |
% |
|
|
3.87 |
% |
|
|
4.85 |
% |
40
For the year ended December 31, 2009, Treasury segment profits increased by $24.3 million
over the same period in 2008. The increase is primarily due to the $28.4 million gain on sale of
securities recognized during 2009, offset by the $4.4 million in prepayment penalties for the
restructure of FHLB advances in 2009. Net interest income increased $868,000, or 4.28%, compared
to 2008. The increase is due to a decrease of $16.1 million in interest expense, offset by a
decrease of 15.2 million in interest income. During 2009, average investments and borrowings
decreased coupled with decreases in interest rates.
For the year ended December 31, 2008, Treasury segment profits increased by $30.3 million over
the same period in 2007. The increase was primarily due to a decrease in interest expense of $30.0
million when compared to 2007. This is due to the 98 basis point decrease in interest rates paid
on borrowings during 2008, offset by the increase in average borrowings.
There are no provisions for credit losses or taxes in the segments as these are accounted for
at the Company level.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Key Measures: |
|
(Dollars in thousands) |
|
Statement of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
69,867 |
|
|
$ |
50,279 |
|
|
$ |
61,360 |
|
Interest expense |
|
|
40,851 |
|
|
|
13,849 |
|
|
|
46,358 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
29,016 |
|
|
$ |
36,430 |
|
|
$ |
15,002 |
|
|
|
|
|
|
|
|
|
|
|
Provision for Credit Losses |
|
|
80,500 |
|
|
|
26,600 |
|
|
|
4,000 |
|
Non-interest income |
|
|
33,410 |
|
|
|
12,858 |
|
|
|
13,176 |
|
Non-interest expense |
|
|
79,781 |
|
|
|
66,395 |
|
|
|
59,698 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss |
|
$ |
(97,855 |
) |
|
$ |
(43,707 |
) |
|
$ |
(35,520 |
) |
|
|
|
|
|
|
|
|
|
|
The Companys administration and other operating departments reported pre-tax loss of
$97.9 million for the year ended December 31, 2009. This represented an increase of $54.1 million
over pre-tax loss of $43.7 million for the year ended December 31, 2008. The increase is
attributed to an increase in provision for credit losses of $53.9 million and an increase in
non-interest expense of $13.4 million offset by an increase in non-interest income of $20.6 million
and decrease in net interest income by $7.4 million. Pre-tax loss for 2008 increased $8.2 million
to $43.7 million, or 23.05%, from pre-tax loss of $35.5 million for 2007.
ANALYSIS OF FINANCIAL CONDITION
The Company reported total assets of $6.74 billion at December 31, 2009. This represented an
increase of $90.2 million, or 1.36%, over total assets of $6.65 billion at December 31, 2008. The
increase is primarily due to an increase in other assets and FDIC loss sharing asset of $158.2
million, offset by a decrease in earning assets of $94.1 million, or 1.50%. Earning assets totaled
$6.17 billion at December 31, 2009 as compared to $6.28 billion at December 31, 2008. The decrease
in earning assets is primarily attributed to the decrease in total investments of $382.8 million,
offset by an increase in net loans of $271.9 million. Total liabilities were $6.10 billion at
December 31, 2009, an increase of $66.8 million, or 1.11%, over total liabilities of $6.03 billion.
Total equity increased $23.3 million, or 3.80%, to $638.2 million at December 31, 2009, compared
to total equity of $614.9 million at December 31, 2008.
41
Investment Securities
The Company maintains a portfolio of investment securities to provide interest income and to
serve as a source of liquidity for its ongoing operations. The tables below set forth information
concerning the composition of the investment securities portfolio at December 31, 2009, 2008, and
2007, and the maturity distribution of the investment securities portfolio at December 31, 2009. At
December 31, 2009, we reported total investment securities of $2.11 billion. This represents a
decrease of $388.0 million, or 15.52%, from total investment securities of $2.50 billion at
December 31, 2008. During 2009, we sold
certain securities with relatively short maturities and recognized a gain on sale of
securities of $28.4 million.
Securities held as available-for-sale are reported at current fair value for financial
reporting purposes. The related unrealized gain or loss, net of income taxes, is recorded in
stockholders equity. At December 31, 2009, securities held as available-for-sale had a fair value
of $2.11 billion, representing 99.8% of total investment securities. Investment securities
available-for-sale had an amortized cost of $2.06 billion at December 31, 2009. At December 31,
2009, the net unrealized holding gain on securities available-for-sale was $47.2 million that
resulted in accumulated other comprehensive gain of $26.4 million (net of $20.8 million in deferred
taxes).
Composition of the Fair Value of Securities Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
|
(amounts in thousands) |
|
U.S. Treasury Obligations |
|
$ |
507 |
|
|
|
0.02 |
% |
|
$ |
0.00 |
% |
|
|
|
|
|
$ |
998 |
|
|
|
0.04 |
% |
Government
agency and government-sponsored enterprises |
|
|
21,713 |
|
|
|
1.03 |
% |
|
|
27,778 |
|
|
|
1.11 |
% |
|
|
50,835 |
|
|
|
2.13 |
% |
Mortgage-backed securities |
|
|
647,168 |
|
|
|
30.70 |
% |
|
|
1,184,485 |
|
|
|
47.50 |
% |
|
|
1,023,061 |
|
|
|
42.80 |
% |
CMO/REMICs |
|
|
773,165 |
|
|
|
36.67 |
% |
|
|
596,791 |
|
|
|
23.94 |
% |
|
|
622,806 |
|
|
|
26.05 |
% |
Municipal bonds |
|
|
663,426 |
|
|
|
31.46 |
% |
|
|
684,422 |
|
|
|
27.45 |
% |
|
|
692,866 |
|
|
|
28.98 |
% |
Other securities |
|
|
2,484 |
|
|
|
0.12 |
% |
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
2,108,463 |
|
|
|
100.00 |
% |
|
$ |
2,493,476 |
|
|
|
100.00 |
% |
|
$ |
2,390,566 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The maturity distribution of the available-for-sale portfolio at December 31, 2009
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing |
|
|
|
|
|
|
|
Weighted |
|
|
After one year |
|
|
Weighted |
|
|
After five |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
Balance as of |
|
|
Weighted |
|
|
|
|
|
|
One year |
|
|
Average |
|
|
through Five |
|
|
Average |
|
|
years through |
|
|
Average |
|
|
After ten |
|
|
Average |
|
|
December 31, |
|
|
Average |
|
|
% to |
|
|
|
or less |
|
|
Yield |
|
|
Years |
|
|
Yield |
|
|
Ten Years |
|
|
Yield |
|
|
years |
|
|
Yield |
|
|
2009 |
|
|
Yield |
|
|
Total |
|
U.S. Treasury Obligations |
|
$ |
507 |
|
|
|
0.28 |
% |
|
$ |
0.00 |
% |
|
|
|
|
|
$ |
0.00 |
% |
|
|
|
|
|
$ |
0.00 |
% |
|
$ |
|
|
|
$ |
507 |
|
|
|
0.28 |
% |
|
|
0.02 |
% |
Government agency and
government-sponsored
enterprises |
|
|
21,359 |
|
|
|
2.54 |
% |
|
|
354 |
|
|
|
2.46 |
% |
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
0.00 |
% |
|
$ |
21,713 |
|
|
|
2.54 |
% |
|
|
1.03 |
% |
Mortgage-backed securities |
|
|
2,000 |
|
|
|
4.16 |
% |
|
|
487,990 |
|
|
|
4.41 |
% |
|
|
156,775 |
|
|
|
4.71 |
% |
|
|
403 |
|
|
|
5.31 |
% |
|
$ |
647,168 |
|
|
|
4.48 |
% |
|
|
30.70 |
% |
CMO/REMICs |
|
|
21,460 |
|
|
|
4.63 |
% |
|
|
407,998 |
|
|
|
4.82 |
% |
|
|
343,707 |
|
|
|
4.54 |
% |
|
|
|
|
|
|
0.00 |
% |
|
$ |
773,165 |
|
|
|
4.69 |
% |
|
|
36.67 |
% |
Municipal bonds (1) |
|
|
102,429 |
|
|
|
5.28 |
% |
|
|
148,287 |
|
|
|
3.64 |
% |
|
|
321,624 |
|
|
|
3.97 |
% |
|
|
91,086 |
|
|
|
3.92 |
% |
|
$ |
663,426 |
|
|
|
4.09 |
% |
|
|
31.46 |
% |
Other Securities |
|
|
2,484 |
|
|
|
5.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,484 |
|
|
|
5.77 |
% |
|
|
0.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
150,239 |
|
|
|
4.77 |
% |
|
$ |
1,044,629 |
|
|
|
4.46 |
% |
|
$ |
822,106 |
|
|
|
4.35 |
% |
|
$ |
91,489 |
|
|
|
3.92 |
% |
|
$ |
2,108,463 |
|
|
|
4.41 |
% |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The weighted average yield is not tax-equivalent. The tax-equivalent yield is 5.68%. |
The maturity of each security category is defined as the contractual maturity except for
the categories of mortgage-backed securities and CMO/REMICs whose maturities are defined as the
estimated average life. The final maturity of mortgage-backed securities and CMO/REMICs will differ
from their contractual maturities because the underlying mortgages have the right to repay such
obligations without penalty. The speed at which the underlying mortgages repay is influenced by
many factors, one of which is interest rates. Mortgages tend to repay faster as interest rates fall
and slower as interest rate rise. This will either shorten or extend the estimated average life.
Also, the yield on mortgage-backed securities and CMO/REMICs are affected by the speed at which the
underlying mortgages repay. This is caused by the change in the amount of amortization of premiums
or accretion of discount of each security as repayments increase or decrease. The Company obtains
the estimated average life of each security from independent third parties.
42
The weighted-average yield on the investment portfolio at December 31, 2009 was 4.41% with a
weighted-average life of 4.7 years. This compares to a weighted-average yield of 4.70% at December
31, 2008 with a weighted-average life of 4.9 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 pay-downs.
Approximately 67% of the securities in the investment portfolio are issued by the U.S.
government or U.S. government-sponsored agencies which guarantee payment of principal and interest.
Composition of the Fair Value and Gross Unrealized Losses of Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Holding |
|
|
|
|
|
Holding |
|
|
|
|
|
Holding |
|
Description of Securities |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
Held-To-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,838 |
|
|
$ |
1,671 |
|
|
$ |
3,838 |
|
|
$ |
1,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency |
|
$ |
5,022 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,022 |
|
|
$ |
1 |
|
Mortgage-backed securities |
|
|
73,086 |
|
|
|
968 |
|
|
|
|
|
|
|
|
|
|
|
73,086 |
|
|
|
968 |
|
CMO/REMICs |
|
|
179,391 |
|
|
|
3,025 |
|
|
|
9,640 |
|
|
|
286 |
|
|
|
189,031 |
|
|
|
3,311 |
|
Municipal bonds |
|
|
80,403 |
|
|
|
2,122 |
|
|
|
1,785 |
|
|
|
298 |
|
|
|
82,188 |
|
|
|
2,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
337,902 |
|
|
$ |
6,116 |
|
|
$ |
11,425 |
|
|
$ |
584 |
|
|
$ |
349,327 |
|
|
$ |
6,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the twelve months ended December 31, 2009, the Company recorded $1.7 million, on a pre-tax
basis, of the non-credit portion of OTTI for this security in other comprehensive income, which is
included as gross unrealized losses. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Holding |
|
|
|
|
|
Holding |
|
|
|
|
|
Holding |
|
Description of Securities |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
Held-To-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO |
|
$ |
4,770 |
|
|
$ |
2,097 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,770 |
|
|
$ |
2,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
$ |
265 |
|
|
$ |
|
|
|
$ |
13,903 |
|
|
$ |
1 |
|
|
$ |
14,168 |
|
|
$ |
1 |
|
CMO/REMICs |
|
|
163,036 |
|
|
|
4,542 |
|
|
|
1,853 |
|
|
|
53 |
|
|
|
164,889 |
|
|
|
4,595 |
|
Municipal bonds |
|
|
159,370 |
|
|
|
5,341 |
|
|
|
37,994 |
|
|
|
1,596 |
|
|
|
197,364 |
|
|
|
6,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
322,671 |
|
|
$ |
9,883 |
|
|
$ |
53,750 |
|
|
$ |
1,650 |
|
|
$ |
376,421 |
|
|
$ |
11,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables above show the 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 December 31, 2009 and 2008. The Company has reviewed the
individual securities to determine whether a decline in fair value below the amortized cost basis
is other-than-temporary. A summary of our analysis of these securities and the unrealized losses is
described more fully in Note 3 Investment Securities in the notes to the consolidated financial
statements. Economic trends may adversely affect the value of the portfolio of investment
securities that we hold.
During 2009, the Company recognized an other-than-temporary impairment on the held-to-maturity
investment security. The total impairment of $2.0 million was reduced by $1.7 million for the
non-credit portion which was reflected in other comprehensive income. The remaining $323,000
impairment loss was offset to other income.
43
Non-Covered Loans
At December 31, 2009, the Company reported total non-covered loans, net of deferred loan fees,
of $3.61 billion. This represents a decrease of $128.5 million, or 3.44%, from total loans, net of
deferred loan fees of $3.74 billion at December 31, 2008. The loan portfolio was affected by real
estate trends, diminished loan demand and the weakening of the economy.
Table 4 presents the distribution of our non-covered loans at the dates indicated.
TABLE 4 Distribution of Loan Portfolio by Type
(Non-Covered Loans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
|
Commercial and Industrial |
|
$ |
413,715 |
|
|
$ |
370,829 |
|
|
$ |
365,214 |
|
|
$ |
264,416 |
|
|
$ |
223,330 |
|
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
265,444 |
|
|
|
351,543 |
|
|
|
308,354 |
|
|
|
299,112 |
|
|
|
270,436 |
|
Commercial Real Estate |
|
|
1,989,644 |
|
|
|
1,945,706 |
|
|
|
1,805,946 |
|
|
|
1,642,370 |
|
|
|
1,363,516 |
|
SFR Mortgage |
|
|
265,543 |
|
|
|
333,931 |
|
|
|
365,849 |
|
|
|
284,725 |
|
|
|
271,237 |
|
Consumer, net of unearned discount |
|
|
67,693 |
|
|
|
66,255 |
|
|
|
58,999 |
|
|
|
54,125 |
|
|
|
59,801 |
|
Municipal Lease Finance Receivables |
|
|
159,582 |
|
|
|
172,973 |
|
|
|
156,646 |
|
|
|
126,393 |
|
|
|
108,832 |
|
Auto and equipment leases |
|
|
30,337 |
|
|
|
45,465 |
|
|
|
58,505 |
|
|
|
51,420 |
|
|
|
39,442 |
|
Dairy and Livestock |
|
|
422,958 |
|
|
|
459,329 |
|
|
|
387,488 |
|
|
|
358,259 |
|
|
|
338,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans (Non-Covered) |
|
|
3,614,916 |
|
|
|
3,746,031 |
|
|
|
3,507,001 |
|
|
|
3,080,820 |
|
|
|
2,674,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses |
|
|
108,924 |
|
|
|
53,960 |
|
|
|
33,049 |
|
|
|
27,737 |
|
|
|
23,204 |
|
Deferred Loan Fees |
|
|
6,537 |
|
|
|
9,193 |
|
|
|
11,857 |
|
|
|
10,624 |
|
|
|
10,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Loans (Non-Covered) |
|
$ |
3,499,455 |
|
|
$ |
3,682,878 |
|
|
$ |
3,462,095 |
|
|
$ |
3,042,459 |
|
|
$ |
2,640,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans are loans to commercial entities to finance capital
purchases or improvements, or to provide cash flow for operations. Real estate loans are loans
secured by conforming first trust deeds on real property, including property under construction,
land development, commercial property and single- family and multifamily residences. Consumer loans
include installment loans to consumers as well as home equity loans and other loans secured by
junior liens on real property. Municipal lease finance receivables are leases to municipalities.
Dairy and livestock loans are loans to finance the operating needs of wholesale dairy farm
operations, cattle feeders, livestock raisers, and farmers.
Our loan portfolio is primarily located throughout our marketplace. The following is the
breakdown of our total non-covered loans and non-covered commercial real estate loans by region at
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Non-Covered |
|
|
|
|
|
|
|
|
|
|
Commercial |
Non-Covered |
|
Total Non-Covered Loans |
|
Real Estate Loans |
Loans by Market Area |
|
|
|
|
(amounts in thousands) |
|
|
|
|
Los Angeles County |
|
$ |
1,176,881 |
|
|
|
32.6 |
% |
|
$ |
709,960 |
|
|
|
35.6 |
% |
Inland Empire |
|
|
760,009 |
|
|
|
21.0 |
% |
|
|
609,273 |
|
|
|
30.6 |
% |
Central Valley |
|
|
634,492 |
|
|
|
17.6 |
% |
|
|
289,955 |
|
|
|
14.6 |
% |
Orange County |
|
|
535,897 |
|
|
|
14.8 |
% |
|
|
217,932 |
|
|
|
11.0 |
% |
Other Areas |
|
|
507,637 |
|
|
|
14.0 |
% |
|
|
162,524 |
|
|
|
8.2 |
% |
|
|
|
|
|
$ |
3,614,916 |
|
|
|
100.0 |
% |
|
$ |
1,989,644 |
|
|
|
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 an original
loan-to-value ratio of 65-75%. This table breaks down our real estate portfolio, with the
exception of construction loans which are addressed in a separate table.
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Percent |
|
Average |
Non-Covered Real Estate Loans |
|
|
|
|
|
|
|
|
|
Owner- |
|
Loan |
(amounts in thousands) |
|
Loan Balance |
|
Percent |
|
Occupied (1) |
|
Balance |
Single Family-Direct |
|
$ |
51,307 |
|
|
|
2.3 |
% |
|
|
100.0 |
% |
|
$ |
457 |
|
Single Family-Mortgage Pools |
|
|
214,236 |
|
|
|
9.5 |
% |
|
|
100.0 |
% |
|
|
337 |
|
Multifamily |
|
|
112,411 |
|
|
|
5.0 |
% |
|
|
0.0 |
% |
|
|
885 |
|
Industrial |
|
|
670,218 |
|
|
|
29.7 |
% |
|
|
36.9 |
% |
|
|
880 |
|
Office |
|
|
386,602 |
|
|
|
17.1 |
% |
|
|
24.5 |
% |
|
|
1,015 |
|
Retail |
|
|
234,368 |
|
|
|
10.4 |
% |
|
|
15.0 |
% |
|
|
1,051 |
|
Medical |
|
|
135,827 |
|
|
|
6.0 |
% |
|
|
42.7 |
% |
|
|
1,861 |
|
Secured by Farmland |
|
|
153,090 |
|
|
|
6.8 |
% |
|
|
100.0 |
% |
|
|
2,097 |
|
Other |
|
|
297,128 |
|
|
|
13.2 |
% |
|
|
51.6 |
% |
|
|
1,147 |
|
|
|
|
|
|
$ |
2,255,187 |
|
|
|
100.0 |
% |
|
|
44.7 |
% |
|
|
1,037 |
|
|
|
|
|
|
|
(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 $51.3 million. In addition, we
have purchased pools of owner-occupied single-family loans from real estate lenders, Single
Family-Mortgage Pools, totaling $214.2 million. These loans were purchased with average FICO
scores predominantly ranging from 700 to over 800 and overall original loan-to-value ratios of 60%
to 80%. These pools were purchased to diversify our loan portfolio since we make few single-family
loans. Due to market conditions, we have not purchased any mortgage pools since August 2007.
As of December 31, 2009, the Company had $265.4 million in non-covered construction loans.
This represents 7.34% of total non-covered loans outstanding of $3.61 billion. Of this $265.4
million in construction loans, approximately 26%, or $68.5 million, were for single-family
residences, residential land loans, and multi-family land development loans. The remaining
construction loans, totaling $196.9 million, were related to commercial construction. The average
balance of any single construction loan is approximately $3.8 million. Our construction loans are
located throughout our marketplace as can be seen in the following table.
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Covered |
|
|
Construction Loans |
|
December 31, 2009 |
|
|
SFR & Multifamily |
(amounts in thousands) |
|
Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development |
|
|
|
|
|
Construction |
|
|
|
|
|
Total |
|
|
|
|
Inland Empire |
|
$ |
3,408 |
|
|
|
16.1 |
% |
|
$ |
16,899 |
|
|
|
35.8 |
% |
|
$ |
20,307 |
|
|
|
29.7 |
% |
Orange |
|
|
5,196 |
|
|
|
24.5 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
5,196 |
|
|
|
7.6 |
% |
Los Angeles |
|
|
|
|
|
|
0.0 |
% |
|
|
14,685 |
|
|
|
31.1 |
% |
|
|
14,685 |
|
|
|
21.4 |
% |
Central Valley |
|
|
12,604 |
|
|
|
59.4 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
12,604 |
|
|
|
18.4 |
% |
San Diego |
|
|
|
|
|
|
0.0 |
% |
|
|
4,417 |
|
|
|
9.3 |
% |
|
|
4,417 |
|
|
|
6.4 |
% |
Other (includes out-of-state) |
|
|
|
|
|
|
0.0 |
% |
|
|
11,272 |
|
|
|
23.8 |
% |
|
|
11,272 |
|
|
|
16.5 |
% |
|
|
|
|
|
$ |
21,208 |
|
|
|
100.0 |
% |
|
$ |
47,273 |
|
|
|
100.0 |
% |
|
$ |
68,481 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development |
|
|
|
|
|
Construction |
|
|
|
|
|
Total |
|
|
|
|
Inland Empire |
|
$ |
17,402 |
|
|
|
39.1 |
% |
|
$ |
61,507 |
|
|
|
40.4 |
% |
|
$ |
78,909 |
|
|
|
40.1 |
% |
Orange |
|
|
|
|
|
|
0.0 |
% |
|
|
3,625 |
|
|
|
2.4 |
% |
|
|
3,625 |
|
|
|
1.8 |
% |
Los Angeles |
|
|
4,700 |
|
|
|
10.6 |
% |
|
|
38,739 |
|
|
|
25.4 |
% |
|
|
43,439 |
|
|
|
22.1 |
% |
Central Valley |
|
|
15,388 |
|
|
|
34.6 |
% |
|
|
19,741 |
|
|
|
12.9 |
% |
|
|
35,129 |
|
|
|
17.8 |
% |
Other (includes out-of-state) |
|
|
6,977 |
|
|
|
15.7 |
% |
|
|
28,884 |
|
|
|
18.9 |
% |
|
|
35,861 |
|
|
|
18.2 |
% |
|
|
|
|
|
$ |
44,467 |
|
|
|
100.0 |
% |
|
$ |
152,496 |
|
|
|
100.0 |
% |
|
$ |
196,963 |
|
|
|
100.0 |
% |
|
|
|
Of the total SFR and multifamily loans, $32.8 million are for multifamily and the
remainder represents single-family loans.
Covered Loans from the SJB Acquisition
The table below presents the distribution of our covered loans as of December 31, 2009.
Distribution of Loan Portfolio by Type
(Covered Loans)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
|
Commercial and Industrial |
|
$ |
61,802 |
|
|
|
9.4 |
% |
Real Estate |
|
|
|
|
|
|
|
|
Construction |
|
|
136,065 |
|
|
|
20.8 |
% |
Commercial Real Estate |
|
|
357,140 |
|
|
|
54.4 |
% |
SFR Mortgage |
|
|
17,510 |
|
|
|
2.7 |
% |
Consumer, net of unearned discount |
|
|
11,066 |
|
|
|
1.7 |
% |
Municipal Lease Finance Receivables |
|
|
983 |
|
|
|
0.2 |
% |
Agribusiness |
|
|
70,493 |
|
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
Gross Loans |
|
|
655,059 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
Purchases accounting discount |
|
|
184,419 |
|
|
|
|
|
Deferred Loan Fees |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Loans |
|
$ |
470,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The above loans are subject to a loss sharing agreement with the FDIC, the terms of which
provide that the FDIC will absorb 80% of losses and share in 80% of loss recoveries up to $144.0
million with respect to covered assets, after a first loss amount of $26.7 million, which is
assumed by the Company. The FDIC will reimburse the Bank for 95% of losses and share in 95% of
loss recoveries in excess of
46
$144.0 million with respect to covered assets. The loss sharing
agreement is in effect for 5 years for commercial loans and 10 years for single-family residential
loans from the October 16, 2009 acquisition date and the loss recovery provisions are in effect for
8 and 10 years, respectively for commercial and single-family residential loans from the
acquisition date.
Non-Covered and Covered Loans
Table 5 provides the maturity distribution for commercial and industrial loans, real estate
construction loans and agribusiness loans as of December 31, 2009. The loan amounts are based on
contractual maturities although the borrowers have the ability to prepay the loans. Amounts are
also classified according to re-pricing opportunities or rate sensitivity. The following table
includes both covered and non-covered loans.
TABLE 5 Loan Maturities and Interest Rate Category at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One |
|
|
|
|
|
|
|
|
|
|
|
|
|
But |
|
|
|
|
|
|
|
|
|
Within |
|
|
Within |
|
|
After |
|
|
|
|
|
|
One Year |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
|
Types of Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
206,655 |
|
|
$ |
107,066 |
|
|
$ |
161,796 |
|
|
$ |
475,517 |
|
Commericial Real Estate |
|
|
170,770 |
|
|
|
712,675 |
|
|
|
1,463,339 |
|
|
|
2,346,784 |
|
Construction |
|
|
355,609 |
|
|
|
33,309 |
|
|
|
12,591 |
|
|
|
401,509 |
|
Dairy and Livestock/Agribusiness |
|
|
433,347 |
|
|
|
18,939 |
|
|
|
41,165 |
|
|
|
493,451 |
|
Other |
|
|
24,597 |
|
|
|
96,803 |
|
|
|
431,314 |
|
|
|
552,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,190,978 |
|
|
$ |
968,792 |
|
|
$ |
2,110,205 |
|
|
$ |
4,269,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loans based upon: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rates |
|
$ |
36,866 |
|
|
$ |
260,790 |
|
|
$ |
1,038,221 |
|
|
$ |
1,335,877 |
|
Floating or adjustable rates |
|
|
1,154,112 |
|
|
|
708,002 |
|
|
|
1,071,984 |
|
|
|
2,934,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,190,978 |
|
|
$ |
968,792 |
|
|
$ |
2,110,205 |
|
|
$ |
4,269,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a normal practice in extending credit for commercial and industrial purposes, we may
accept trust deeds on real property as collateral. In some cases, when the primary source of
repayment for the loan is anticipated to come from the cash flow from normal operations of the
borrower, real property as collateral is not the primary source of repayment but has been taken as
an abundance of caution. In these cases, the real property is considered a secondary source of
repayment for the loan. Since we lend primarily in Southern and Central California, our real estate
loan collateral is concentrated in this region. At December 31, 2009, substantially all of our
loans secured by real estate were collateralized by properties located in California. This
concentration is considered when determining the adequacy of our allowance for credit losses.
Non-Performing Assets (Non-Covered)
The following table provides information on non-covered non-performing assets at the dates
indicated.
47
Non-Performing Assets
(Non-Covered Loans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
|
Nonaccrual loans |
|
$ |
69,779 |
|
|
$ |
17,684 |
|
|
$ |
1,435 |
|
|
$ |
|
|
|
$ |
|
|
Loans past due 90 days or more and still |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accruing interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned (OREO) |
|
|
3,936 |
|
|
|
6,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
73,715 |
|
|
$ |
24,249 |
|
|
$ |
1,435 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans |
|
$ |
3,517 |
|
|
$ |
2,500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of nonperforming assets
to total loans outstanding & OREO |
|
|
1.81 |
% |
|
|
0.65 |
% |
|
|
0.04 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of nonperforming assets
to total assets |
|
|
1.09 |
% |
|
|
0.36 |
% |
|
|
0.02 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-covered non-performing assets include OREO, non-accrual loans, and loans 90 days or
more past due and still accruing interest (see Risk Management Credit Risk herein). At
December 31, 2009, we had $73.7 million in non-covered, non-performing assets. Of this amount,
$69.8 million were non-covered non-accrual loans and $3.9 million was non-covered OREO. At
December 31, 2008, we had $24.2 million in non-performing assets, of which $17.7 million were
non-accrual loans and $6.6 million was OREO. Loans are put on non-accrual after 90 days of
non-performance. They can also be put on non-accrual if, in the judgment of management, the
collectability is doubtful. All accrued and unpaid interest is reversed. The Bank allocates
specific reserves which are included in the allowance for credit losses for potential losses on
non-accrual loans. There were no loans greater than 90 days past due still accruing.
A loan is impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts (contractual interest and principal) according to
the contractual terms of the loan agreement. At December 31, 2009, we had loans with a balance of
$72.3 million classified as impaired. This balance includes the non-accrual loans of $69.8 million
and three restructured loans with a balance of $3.5 million as of December 31, 2009. A restructured
loan is a loan on which terms or conditions have been modified due to the deterioration of the
borrowers financial condition and a concession has been provided to the borrower. At December 31,
2008 we had loans with a balance of $17.7 million classified as impaired and one restructured loan
of $2.5 million.
At December 31, 2009, we held $3.9 million in non-covered OREO compared to $6.6 million as of
December 31, 2008, a decrease of $2.7 million. This was primarily due to the sale of $14.3 million
in OREO during 2009 offset by a transfer of $11.5 million from non-performing loans during 2009.
The Bank incurred expenses of $1.2 million related to the holding of OREO.
Non-Performing Assets and Delinquencies (Non-Covered)
The table below provides trends in our non-performing assets and delinquencies during 2009 for
total, covered and non-covered loans.
48
Non-Performing Assets & Delinquency Trends
(Non-Covered Loans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
Non-Performing Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Construction and Land |
|
$ |
13,843 |
|
|
$ |
15,729 |
|
|
$ |
17,348 |
|
|
$ |
20,943 |
|
|
$ |
7,524 |
|
Commercial Construction |
|
|
23,832 |
|
|
|
19,636 |
|
|
|
21,270 |
|
|
|
22,102 |
|
|
|
|
|
Residential Mortgage |
|
|
11,787 |
|
|
|
8,102 |
|
|
|
4,632 |
|
|
|
2,203 |
|
|
|
3,116 |
|
Commercial Real Estate |
|
|
17,129 |
|
|
|
13,522 |
|
|
|
7,041 |
|
|
|
1,661 |
|
|
|
4,658 |
|
Commercial and Industrial |
|
|
3,173 |
|
|
|
1,045 |
|
|
|
859 |
|
|
|
792 |
|
|
|
2,074 |
|
Consumer |
|
|
15 |
|
|
|
100 |
|
|
|
115 |
|
|
|
336 |
|
|
|
312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
69,779 |
|
|
$ |
58,134 |
|
|
$ |
51,265 |
|
|
$ |
48,037 |
|
|
$ |
17,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Loans |
|
|
1.93 |
% |
|
|
1.61 |
% |
|
|
1.42 |
% |
|
|
1.31 |
% |
|
|
0.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past Due 30-89 Days |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Construction and Land |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Commercial Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage |
|
|
4,921 |
|
|
|
1,510 |
|
|
|
2,069 |
|
|
|
3,814 |
|
|
|
1,931 |
|
Commercial Real Estate |
|
|
2,407 |
|
|
|
190 |
|
|
|
1,074 |
|
|
|
8,341 |
|
|
|
2,402 |
|
Commercial and Industrial |
|
|
2,973 |
|
|
|
5,094 |
|
|
|
590 |
|
|
|
1,720 |
|
|
|
592 |
|
Dairy & Livestock |
|
|
|
|
|
|
|
|
|
|
3,551 |
|
|
|
|
|
|
|
|
|
Consumer |
|
|
239 |
|
|
|
87 |
|
|
|
8 |
|
|
|
62 |
|
|
|
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,540 |
|
|
$ |
6,881 |
|
|
$ |
7,292 |
|
|
$ |
13,937 |
|
|
$ |
5,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Loans |
|
|
0.29 |
% |
|
|
0.19 |
% |
|
|
0.20 |
% |
|
|
0.38 |
% |
|
|
0.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Construction and Land |
|
$ |
|
|
|
$ |
1,137 |
|
|
$ |
1,789 |
|
|
$ |
2,416 |
|
|
$ |
6,158 |
|
Commercial Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
1,187 |
|
|
|
4,612 |
|
|
|
87 |
|
Commercial and Industrial |
|
|
3,936 |
|
|
|
|
|
|
|
893 |
|
|
|
893 |
|
|
|
|
|
Residential Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
745 |
|
|
|
320 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,936 |
|
|
$ |
1,137 |
|
|
$ |
4,035 |
|
|
$ |
8,666 |
|
|
$ |
6,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Performing, Past Due & OREO |
|
$ |
84,255 |
|
|
$ |
66,152 |
|
|
$ |
62,592 |
|
|
$ |
70,640 |
|
|
$ |
29,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Loans |
|
|
2.33 |
% |
|
|
1.84 |
% |
|
|
1.73 |
% |
|
|
1.93 |
% |
|
|
0.79 |
% |
We had $69.8 million in non-performing, non-covered loans, or 1.93% of total loans at December
31, 2009. This compares to $58.1 million in non-performing loans at September 30, 2009, $51.3
million in non-performing loans at June 30, 2009, $48.0 million in non-performing loans at March
31, 2009, and $17.7 million in non-performing loans at December 31, 2008. At December 31, 2009,
non-performing loans consist of $13.9 million in residential real estate construction and land
loans, $23.8 million in commercial construction loans, $11.8 million in single-family mortgage
loans, $17.1 million in commercial real estate loans, and $3.2 million in other commercial loans.
Loans acquired through the SJB acquisition, which are contractually past due, are considered
accruing and performing as the loans accrete interest income over the estimated life of the loan
when cash flows are reasonably estimable. We have $163.2 million in gross loans acquired from SJB
which are contractually past due and would normally be reported as nonaccrual. These loans have a
carrying value, net of purchase discount, of $30.8 million. We have loans acquired from SJB
delinquent 30-89 days with a gross balance of $23.2 million and carrying value, net of purchase
discount, of $18.5 million.
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 December 31,
2009 for which known credit problems of the borrower would cause serious doubts as to the ability
of such borrowers to comply with their present loan repayment terms, or any known events that would
result in the loan being designated as non-performing at some future date. We can anticipate that
there will be some losses in the loan portfolio given the current state of the economy. However,
we cannot predict the extent to which the deterioration in general economic conditions, real estate
values, increase in general rates of interest, change in the financial conditions or business of a
borrower may adversely affect a borrowers ability to pay. See Risk Management Credit Risk
herein.
49
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 deposits
from these customers are crucial elements in the performance of the Company.
We reported total deposits of $4.44 billion at December 31, 2009. This represented an increase
of $930.5 million, or 26.52%, over total deposits of $3.51 billion at December 31, 2008. This
increase was due to organic growth primarily from our Specialty Banking Group and Commercial
Banking Centers and due to deposits acquired from the SJB acquisition. The average balance of
deposits by category and the average effective interest rates paid on deposits is summarized for
the years ended December 31, 2009, 2008 and 2007 in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Amounts in thousands) |
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
Non-interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
1,431,204 |
|
|
|
|
|
|
$ |
1,268,548 |
|
|
|
|
|
|
|
1,285,857 |
|
|
|
|
|
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Checking |
|
|
403,092 |
|
|
|
0.41 |
% |
|
|
341,254 |
|
|
|
0.73 |
% |
|
|
338,923 |
|
|
|
1.62 |
% |
Money Market |
|
|
816,199 |
|
|
|
0.98 |
% |
|
|
780,997 |
|
|
|
1.71 |
% |
|
|
830,042 |
|
|
|
3.05 |
% |
Savings |
|
|
147,065 |
|
|
|
0.49 |
% |
|
|
116,559 |
|
|
|
0.47 |
% |
|
|
119,780 |
|
|
|
0.78 |
% |
Time deposits |
|
|
1,195,378 |
|
|
|
1.22 |
% |
|
|
769,827 |
|
|
|
2.52 |
% |
|
|
844,667 |
|
|
|
4.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
3,992,938 |
|
|
|
|
|
|
$ |
3,277,185 |
|
|
|
|
|
|
|
3,419,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of non-interest-bearing demand deposits in relation to total deposits is an
integral element in achieving a low cost of funds. Non-interest-bearing deposits represented 35.19%
of total deposits as of December 31, 2009 and 38.03% of total deposits as of December 31, 2008.
Non-interest-bearing demand deposits totaled $1.56 billion at December 31, 2009. This represented
an increase of $227.7 million, or 17.07%, over total non-interest-bearing demand deposits of $1.33
billion at December 31, 2008.
Table 7 provides the remaining maturities of large denomination ($100,000 or more) time
deposits, including public funds, at December 31, 2009.
Table
7 Maturity Distribution of Large Denomination Time Deposits
|
|
|
|
|
|
|
(Amount in thousands) |
|
3 months or less |
|
$ |
712,528 |
|
Over 3 months through 6 months |
|
|
215,707 |
|
Over 6 months through 12 months |
|
|
65,545 |
|
Over 12 months |
|
|
10,022 |
|
|
|
|
|
Total |
|
$ |
1,003,802 |
|
|
|
|
|
Other Borrowed Funds
To achieve the desired growth in earning assets we fund that growth through the sourcing of
funds. The first source of funds we pursue is non-interest-bearing deposits (the lowest cost of
funds to the Company), next we pursue growth in interest-bearing deposits and finally we supplement
the growth in deposits with borrowed funds. Borrowed funds, as a percent of total funding (total
deposits plus demand notes plus borrowed funds), was 25.14% at December 31, 2009, as compared to
40.12% at December 31, 2008.
50
At December 31, 2009, borrowed funds totaled $1.49 billion. This represented a decrease of
$860.2 million, or 36.59%, from total borrowed funds of $2.35 billion at December 31, 2008. As a
result of the increase in deposits of $930.5 million and net decrease in investment securities of
$388.0 million, it was possible for us to reduce our reliance on borrowings. During 2009, we
restructured a $300 million advance by paying-off $100 million and extended the maturity of $200
million for seven years at a 4.52% fixed rate. Imbedded in this fixed rate is a rate cap
protecting an additional $200 million of interest rate risk. We also prepaid another $100 million
advance. The prepayment penalty for the two $100 million advances was $4.4 million, which was
recognized in other operating expenses. The prepayment penalty on the $200 million restructured
advance was $1.9 million and will be amortized to interest expense over the next seven years. The
maximum outstanding borrowings at any month-end were $2.34 billion during 2009 and $2.68 billion
during 2008.
We entered into short-term borrowing agreements with the Federal Home Loan Bank (FHLB). We had
no outstanding balance as of December 31, 2009 under these agreements. As of December 31, 2008 we
had $776.5 million under these agreements. FHLB held certain investment securities of the Bank as
collateral for those borrowings. On December 31, 2009 we had no overnight borrowings with financial
institutions compared to $6.2 million at December 31, 2008.
In November 2006, we began a repurchase agreement product with our customers. This product,
known as Citizens Sweep Manager, sells our securities overnight to our customers under an agreement
to repurchase them the next day. As of December 31, 2009 and 2008, total funds borrowed under
these agreements were $485.1 million and $364.0 million, respectively.
The following table summarizes the short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds |
|
|
|
|
|
|
|
|
|
Purchased and |
|
|
Other |
|
|
|
|
|
|
Repurchase |
|
|
Short-term |
|
|
|
|
|
|
Agreements |
|
|
Borrowings |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
At December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding |
|
$ |
485,132 |
|
|
$ |
|
|
|
$ |
485,132 |
|
Weighted-average interest rate |
|
|
0.95 |
% |
|
|
|
|
|
|
0.95 |
% |
For the year ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Highest amount at month-end |
|
$ |
485,132 |
|
|
$ |
857,000 |
|
|
$ |
1,342,132 |
|
Daily-average amount outstanding |
|
$ |
449,504 |
|
|
$ |
417,959 |
|
|
$ |
867,462 |
|
Weighted-average interest rate |
|
|
1.05 |
% |
|
|
0.46 |
% |
|
|
0.76 |
% |
At December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding |
|
$ |
363,973 |
|
|
$ |
776,500 |
|
|
$ |
1,140,473 |
|
Weighted-average interest rate |
|
|
1.28 |
% |
|
|
1.39 |
% |
|
|
1.35 |
% |
For the year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Highest amount at month-end |
|
$ |
562,190 |
|
|
$ |
1,162,000 |
|
|
$ |
1,724,190 |
|
Daily-average amount outstanding |
|
$ |
458,993 |
|
|
$ |
1,199,757 |
|
|
$ |
1,658,750 |
|
Weighted-average interest rate |
|
|
2.03 |
% |
|
|
3.31 |
% |
|
|
2.96 |
% |
During 2009 and 2008, we entered into long-term borrowing agreements with the FHLB. We had
outstanding balances of $750.0 million and $950.0 million under these agreements at December 31,
2009 and 2008, respectively, with weighted-average interest rate of 3.81% in 2009 and 4.1% in 2008.
We had an average outstanding balance of $940.4 million and $802.9 million as of December 31, 2009
and 2008, respectively. The FHLB held certain investment securities of the Bank as collateral for
those 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 tied to three-month LIBOR and reset quarterly and
the maturity is September 30, 2012. This repurchase agreement and the customer repurchase
agreements discussed
51
above are collectively included in Item 15 Exhibits and Financial Statement
Schedules as repurchase agreements.
The Bank acquired subordinated debt of $5.0 million from the acquisition of FCB in June 2007
which is included in borrowings in Item 15 Exhibits and Financial Statement Schedules. 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.
At December 31, 2009 and 2008 junior subordinated debentures totaled $115.1 million.
Aggregate Contractual Obligations
The following table summarizes the aggregate contractual obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity by Period |
|
|
|
|
|
|
|
Less Than |
|
|
One Year |
|
|
Four Year |
|
|
After |
|
|
|
|
|
|
|
One |
|
|
to Three |
|
|
to Five |
|
|
Five |
|
|
|
Total |
|
|
Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
|
(amounts in thousands) |
|
Deposits |
|
$ |
4,438,654 |
|
|
$ |
4,421,564 |
|
|
$ |
13,441 |
|
|
$ |
489 |
|
|
$ |
3,160 |
|
Repurchase Agreements |
|
|
735,132 |
|
|
|
485,132 |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
FHLB and Other Borrowings |
|
|
757,425 |
|
|
|
102,425 |
|
|
|
100,000 |
|
|
|
100,000 |
|
|
|
455,000 |
|
Junior Subordinated Debentures |
|
|
115,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,055 |
|
Deferred Compensation |
|
|
8,524 |
|
|
|
847 |
|
|
|
1,613 |
|
|
|
1,591 |
|
|
|
4,473 |
|
Operating Leases |
|
|
25,361 |
|
|
|
5,587 |
|
|
|
9,089 |
|
|
|
4,697 |
|
|
|
5,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,080,151 |
|
|
$ |
5,015,555 |
|
|
$ |
374,143 |
|
|
$ |
106,777 |
|
|
$ |
583,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits represent non-interest bearing, money market, savings, NOW, certificates of deposits,
brokered and all other deposits held by the Company.
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 Treasury Tax &Loan.
Junior subordinated debentures represent the amounts that are due from the Company to CVB
Statutory Trust I, CVB Statutory Trust II & CVB Statutory Trust III. The debentures have the same
maturity as the Trust Preferred Securities. CVB Statutory Trust I which matures in 2033, became
callable in whole or in part in December 2008. CVB Statutory Trust II matures in 2034 and becomes
callable in whole or in part in January 2009. CVB Statutory Trust III, which matures in 2036, will
become callable in whole or in part in 2011. It also represents FCB Capital Trust II which matures
in 2033 and became callable in 2008. We have not called any of our debentures as of December 31,
2009.
Deferred compensation represents the amounts that are due to former employees based on salary
continuation agreements as a result of acquisitions.
Operating leases represent the total minimum lease payments due under non-cancelable operating
leases.
Off-Balance Sheet Arrangements
At December 31, 2009, we had commitments to extend credit of approximately $596.6 million,
obligations under letters of credit of $69.5 million and available lines of credit totaling $1.1
billion from certain financial 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
52
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. We use the same credit underwriting policies in granting or accepting such
commitments or contingent obligations as we do for on-balance sheet instruments, which consist of
evaluating customers creditworthiness individually. The Company has a reserve for undisbursed
commitments of $7.9 million as of December 31, 2009 and $4.2 million as of December 31, 2008.
Standby letters of credit 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, we hold appropriate collateral supporting those commitments. We do not anticipate any
material losses as a result of these transactions.
The following table summarizes the off-balance sheet items at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity by Period |
|
|
|
|
|
|
|
Less Than |
|
|
One Year |
|
|
Four Year |
|
|
After |
|
|
|
|
|
|
|
One |
|
|
to Three |
|
|
to Five |
|
|
Five |
|
|
|
Total |
|
|
Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
|
( Amounts in thousands ) |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment to extend credit |
|
|
596,588 |
|
|
|
187,847 |
|
|
|
54,676 |
|
|
|
50,799 |
|
|
|
303,266 |
|
Obligations under letters of credit |
|
|
69,536 |
|
|
|
53,449 |
|
|
|
10,201 |
|
|
|
5,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
666,124 |
|
|
$ |
241,296 |
|
|
$ |
64,877 |
|
|
$ |
56,685 |
|
|
$ |
303,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Cash Flow
Since the primary sources and uses of funds for the Bank are loans and deposits, the
relationship between gross loans and total deposits provides a useful measure of the Banks
liquidity. Typically, the closer the ratio of loans to deposits is to 100%, the more reliant the
Bank is on its loan portfolio to provide for short-term liquidity needs. Since repayment of loans
tends to be less predictable than the maturity of investments and other liquid resources, the
higher the loans to deposit ratio the less liquid are the Banks assets. For 2009, the Banks loan
to deposit ratio averaged 93.55%, compared to an average ratio of 107.00% for 2008 and 94.35% for
2007. The Banks ratio of loans to deposits and customer repurchases averaged, 84.26% for 2009,
96.24% for 2008, and 87.43% for 2007.
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 rent paid by a third party on office space in our corporate
headquarters. There are statutory and regulatory provisions that could limit the ability of the
Bank to pay 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.
Under applicable California law, the Bank cannot make any distribution (including a cash
dividend) to its shareholder (CVB) in an amount which exceeds the lesser of: (i) the retained
earnings of the Bank or (ii) the net income of the Bank for its last three fiscal years, less the
amount of any distributions made by the Bank to its shareholder during such period.
Notwithstanding the foregoing, with the prior approval of the California Commissioner of Financial
Institutions, the Bank may make a distribution (including a cash dividend) to CVB in an amount not
exceeding the greatest of: (i) the retained earnings of the Bank; (ii) the net income of the Bank
for its last fiscal year; or (iii) the net income of the Bank for its current fiscal year.
At December 31, 2009, approximately $108.8 million of the Banks equity was unrestricted and
available to be paid as dividends to CVB. See Item 1. Business Supervision and
Regulation-Dividends
53
and Other Transfers of Funds. As of December 31, 2009, neither the Bank nor
CVB had any material commitments for capital expenditures.
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 $66.0 million for 2009, $83.6 million for
2008, and $71.1 million for 2007. The decrease in cash provided by operating activities in 2009
compared to 2008 was primarily due to the increase in cash paid to vendors and employees and income
taxes paid, offset by decreases in interest and dividends and service charge fees received and
interest paid.
Cash provided by investing activities totaled $562.5 million for 2009, compared to cash used
in investing activities of $333.9 million for 2008 and $21.1 million for 2007. The increase in cash
provided by investing activities in 2009 was primarily due to the sales, repayment and maturities
of investment securities and decrease in loans, offset by purchases of investment securities.
Net cash used in financing activities totaled $620.5 million compared to net cash provided by
financing activities of $256.1 million for 2008, and compared to funds used by financing activities
of $106.9 million in 2007. The increase in net cash used in financing activities during 2009 was
primarily the result of repayments of FHLB advances and decreases in other borrowings.
At December 31, 2009, cash and cash equivalents totaled $103.3 million. This represented an
increase of $8.0 million, or 8.35%, over a total of $95.3 million at December 31, 2008.
Capital Resources
Historically, our primary source of capital has been the retention of operating earnings. In
order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources
and uses of capital in conjunction with projected increases in assets and the level of risk. As
part of this ongoing assessment, the Board of Directors reviews the various components of capital,
the costs, benefits and impact of raising additional capital and the availability of alternative
sources of capital. Based on the Board of Directors analysis of our capital needs (including any
capital needs arising out of our financial condition and results of operations or from any
acquisitions we may make) and the input of our regulators, we could determine or, our regulators
could require us, to raise additional capital.
In December 2008, we applied for and received $130.0 million through the issuance to the U.S.
Department of Treasurys Capital Purchase Program of Series B Preferred Stock. In connection with
this transaction, we issued a warrant to the U.S. Treasury to purchase 1,669,521 shares of our
common stock. Dividends on our outstanding Series B Preferred Stock were payable at a rate of 5%
for the first five years of issuance, and 9% thereafter. Dividends were cumulative.
In July 2009, we raised $132.5 million in gross proceeds ($126.1 million net proceeds) from
the issuance of common stock in an underwritten public offering. Because we issued common stock in
excess of $130 million, the warrant was reduced to 834,000 shares. The net proceeds were used,
along with other funds, to repurchase the preferred stock and outstanding warrant issued to the
United States Treasury as part of our participation in the Capital Purchase Program.
Total stockholders equity was $638.2 million at December 31, 2009. This represented an
increase of $23.3 million, or 3.80%, over total stockholders equity of $614.9 million at December
31, 2008.
54
For further information about our capital ratios, see Item 1. Business Capital Standards.
During 2009, the Board of Directors of the Company declared quarterly common stock cash
dividends that totaled $0.34 per share for the full year and paid preferred stock dividends
totaling $4.8 million in the aggregate. Dividends are payable at the discretion of the Board of
Directors and there can be no assurance that the Board of Directors will continue to pay dividends
at the same rate, or at all, in the future. CVBs ability to pay cash dividends to its
shareholders is subject to restrictions under federal and California law, including restrictions
imposed by the FRB.
RISK MANAGEMENT
We have adopted a Risk Management Plan to ensure the proper control and management of all risk
factors inherent in the operation of the Company and the Bank. Specifically, credit risk, interest
rate risk, liquidity risk, transaction risk, compliance risk, strategic risk, reputation risk,
price risk and foreign exchange risk, can all affect the market risk exposure of the Company. These
specific risk factors are not mutually exclusive. It is recognized that any product or service
offered by us may expose the Bank to one or more of these risks. Our Risk Management Committee and
Risk Management Department monitors these risks to minimize exposure to the Company.
Credit Risk
Credit risk is defined as the risk to earnings or capital arising from an obligors failure to
meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all
activities where success depends on counter party, issuer, or borrower performance. Credit risk
arises through the extension of loans and leases, certain securities, and letters of credit.
Credit risk in the investment portfolio and correspondent bank accounts is addressed through
defined limits in the Banks policy statements. In addition, certain securities carry insurance to
enhance credit quality of the bond. Limitations on industry concentration, aggregate customer
borrowings, geographic boundaries and standards on loan quality also are designed to reduce loan
credit risk. Senior Management, Directors Committees, and the Board of Directors are provided with
information to appropriately identify, measure, control and monitor the credit risk of the Bank.
Implicit in lending activities is the risk that losses will occur and that the amount of such
losses will vary over time. Consequently, we maintain an allowance for credit losses by charging a
provision for credit losses to earnings. Loans determined to be losses are charged against the
allowance for credit losses. Our allowance for credit losses is maintained at a level considered by
us to be adequate to provide for estimated probable losses inherent in the existing portfolio.
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 realized in
respect of these losses can vary significantly from the estimated amounts. We employ a systematic
methodology that is intended to reduce the differences between estimated and actual losses.
Our methodology for assessing the appropriateness of the allowance is conducted on a regular
basis and considers all loans. The systematic methodology consists of two major elements.
The first major element includes a detailed analysis of the loan portfolio in two phases. In
the first phase, individual loans are reviewed to identify loans for impairment. A loan is impaired
when principal and interest are deemed uncollectible in accordance with the original contractual
terms of the loan. Impairment is measured as either the expected future cash flows discounted at
each 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.
55
Central to the first phase and our credit risk management is our 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 this second phase, groups or pools
of homogeneous loans are reviewed to determine a portfolio formula allowance. In the case of the
portfolio formula allowance, homogeneous portfolios, such as small business loans, consumer loans,
agricultural loans, and real estate loans, are aggregated or pooled in determining the appropriate
allowance. The risk assessment process in this case emphasizes trends in the different portfolios
for delinquency, loss, and other-behavioral characteristics of the subject portfolios.
The second major element in our methodology for assessing the appropriateness of the allowance
consists of our considerations of qualitative factors, including, all known relevant internal and
external factors that may affect the collectability of a loan. 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 qualitative 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), |
56
|
|
|
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.
Allowance for Credit Losses on Non-Covered Loans
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 a provision for credit losses of $80.5 million, $26.6 million and $4.0
million for 2009, 2008 and 2007, respectively. There is no allowance on covered loans acquired
through the SJB acquisition as they were recorded at fair value as of the acquisition date and
these loans are covered by a loss sharing agreement with the FDIC.
At December 31, 2009, we reported an allowance for credit losses of $108.9 million. This
represents an increase of $55.0 million, or 101.86%, over the allowance for credit losses of $54.0
million at December 31, 2008. During 2009, we recorded a provision for credit losses of $80.5
million and net charge-offs of $25.5 million. The increase in allowance during 2009 was due to the
increase in classified loans and the changes in qualitative factors which we use to evaluate our
portfolio and is consistent with the current economic environment. (See Table 8 Summary of
Credit Loss Experience.)
For 2009, total loans charged-off were $26.3 million, offset by the recoveries of loans
previously charged-off of $803,000 resulting in net charge-offs of $25.5 million. For 2008, total
loans charged-off were $6.0 million offset by the recoveries of loans previously charged-off of
$348,000 resulting in net charge-offs of $5.7 million.
In addition to the allowance for credit losses, the Company also has a reserve for undisbursed
commitments for loans and letters of credit. This reserve is carried on the liabilities section of
the balance sheet in other liabilities. Provisions to this reserve are included in other expense.
The Company recorded an increase of $3.7 million and $1.3 million in the reserve for undisbursed
commitments for 2009 and 2008, respectively. As of December 31, 2009, the balance in this reserve
was $7.9 million compared to a balance of $4.2 million as of December 31, 2008. The increase in
provision for unfunded commitments was primarily due to an increase in loan commitments and more
specifically, an increase in classified loans related to those commitments.
Table 8 presents a comparison of net credit losses, the provision for credit losses (including
adjustments incidental to mergers), and the resulting allowance for credit losses for each of the
years indicated. The table below provides information on non-covered loans only because there was
no allowance or charge-offs on covered loans as of December 31, 2009.
57
TABLE 8 Summary of Credit Loss Experience
(Non-Covered Loans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For Years Ended December 31, |
|
|
|
Non-covered only |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(amounts in thousands) |
|
Amount of Total Loans at End of Period (1) |
|
$ |
3,608,379 |
|
|
$ |
3,736,838 |
|
|
$ |
3,495,144 |
|
|
$ |
3,070,196 |
|
|
$ |
2,663,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Total Loans Outstanding (1) |
|
$ |
3,735,339 |
|
|
$ |
3,506,510 |
|
|
$ |
3,226,086 |
|
|
$ |
2,811,782 |
|
|
$ |
2,277,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses at Beginning of Period |
|
$ |
53,960 |
|
|
$ |
33,049 |
|
|
$ |
27,737 |
|
|
$ |
23,204 |
|
|
$ |
22,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Charged-Off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
21,602 |
|
|
|
4,690 |
|
|
|
1,748 |
|
|
|
|
|
|
|
780 |
|
Commercial and Industrial |
|
|
4,141 |
|
|
|
626 |
|
|
|
127 |
|
|
|
90 |
|
|
|
243 |
|
Lease Finance Receivables |
|
|
294 |
|
|
|
410 |
|
|
|
182 |
|
|
|
79 |
|
|
|
91 |
|
Consumer Loans |
|
|
302 |
|
|
|
311 |
|
|
|
41 |
|
|
|
31 |
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Charged-Off |
|
|
26,339 |
|
|
|
6,037 |
|
|
|
2,098 |
|
|
|
200 |
|
|
|
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans |
|
|
471 |
|
|
|
192 |
|
|
|
82 |
|
|
|
1,140 |
|
|
|
572 |
|
Commercial and Industrial |
|
|
96 |
|
|
|
24 |
|
|
|
465 |
|
|
|
400 |
|
|
|
543 |
|
Lease Finance Receivables |
|
|
202 |
|
|
|
48 |
|
|
|
148 |
|
|
|
82 |
|
|
|
101 |
|
Consumer Loans |
|
|
34 |
|
|
|
84 |
|
|
|
44 |
|
|
|
111 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Recovered |
|
|
803 |
|
|
|
348 |
|
|
|
739 |
|
|
|
1,733 |
|
|
|
1,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans Charged-Off (Recovered) |
|
|
25,536 |
|
|
|
5,689 |
|
|
|
1,359 |
|
|
|
(1,533 |
) |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision Charged to Operating Expense |
|
|
80,500 |
|
|
|
26,600 |
|
|
|
4,000 |
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments Incident to Mergers and reclassifications |
|
|
|
|
|
|
|
|
|
|
2,671 |
|
|
|
|
|
|
|
756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses at End of period |
|
$ |
108,924 |
|
|
$ |
53,960 |
|
|
$ |
33,049 |
|
|
$ |
27,737 |
|
|
$ |
23,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans Charged-Off (Recovered) to Average Total Loans |
|
|
0.68 |
% |
|
|
0.16 |
% |
|
|
0.04 |
% |
|
|
-0.05 |
% |
|
|
0.00 |
% |
Net Loans Charged-Off (Recovered) to Total Loans at End of Period |
|
|
0.71 |
% |
|
|
0.15 |
% |
|
|
0.04 |
% |
|
|
-0.05 |
% |
|
|
0.00 |
% |
Allowance for Credit Losses to Average Total Loans |
|
|
2.92 |
% |
|
|
1.54 |
% |
|
|
1.02 |
% |
|
|
0.99 |
% |
|
|
1.02 |
% |
Allowance for Credit Losses to Total Loans at End of Period |
|
|
3.02 |
% |
|
|
1.44 |
% |
|
|
0.95 |
% |
|
|
0.90 |
% |
|
|
0.87 |
% |
Net Loans Charged-Off (Recovered) to Allowance for Credit Losses |
|
|
23.44 |
% |
|
|
10.54 |
% |
|
|
4.11 |
% |
|
|
-5.53 |
% |
|
|
0.20 |
% |
Net Loans Charged-Off (Recovered) to Provision for Credit Losses |
|
|
31.72 |
% |
|
|
21.39 |
% |
|
|
33.98 |
% |
|
|
-51.10 |
% |
|
|
|
|
|
|
|
(1) |
|
Net of deferred loan origination fees. |
While we believe that the allowance at December 31, 2009, was adequate to absorb losses from
any known or inherent risks in the portfolio, no assurance can be given that economic conditions
which adversely affect our service areas or other circumstances will not be reflected in increased
provisions or credit losses in the future.
Table 9 provides a summary of the allocation of the allowance for credit losses for specific
loan categories at the dates indicated for non-covered loans. The allocations presented should not
be interpreted as an indication that loans charged to the allowance for credit losses will occur in
these amounts or proportions, or that the portion of the allowance allocated to each loan category
represents the total amount available for future losses that may occur within these categories.
Table 9 Allocation of Allowance for Credit Losses
(Non-Covered Loans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Loans |
|
|
|
|
|
|
% of Loans |
|
|
|
|
|
|
% of Loans |
|
|
|
Allowance |
|
|
% of Loans to |
|
|
Allowance |
|
|
% of Loans to |
|
|
Allowance |
|
|
to Total |
|
|
Allowance |
|
|
to Total |
|
|
Allowance |
|
|
to Total |
|
|
|
for |
|
|
Total Loans |
|
|
for |
|
|
Total Loans |
|
|
for |
|
|
Loans in |
|
|
for |
|
|
Loans in |
|
|
for |
|
|
Loans in |
|
|
|
Credit |
|
|
in Each |
|
|
Credit |
|
|
in Each |
|
|
Credit |
|
|
Each |
|
|
Credit |
|
|
Each |
|
|
Credit |
|
|
Each |
|
|
|
Losses |
|
|
Category |
|
|
Losses |
|
|
Category |
|
|
Losses |
|
|
Category |
|
|
Losses |
|
|
Category |
|
|
Losses |
|
|
Category |
|
|
|
( amounts in thousands ) |
|
Real Estate |
|
$ |
42,215 |
|
|
|
62.4 |
% |
|
$ |
16,463 |
|
|
|
60.8 |
% |
|
$ |
9,028 |
|
|
|
61.9 |
% |
|
$ |
8,232 |
|
|
|
62.5 |
% |
|
$ |
9,452 |
|
|
|
61.2 |
% |
Construction |
|
|
21,222 |
|
|
|
7.3 |
% |
|
|
19,491 |
|
|
|
9.4 |
% |
|
|
7,828 |
|
|
|
8.8 |
% |
|
|
4,320 |
|
|
|
9.7 |
% |
|
|
2,370 |
|
|
|
10.1 |
% |
Commercial and Industrial |
|
|
40,507 |
|
|
|
28.4 |
% |
|
|
17,271 |
|
|
|
28.0 |
% |
|
|
15,266 |
|
|
|
27.6 |
% |
|
|
14,568 |
|
|
|
26.0 |
% |
|
|
14,122 |
|
|
|
26.5 |
% |
Consumer |
|
|
802 |
|
|
|
1.9 |
% |
|
|
735 |
|
|
|
1.8 |
% |
|
|
506 |
|
|
|
1.7 |
% |
|
|
297 |
|
|
|
1.8 |
% |
|
|
224 |
|
|
|
2.2 |
% |
Unallocated |
|
|
4,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421 |
|
|
|
|
|
|
|
320 |
|
|
|
|
|
|
|
(2,964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
108,924 |
|
|
|
100.0 |
% |
|
$ |
53,960 |
|
|
|
100.0 |
% |
|
$ |
33,049 |
|
|
|
100.0 |
% |
|
$ |
27,737 |
|
|
|
100.0 |
% |
|
$ |
23,204 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Risk
In the normal course of its business activities, we are exposed to market risks, including
price and liquidity risk. Market risk is the potential for 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 includes securities, loans, deposits, debt, and derivative financial instruments.
58
The table below provides the actual balances as of December 31, 2009 of interest-earning
assets (net of deferred loan fees and allowance for credit losses) and interest-bearing
liabilities, including the average rate earned or paid for 2009, the projected contractual
maturities over the next five years, and the estimated fair value of each category determined using
available market information and appropriate valuation methodologies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing |
|
|
|
December 31, |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years |
|
|
Estimated |
|
|
|
2009 |
|
|
Rate |
|
|
One year |
|
|
Two years |
|
|
Three years |
|
|
Four years |
|
|
and beyond |
|
|
Fair Value |
|
|
|
(Amounts in thousands) |
|
Interest-Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale (1) |
|
$ |
2,108,463 |
|
|
|
4.41 |
% |
|
$ |
139,298 |
|
|
$ |
235,204 |
|
|
$ |
277,434 |
|
|
$ |
239,225 |
|
|
$ |
1,217,302 |
|
|
$ |
2,108,463 |
|
Investment securities held-to-maturity |
|
$ |
3,838 |
|
|
|
6.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,838 |
|
|
|
3,838 |
|
Loans and lease finance receivables, net |
|
|
3,970,089 |
|
|
|
5.52 |
% |
|
|
1,190,978 |
|
|
|
146,879 |
|
|
|
206,935 |
|
|
|
144,124 |
|
|
|
2,281,173 |
|
|
|
3,955,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets |
|
$ |
6,082,390 |
|
|
|
|
|
|
$ |
1,330,276 |
|
|
$ |
382,083 |
|
|
$ |
484,369 |
|
|
$ |
383,349 |
|
|
$ |
3,502,313 |
|
|
$ |
6,067,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
2,876,673 |
|
|
|
0.97 |
% |
|
$ |
2,860,417 |
|
|
$ |
10,205 |
|
|
$ |
2,402 |
|
|
$ |
360 |
|
|
$ |
3,289 |
|
|
|
2,879,305 |
|
Demand note to U.S. Treasury |
|
|
2,425 |
|
|
|
0.00 |
% |
|
|
2,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,425 |
|
Borrowings |
|
|
1,490,132 |
|
|
|
3.29 |
% |
|
|
835,132 |
|
|
|
|
|
|
|
100,000 |
|
|
|
100,000 |
|
|
|
455,000 |
|
|
|
1,536,933 |
|
Junior subordinated debentures |
|
|
115,055 |
|
|
|
3.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,055 |
|
|
|
115,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
4,484,285 |
|
|
|
|
|
|
$ |
3,697,974 |
|
|
$ |
10,205 |
|
|
$ |
102,402 |
|
|
$ |
100,360 |
|
|
$ |
573,344 |
|
|
$ |
4,534,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These include mortgage-backed securities which generally prepay before maturity. |
Interest Rate Risk
During periods of changing interest rates, the ability to re-price 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 our service area. Short-term re-pricing
risk is minimized by controlling the level of floating rate loans and maintaining a downward
sloping ladder of bond payments and maturities. Basic 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 relatively short. 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/re-pricing gap analysis. This analysis measures,
at specific time intervals, the differences between earning assets and interest-bearing liabilities
for which re-pricing opportunities will occur. A positive difference, or gap, indicates that
earning assets will re-price 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. In managing risks associated with
rising interest rates, we utilize interest rate derivative contracts on certain loans and borrowed
funds. On the asset side, the derivatives allow us to convert some of our fixed-rate loans to
variable-rate loans which protects against loss of income in a rising interest rate environment.
On the liability side, we utilize rate caps to protect against rising interest rates on borrowed
funds.
59
TABLE 10 Asset and Liability Maturity/Repricing Gap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 90 |
|
|
Over 180 |
|
|
|
|
|
|
|
|
|
90 days |
|
|
days to |
|
|
days to |
|
|
Over |
|
|
|
|
2009 |
|
or less |
|
|
180 days |
|
|
365 days |
|
|
365 days |
|
|
Total |
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
|
|
|
|
Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities at carrying value |
|
$ |
109,733 |
|
|
$ |
95,245 |
|
|
$ |
182,462 |
|
|
$ |
1,724,861 |
|
|
$ |
2,112,301 |
|
Gross Loans |
|
|
1,535,697 |
|
|
|
204,711 |
|
|
|
346,503 |
|
|
|
2,183,064 |
|
|
|
4,269,975 |
|
|
|
|
Total |
|
$ |
1,645,430 |
|
|
$ |
299,956 |
|
|
$ |
528,965 |
|
|
$ |
3,907,925 |
|
|
$ |
6,382,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Deposits |
|
$ |
962,254 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
720,161 |
|
|
$ |
1,682,415 |
|
Time Deposits |
|
|
817,628 |
|
|
|
215,991 |
|
|
|
147,700 |
|
|
|
12,939 |
|
|
|
1,194,258 |
|
Demand Note to U.S. Treasury |
|
|
2,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,425 |
|
Other Borrowings |
|
|
590,132 |
|
|
|
|
|
|
|
|
|
|
|
900,000 |
|
|
|
1,490,132 |
|
Junior subordinated debentures |
|
|
115,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,487,494 |
|
|
$ |
215,991 |
|
|
$ |
147,700 |
|
|
$ |
1,633,100 |
|
|
$ |
4,484,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period GAP |
|
$ |
(842,064 |
) |
|
$ |
83,965 |
|
|
$ |
381,265 |
|
|
$ |
2,274,825 |
|
|
$ |
1,897,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP |
|
$ |
(842,064 |
) |
|
$ |
(758,099 |
) |
|
$ |
(376,834 |
) |
|
$ |
1,897,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 90 |
|
|
Over 180 |
|
|
|
|
|
|
|
|
|
90 days |
|
|
days to |
|
|
days to |
|
|
Over |
|
|
|
|
2008 |
|
or less |
|
|
180 days |
|
|
365 days |
|
|
365 days |
|
|
Total |
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
|
|
|
|
Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities at carrying value |
|
$ |
185,604 |
|
|
$ |
158,128 |
|
|
$ |
230,836 |
|
|
$ |
1,925,775 |
|
|
$ |
2,500,343 |
|
Gross Loans |
|
|
1,351,931 |
|
|
|
197,818 |
|
|
|
297,539 |
|
|
|
1,898,743 |
|
|
|
3,746,031 |
|
|
|
|
Total |
|
$ |
1,537,535 |
|
|
|
355,946 |
|
|
|
528,375 |
|
|
|
3,824,518 |
|
|
|
-6,246,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Deposits |
|
$ |
707,324 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
436,458 |
|
|
$ |
1,143,782 |
|
Time Deposits |
|
|
768,174 |
|
|
|
150,029 |
|
|
|
82,131 |
|
|
|
29,792 |
|
|
|
1,030,126 |
|
Demand Note to U.S. Treasury |
|
|
5,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,373 |
|
Other Borrowings |
|
|
1,145,473 |
|
|
|
|
|
|
|
|
|
|
|
1,200,000 |
|
|
|
2,345,473 |
|
Junior subordinated debentures |
|
|
115,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,055 |
|
|
|
|
Total |
|
|
2,741,399 |
|
|
|
150,029 |
|
|
|
82,131 |
|
|
|
1,666,250 |
|
|
|
-4,639,809 |
|
|
|
|
Period GAP |
|
$ |
(1,203,864 |
) |
|
$ |
205,917 |
|
|
$ |
446,244 |
|
|
$ |
2,158,268 |
|
|
$ |
1,606,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP |
|
$ |
(1,203,864 |
) |
|
$ |
(997,947 |
) |
|
$ |
(551,703 |
) |
|
$ |
1,606,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 10 provides the Banks maturity/re-pricing gap analysis at December 31, 2009, and 2008.
We had a negative cumulative 180-day gap of $758.1 million and a negative cumulative 365-days gap
of $376.8 million at December 31, 2009. This represented a decrease of $239.9 million, over the
180-day cumulative negative gap of $997.9 billion at December 31, 2008. In theory, this would
indicate that at December 31, 2009, $758.1 million more in liabilities than assets would re-price
if there were a change in interest rates over the next 180 days. If interest rates increase, the
negative gap would tend to result in a lower net interest margin. If interest rates decrease, the
negative gap would tend to result in an increase in the net interest margin. However, we do have
the ability to anticipate the increase in deposit rates, and the ability to extend interest-bearing
liabilities, offsetting, in part, the negative gap.
The interest rates paid on deposit accounts do not always move in unison with the rates
charged on loans. In addition, the magnitude of changes in the rates charged on loans is not always
proportionate to the magnitude of changes in the rate paid on 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 re-pricing opportunities of earning assets or
interest-bearing liabilities. The fact that the Bank reported a negative gap at December 31, 2009
for changes within the following 365 days 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 $1.42 billion, or 67%, of the total investment portfolio at December 31, 2009
consisted of securities backed by mortgages. The final maturity of these securities can be affected
by the speed at which the underlying mortgages repay. Mortgages tend to repay faster as interest
rates fall, and slower as interest rates rise. As a result, we may be subject to a prepayment
risk resulting from greater
60
funds available for reinvestment at a time when available yields are
lower. Conversely, we may be subject to extension risk resulting, as lesser amounts would be
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 interest income from
all interest-earning assets and interest expense paid on all interest-bearing liabilities reflected
on our balance sheet. This sensitivity analysis is compared to policy limits, which specify a
maximum tolerance level for net interest income exposure over a one-year horizon assuming no
balance sheet growth, given a 200 basis point upward and a 100 basis point downward shift in
interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed.
The following reflects our net interest income sensitivity analysis as of December 31, 2009:
|
|
|
|
|
|
|
Estimated Net |
|
Simulated |
|
Interest Income |
|
Rate Changes |
|
Sensitivity |
|
+ 200 basis points |
|
|
(3.25% |
) |
- 100 basis points |
|
|
0.58 |
% |
The Company is currently more liability sensitive. The estimated sensitivity does not
necessarily represent a forecast and the results may not be indicative of actual changes to our net
interest income. These estimates are based upon a number of assumptions including: the nature and
timing of interest rate levels including yield curve shape, prepayments on loans and securities,
pricing strategies on loans and deposits, and replacement of asset and liability cash-flows. While
the assumptions used are based on current economic and local market conditions, there is no
assurance as to the predictive nature of these conditions including how customer preferences or
competitor influences might change.
Liquidity Risk
Liquidity risk is the risk to earnings or capital resulting from our inability to meet
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 FRB. 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.
61
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 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 Aa3. |
|
|
|
|
We do not have any investments in the preferred stock of any other company. |
|
|
|
|
We do not have in our investment portfolio any trust preferred securities of any other
company. |
|
|
|
|
Most 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 AXII or above. |
|
|
|
|
We have no significant Counterparty exposure related to derivatives such as interest
rate swaps. |
|
|
|
|
We have no significant exposure to our Cash Surrender Value of Life insurance since all
of the insurance companies carry an AM Best rating of A or greater. |
|
|
|
|
We have $345.0 million in Fed Funds lines of credit with other banks. All of these
banks are major U.S. banks, with over $20.0 billion in assets. We rely on these funds for
overnight borrowings. We currently have no outstanding Fed Funds balance. |
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 the Bank offers.
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 the
Bank 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.
62
Our Risk Management Policy and Program and the Code of Ethical Conduct are the cornerstone for
controlling compliance risk. An integral part of controlling this risk is the proper training of
associates. The Chief Risk Officer is responsible for developing and executing a comprehensive
compliance training program. The Chief Risk Officer will ensure that each associate receives
adequate training with regard to their position to ensure that laws and regulations are not
violated. All associates who deal in compliance high risk areas are trained to be knowledgeable
about the level and severity of exposure in those areas and the policies and procedures in place to
control such exposure.
Our Risk Management Policy and Program includes an audit program aimed at identifying problems
and ensuring that problems are corrected. The audit program includes two levels of review. One is
in-depth audits performed by an independent external firm and the other is periodic monitoring
performed by the Risk Management Division.
The Bank utilizes independent external firms 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 branchs and departments of the Bank.
The branch or department that is the subject of an audit is required to respond to the audit
and correct any violations noted. The Chief Risk Officer reviews audit findings and the response
provided by the branch or department to identify areas which pose a significant compliance risk to
the Bank.
The Risk Management Division conducts periodic monitoring of the Banks compliance efforts
with a special focus on those areas that expose the Bank to compliance risk. The purpose of the
periodic monitoring is to ensure that Bank associates are adhering to established policies and
procedures adopted by the Bank. The Chief Risk Officer notifies the appropriate department head,
the Management Compliance Committee, the Audit Committee and the Risk Management Committee of any
violations noted. The branch or department that is the subject of the review is required to respond
to the findings and correct any noted violations.
The Bank recognizes that customer complaints can often identify weaknesses in the Banks
compliance program which could expose the Bank to risk. Therefore, all complaints are given prompt
attention. The Banks Risk Management Policy and Program includes provisions on how customer
complaints are to be addressed. The Chief Risk Officer reviews all complaints to determine if a
significant compliance risk exists and communicates those findings to the Risk Management
Committee.
Strategic Risk
Strategic risk is the risk to earnings or capital arising from adverse decisions or improper
implementation of strategic decisions. This risk is a function of the compatibility between an
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, including members of the Board of Directors and Senior Leadership, 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 |
63
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 the Banks ability to establish new relationships or services, or continue servicing
existing relationships. It can expose the Bank to litigation and, in some instances, financial
loss.
Price and Foreign Exchange Risk
Price risk arises from changes in market factors that affect the value of traded instruments.
Foreign exchange risk is the risk to earnings or capital arising from movements in foreign exchange
rates.
Our current exposure to price risk is nominal. We do not have trading accounts. Consequently,
the level of price risk within the investment portfolio is limited to the need to sell securities
for reasons other than trading. The section of this policy pertaining to liquidity risk addresses
this risk.
We maintain deposit accounts with various foreign banks. Our Interbank Liability Policy limits
the balance in any of these accounts to an amount that does not present a significant risk to our
earnings from changes in the value of foreign currencies.
Our asset liability model calculates the market value of the Banks equity. In addition,
management prepares, on a monthly basis, a capital volatility report that compares changes in the
market value of the investment portfolio. We have as our target to always be well-capitalized by
regulatory standards.
The Balance Sheet Management Policy requires the submission of a Fair Value Matrix Report to
the Balance Sheet Management Committee on a quarterly basis. The report calculates the economic
value of equity under different interest rate scenarios, revealing the level or price risk of the
Banks interest sensitive asset and liability portfolios.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in the market prices and interest rates.
Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking
activities. We currently do not enter into futures, forwards, or option contracts. For greater
discussion on the risk management of the Company, see Item 7. Managements Discussion and Analysis
of Financial Condition and the Results of Operations Risk Management.
64
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CVB Financial Corp.
Index to Consolidated Financial Statements
and Financial Statement Schedules
|
|
|
|
|
|
|
Page |
|
Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
|
|
113 |
|
All schedules are omitted because they are not applicable, not material or because the
information is included in the financial statements or the notes thereto.
For information about the location of managements annual reports on internal control, our
financial reporting and the audit report of KPMG LLP thereon. See Item 9A. Controls and
Procedures.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
1) Managements Report on Internal Control over Financial Reporting
Management of CVB Financial Corp., together with its consolidated subsidiaries (the
Company), is responsible for establishing and maintaining adequate internal control over
financial reporting. The Companys internal control over financial reporting is a process designed
under the supervision of the Companys principal executive and principal financial officers to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of the Companys financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles.
Our internal control over financial reporting includes policies and procedures that pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions
and dispositions of assets; provide reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on our financial statements.
As of December 31, 2009, management conducted an assessment of the effectiveness of the
Companys internal control over financial reporting based on the framework established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
65
Commission (COSO). Based on this assessment, management has determined that the Companys internal
control over financial reporting as of December 31, 2009 is effective. KPMG LLP, an independent
registered public accounting firm, has issued their report on the effectiveness of
internal control over financial reporting as of December 31, 2009.
2) Auditor attestation
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
CVB Financial Corp.:
We have audited CVB Financial Corp and subsidiaries internal control over financial reporting as
of December 31, 2009, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed 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. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, CVB Financial Corp. and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
66
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of CVB Financial Corp. and subsidiaries as
of December 31, 2009 and 2008, and the related consolidated statements of earnings, stockholders
equity and comprehensive income, and cash flows for each of the years in the three-year period
ended December 31, 2009, and our report dated March 3, 2010 expressed an unqualified opinion on
those consolidated financial statements.
Los Angeles, California
March 3, 2010
3) Changes in Internal Control over Financial Reporting
We maintain controls and procedures designed to ensure that information is recorded and
reported in all filings of financial reports. Such information is reported to our management,
including our Chief Executive Officer and Chief Financial Officer to allow timely and accurate
disclosure based on the definition of disclosure controls and procedures in SEC Rule 13a-15(e)
and 15d-15(e).
As of the end of the period covered by this report, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures under the
supervision and with the participation of the Chief Executive Officer and the Chief Financial
Officer. Based on the foregoing, our Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures are effective as of the end of the period
covered by this report.
During the fiscal quarter ended December 31, 2009, 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.
ITEM 9B. OTHER INFORMATION
None.
67
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except as hereinafter noted, the information concerning directors and executive officers of
the Company, corporate governance and our audit committee financial expert is incorporated by
reference from the section entitled Discussion of Proposals recommended by the Board Proposal 1:
Election of Directors and Beneficial Ownership Reporting Compliance, Corporate Governance
Principles and Board Matters, and Audit Committee of our definitive Proxy Statement to be filed
pursuant to Regulation 14A within 120 days after the end of the last fiscal year. For information
concerning the executive officers of the Company, see Item 4A of Part I hereto.
The Company has adopted a Code of Ethics that applies to all of the Companys employees,
including the Companys principal executive officer, the principal financial and accounting
officer, and all employees who perform these functions. A copy of the Code of Ethics is available
to any person without charge by submitting a request to the Companys Chief Financial Officer at
701 N. Haven Avenue, Suite 350, Ontario, CA 91764. If the Company shall amend its Code of Ethics
as applies to the principal executive officer, principal financial officer, principal accounting
officer or controller (or persons performing similar functions) or shall grant a waiver from any
provision of the code of ethics to any such person, the Company shall disclose such amendment or
waiver on its website at www.cbbank.com under the tab Investor Relations.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management remuneration and transactions is incorporated by reference
from the section entitled Election of Directors and Executive Compensation Certain
Relationships and Related Transactions of our definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The following table summarizes information as of February 15, 2010 relating to our equity
compensation plans pursuant to which grants of options, restricted stock, or other rights to
acquire shares may be granted from time to time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information |
|
|
Number of Securities |
|
|
|
|
|
|
Remaining Available for |
|
|
|
Number of Securities to |
|
|
Weighted-average |
|
|
Future Issuance Under |
|
|
|
be Issued Upon Exercise |
|
|
Exercise Price |
|
|
Equity Compensation Plans |
|
|
|
of Outstanding Options, |
|
|
of Outstanding Options, |
|
|
( excluding securities |
|
Plan Category |
|
Warrants and Rights (a) |
|
|
Warrants and Rights (b) |
|
|
reflected in column (a)) ( c ) |
|
Equity compensation plans approved
by security holders |
|
|
3,099,203 |
|
|
$ |
10.16 |
|
|
|
2,273,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,099,203 |
|
|
$ |
10.16 |
|
|
|
2,273,391 |
|
|
|
|
|
|
|
|
|
|
|
Information concerning security ownership of certain beneficial owners and management is
incorporated by reference from the sections entitled Stock Ownership of our definitive Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal
year.
68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions with management and
others and information regarding director independence is incorporated by reference from the
section entitled Executive Compensation Certain Relationships and Related Transactions of our
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of
the last fiscal year.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accounting fees and services is incorporated by reference
from the section entitled Ratification of Appointment of Independent Public Accountants of our
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of
the last fiscal year.
69
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements
Reference is made to the Index to Financial Statements at page 65 for a list of financial
statements filed as part of this Report.
Exhibits
See Index to Exhibits at Page 113 of this Form 10-K.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 3rd day of March 2010.
|
|
|
|
|
|
CVB FINANCIAL CORP.
|
|
|
By: |
/s/ CHRISTOPHER D. MYERS
|
|
|
|
Christopher D. Myers |
|
|
|
President and Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ GEORGE A. BORBA
George A. Borba
|
|
Chairman of the Board
|
|
March 3, 2010 |
|
|
|
|
|
/s/ JOHN A. BORBA
John A. Borba
|
|
Director
|
|
March 3, 2010 |
|
|
|
|
|
/s/ RONALD O. KRUSE
Ronald O. Kruse
|
|
Vice Chairman
|
|
March 3, 2010 |
|
|
|
|
|
/s/ ROBERT M. JACOBY
Robert M. Jacoby
|
|
Director
|
|
March 3, 2010 |
|
|
|
|
|
/s/ JAMES C. SELEY
James C. Seley
|
|
Director
|
|
March 3, 2010 |
|
|
|
|
|
/s/ SAN E. VACCARO
San E. Vaccaro
|
|
Director
|
|
March 3, 2010 |
|
|
|
|
|
|
|
Vice Chairman
|
|
March 3, 2010 |
D. Linn Wiley |
|
|
|
|
|
|
|
|
|
/s/ CHRISTOPHER D. MYERS
Christopher D. Myers
|
|
Director, President and
Chief Executive Officer
(Principal Executive Officer)
|
|
March 3, 2010 |
|
|
|
|
|
/s/ EDWARD J. BIEBRICH, JR.
Edward J. Biebrich, Jr.
|
|
Chief Financial Officer
(Principal Financial and
Accounting Officer)
|
|
March 3, 2010 |
71
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Amounts in thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
103,254 |
|
|
$ |
95,297 |
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
2,108,463 |
|
|
|
2,493,476 |
|
Investment securities held-to-maturity |
|
|
3,838 |
|
|
|
6,867 |
|
Interest-bearing balances due from depository institutions |
|
|
1,226 |
|
|
|
285 |
|
Investment in stock of Federal Home Loan Bank (FHLB) |
|
|
97,582 |
|
|
|
93,240 |
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale |
|
|
1,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-covered loans |
|
|
3,608,379 |
|
|
|
3,736,838 |
|
Allowance for credit losses |
|
|
(108,924 |
) |
|
|
(53,960 |
) |
|
|
|
|
|
|
|
Net non-covered loans |
|
|
3,499,455 |
|
|
|
3,682,878 |
|
Covered loans |
|
|
470,634 |
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
3,970,089 |
|
|
|
3,682,878 |
|
|
|
|
|
|
|
|
Total earning assets |
|
|
6,182,637 |
|
|
|
6,276,746 |
|
Premises and equipment, net |
|
|
41,444 |
|
|
|
44,420 |
|
Bank owned life insurance |
|
|
109,480 |
|
|
|
106,366 |
|
Accrued interest receivable |
|
|
28,672 |
|
|
|
28,519 |
|
Deferred tax asset |
|
|
16,053 |
|
|
|
|
|
Intangibles |
|
|
12,761 |
|
|
|
11,020 |
|
Goodwill |
|
|
55,097 |
|
|
|
55,097 |
|
FDIC loss sharing asset |
|
|
133,258 |
|
|
|
|
|
Other assets |
|
|
57,113 |
|
|
|
32,186 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
6,739,769 |
|
|
$ |
6,649,651 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
1,561,981 |
|
|
$ |
1,334,248 |
|
Interest-bearing |
|
|
2,876,673 |
|
|
|
2,173,908 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
4,438,654 |
|
|
|
3,508,156 |
|
Demand Note to U.S. Treasury |
|
|
2,425 |
|
|
|
5,373 |
|
Repurchase agreements |
|
|
735,132 |
|
|
|
607,813 |
|
Borrowings |
|
|
753,118 |
|
|
|
1,737,660 |
|
Deferred tax liabilities |
|
|
|
|
|
|
4,173 |
|
Accrued interest payable |
|
|
6,481 |
|
|
|
9,741 |
|
Deferred compensation |
|
|
9,166 |
|
|
|
8,985 |
|
Junior subordinated debentures |
|
|
115,055 |
|
|
|
115,055 |
|
Other liabilities |
|
|
41,510 |
|
|
|
37,803 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
6,101,541 |
|
|
|
6,034,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Preferred stock, authorized, 20,000,000 shares
without par; issued and outstanding 130,000 (2008) |
|
|
|
|
|
|
121,508 |
|
Common stock, authorized, 122,070,312 shares
without par; issued and outstanding
106,263,511 (2009) and 83,270,263 (2008) |
|
|
491,226 |
|
|
|
364,469 |
|
Retained earnings |
|
|
120,612 |
|
|
|
100,184 |
|
Accumulated other comprehensive income, net of tax |
|
|
26,390 |
|
|
|
28,731 |
|
|
|
|
|
|
|
|
TOTAL stockholders equity |
|
|
638,228 |
|
|
|
614,892 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
6,739,769 |
|
|
$ |
6,649,651 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
72
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three Years Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(amounts in thousands, |
|
|
|
except earnings per share) |
|
INTEREST INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
|
$ |
206,079 |
|
|
$ |
212,626 |
|
|
$ |
221,809 |
|
|
|
|
|
|
|
|
|
|
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
76,798 |
|
|
|
86,930 |
|
|
|
85,899 |
|
Tax-advantaged |
|
|
27,329 |
|
|
|
28,371 |
|
|
|
29,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,127 |
|
|
|
115,301 |
|
|
|
115,130 |
|
|
|
|
|
|
|
|
|
|
|
Dividends from FHLB |
|
|
195 |
|
|
|
4,552 |
|
|
|
4,229 |
|
Federal funds sold |
|
|
343 |
|
|
|
15 |
|
|
|
9 |
|
Interest-bearing deposits with other institutions |
|
|
15 |
|
|
|
24 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
310,759 |
|
|
|
332,518 |
|
|
|
341,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
24,956 |
|
|
|
35,801 |
|
|
|
69,297 |
|
Borrowings |
|
|
59,572 |
|
|
|
96,035 |
|
|
|
103,316 |
|
Junior subordinated debentures |
|
|
3,967 |
|
|
|
7,003 |
|
|
|
7,522 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
88,495 |
|
|
|
138,839 |
|
|
|
180,135 |
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME BEFORE PROVISION FOR
CREDIT LOSSES |
|
|
222,264 |
|
|
|
193,679 |
|
|
|
161,142 |
|
PROVISION FOR CREDIT LOSSES |
|
|
80,500 |
|
|
|
26,600 |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES |
|
|
141,764 |
|
|
|
167,079 |
|
|
|
157,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER OPERATING INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss on investment securities |
|
|
(1,994 |
) |
|
|
|
|
|
|
|
|
Less: Noncredit-related impairment loss recorded
in other comprehensive income |
|
|
1,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment loss on investment securities recognized in earnings |
|
|
(323 |
) |
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
14,889 |
|
|
|
15,228 |
|
|
|
13,381 |
|
CitizensTrust |
|
|
6,657 |
|
|
|
7,926 |
|
|
|
7,226 |
|
Bankcard services |
|
|
2,338 |
|
|
|
2,329 |
|
|
|
2,530 |
|
BOLI Income |
|
|
2,792 |
|
|
|
5,000 |
|
|
|
3,839 |
|
Other |
|
|
5,150 |
|
|
|
3,974 |
|
|
|
4,349 |
|
Gain on sale of securities, net |
|
|
28,446 |
|
|
|
|
|
|
|
|
|
Gain from San Joaquin Bank acquisition |
|
|
21,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income |
|
|
81,071 |
|
|
|
34,457 |
|
|
|
31,325 |
|
|
|
|
|
|
|
|
|
|
|
|
OTHER OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
62,985 |
|
|
|
61,271 |
|
|
|
55,303 |
|
Occupancy |
|
|
11,649 |
|
|
|
11,813 |
|
|
|
10,540 |
|
Equipment |
|
|
6,712 |
|
|
|
7,162 |
|
|
|
7,026 |
|
Stationery and supplies |
|
|
6,829 |
|
|
|
6,913 |
|
|
|
6,712 |
|
Professional services |
|
|
6,965 |
|
|
|
6,519 |
|
|
|
6,274 |
|
Promotion |
|
|
6,528 |
|
|
|
6,882 |
|
|
|
5,953 |
|
Amortization of Intangibles |
|
|
3,163 |
|
|
|
3,591 |
|
|
|
2,969 |
|
Other |
|
|
28,755 |
|
|
|
11,637 |
|
|
|
10,627 |
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses |
|
|
133,586 |
|
|
|
115,788 |
|
|
|
105,404 |
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES |
|
|
89,249 |
|
|
|
85,748 |
|
|
|
83,063 |
|
INCOME TAXES |
|
|
23,830 |
|
|
|
22,675 |
|
|
|
22,479 |
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS |
|
$ |
65,419 |
|
|
$ |
63,073 |
|
|
$ |
60,584 |
|
PREFERRED STOCK DIVIDENDS AND OTHER REDUCTIONS |
|
|
12,942 |
|
|
|
75 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS ALLOCATED TO COMMON SHAREHOLDERS |
|
$ |
52,477 |
|
|
$ |
62,998 |
|
|
$ |
60,552 |
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
63,078 |
|
|
$ |
87,674 |
|
|
$ |
77,935 |
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER COMMON SHARE |
|
$ |
0.56 |
|
|
$ |
0.75 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER COMMON SHARE |
|
$ |
0.56 |
|
|
$ |
0.75 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH DIVIDENDS PER COMMON SHARE |
|
$ |
0.340 |
|
|
$ |
0.340 |
|
|
$ |
0.340 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
73
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
Three Years Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Shares |
|
|
Preferred |
|
|
Common |
|
|
Retained |
|
|
Comprehensive |
|
|
Comprehensive |
|
|
|
|
|
|
Outstanding |
|
|
Stock |
|
|
Stock |
|
|
Earnings |
|
|
Income/(Loss) |
|
|
Income |
|
|
Total |
|
|
|
(amounts and shares in thousands) |
|
|
|
|
|
Balance January 1, 2007 |
|
|
84,282 |
|
|
$ |
|
|
|
$ |
366,082 |
|
|
$ |
34,464 |
|
|
$ |
(13,221 |
) |
|
|
|
|
|
$ |
387,325 |
|
Issuance of common stock |
|
|
372 |
|
|
|
|
|
|
|
2,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,082 |
|
Repurchase of common stock |
|
|
(3,095 |
) |
|
|
|
|
|
|
(33,918 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,918 |
) |
Shares issued for acquisition of
First Coastal Bancshares |
|
|
1,606 |
|
|
|
|
|
|
|
18,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,046 |
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
|
|
|
|
544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
544 |
|
Stock-based Compensation Expense |
|
|
|
|
|
|
|
|
|
|
1,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,413 |
|
Cash dividends ($0.34 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,479 |
) |
|
|
|
|
|
|
|
|
|
|
(28,479 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,584 |
|
|
|
|
|
|
$ |
60,584 |
|
|
|
60,584 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
available-for-sale, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,351 |
|
|
|
17,351 |
|
|
|
17,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
77,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007 |
|
|
83,165 |
|
|
$ |
|
|
|
$ |
354,249 |
|
|
$ |
66,569 |
|
|
$ |
4,130 |
|
|
|
|
|
|
$ |
424,948 |
|
Issuance of preferred stock |
|
|
|
|
|
|
121,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,508 |
|
Issuance of common stock |
|
|
176 |
|
|
|
|
|
|
|
606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606 |
|
Issuance of Warrants |
|
|
|
|
|
|
|
|
|
|
8,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,592 |
|
Repurchase of common stock |
|
|
(71 |
) |
|
|
|
|
|
|
(650 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(650 |
) |
Tax benefit from exercise of stock options |
|
|
|
|
|
|
|
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172 |
|
Stock-based Compensation Expense |
|
|
|
|
|
|
|
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500 |
|
Adoption of EITF 06-4 Split Dollar |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(571 |
) |
|
|
|
|
|
|
|
|
|
|
(571 |
) |
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($0.34 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,317 |
) |
|
|
|
|
|
|
|
|
|
|
(28,317 |
) |
Prefered |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(570 |
) |
|
|
|
|
|
|
|
|
|
|
(570 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,073 |
|
|
|
|
|
|
$ |
63,073 |
|
|
|
63,073 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
available-for-sale, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,601 |
|
|
|
24,601 |
|
|
|
24,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
87,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008 |
|
|
83,270 |
|
|
$ |
121,508 |
|
|
$ |
364,469 |
|
|
$ |
100,184 |
|
|
$ |
28,731 |
|
|
|
|
|
|
$ |
614,892 |
|
Repurchase of Preferred Stock |
|
|
|
|
|
|
(130,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(130,000 |
) |
Amortization of preferred stock discount |
|
|
|
|
|
|
8,492 |
|
|
|
|
|
|
|
(8,492 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Warrant repurchase |
|
|
|
|
|
|
|
|
|
|
(1,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,307 |
) |
Issuance of Common Stock |
|
|
22,655 |
|
|
|
|
|
|
|
126,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,056 |
|
Proceeds from exercise of stock options |
|
|
338 |
|
|
|
|
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280 |
|
Tax benefit from exercise of stock options |
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62 |
|
Stock-based Compensation Expense |
|
|
|
|
|
|
|
|
|
|
1,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,666 |
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($0.34 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,228 |
) |
|
|
|
|
|
|
|
|
|
|
(32,228 |
) |
Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,271 |
) |
|
|
|
|
|
|
|
|
|
|
(4,271 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,419 |
|
|
|
|
|
|
$ |
65,419 |
|
|
|
65,419 |
|
Other comprehensive gain: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
available-for-sale, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,372 |
) |
|
|
(1,372 |
) |
|
|
(1,372 |
) |
Noncredit-related impairment loss on |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment
securities recorded in the current year, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(969 |
) |
|
|
(969 |
) |
|
|
(969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
63,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009 |
|
|
106,263 |
|
|
$ |
|
|
|
$ |
491,226 |
|
|
$ |
120,612 |
|
|
$ |
26,390 |
|
|
|
|
|
|
$ |
638,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Amounts in thousands) |
|
Disclosure of reclassification amount |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on securities arising during the period |
|
|
24,086 |
|
|
|
42,415 |
|
|
|
29,915 |
|
Tax expense |
|
|
(10,116 |
) |
|
|
(17,814 |
) |
|
|
(12,564 |
) |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for gain on securities included in net income |
|
|
(28,123 |
) |
|
|
0 |
|
|
|
0 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense on reclassification adjustments |
|
|
11,812 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain/(loss) on securities |
|
$ |
(2,341 |
) |
|
|
24,601 |
|
|
$ |
17,351 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
74
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollar amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months |
|
|
|
Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends received |
|
$ |
315,165 |
|
|
$ |
329,911 |
|
|
$ |
342,090 |
|
Service charges and other fees received |
|
|
30,729 |
|
|
|
34,301 |
|
|
|
31,777 |
|
Interest paid |
|
|
(94,229 |
) |
|
|
(142,409 |
) |
|
|
(182,979 |
) |
Cash paid to vendors and employees |
|
|
(137,436 |
) |
|
|
(107,722 |
) |
|
|
(99,978 |
) |
Income taxes paid |
|
|
(48,201 |
) |
|
|
(30,446 |
) |
|
|
(19,795 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
66,028 |
|
|
|
83,635 |
|
|
|
71,115 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of FHLB Stock |
|
|
|
|
|
|
|
|
|
|
5,550 |
|
Proceeds from sales of investment securities |
|
|
609,142 |
|
|
|
|
|
|
|
|
|
Proceeds from repayment of investment securities |
|
|
362,234 |
|
|
|
333,050 |
|
|
|
417,098 |
|
Proceeds from repayment of Fed Funds Sold |
|
|
|
|
|
|
|
|
|
|
52,000 |
|
Proceeds from maturity of investment securities |
|
|
251,302 |
|
|
|
48,854 |
|
|
|
62,485 |
|
Purchases of investment securities held-to-maturity |
|
|
|
|
|
|
(7,710 |
) |
|
|
|
|
Purchases of investment securities |
|
|
(793,017 |
) |
|
|
(442,816 |
) |
|
|
(263,623 |
) |
Purchases of FHLB stock |
|
|
|
|
|
|
(13,257 |
) |
|
|
(2,927 |
) |
Net decrease/(increase) in loans and lease finance receivables |
|
|
107,350 |
|
|
|
(246,914 |
) |
|
|
(284,798 |
) |
Proceeds from sales of premises and equipment |
|
|
342 |
|
|
|
229 |
|
|
|
113 |
|
Proceeds from sales of other real estate owned |
|
|
13,859 |
|
|
|
|
|
|
|
|
|
Purchase of premises and equipment |
|
|
(4,162 |
) |
|
|
(5,053 |
) |
|
|
(7,514 |
) |
Cash acquired in San Joaquin Bank acquisition |
|
|
15,844 |
|
|
|
|
|
|
|
|
|
Cash paid for purchase of First Coastal
Bancshares, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
743 |
|
Other, net |
|
|
(440 |
) |
|
|
(323 |
) |
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) investing activities |
|
|
562,454 |
|
|
|
(333,940 |
) |
|
|
(21,127 |
) |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in transaction deposits |
|
|
388,869 |
|
|
|
(95,967 |
) |
|
|
(142,802 |
) |
Net increase/(decrease) in time deposits |
|
|
11,702 |
|
|
|
239,775 |
|
|
|
(93,194 |
) |
Advances from Federal Home Loan Bank |
|
|
200,000 |
|
|
|
450,000 |
|
|
|
600,000 |
|
Repayment of advances from Federal Home Loan Bank |
|
|
(600,000 |
) |
|
|
(600,000 |
) |
|
|
(480,000 |
) |
Repayment of advances from Federal Reserve Bank |
|
|
(29,000 |
) |
|
|
|
|
|
|
|
|
Net decrease in other borrowings |
|
|
(678,007 |
) |
|
|
138,993 |
|
|
|
(173,105 |
) |
Net increase in repurchase agreements |
|
|
127,319 |
|
|
|
21,504 |
|
|
|
241,959 |
|
Issuance of preferred stock and warrant |
|
|
|
|
|
|
130,000 |
|
|
|
|
|
Cash dividends on preferred stock |
|
|
(4,271 |
) |
|
|
|
|
|
|
|
|
Cash dividends on common stock |
|
|
(32,228 |
) |
|
|
(28,317 |
) |
|
|
(28,479 |
) |
Repurchase of preferred stock and warrant |
|
|
(131,307 |
) |
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
(33,918 |
) |
Issuance of common stock |
|
|
126,056 |
|
|
|
(650 |
) |
|
|
|
|
Issuance of junior subordinated debentures |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
280 |
|
|
|
606 |
|
|
|
2,082 |
|
Tax benefit related to exercise of stock options |
|
|
62 |
|
|
|
172 |
|
|
|
544 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by financing activities |
|
|
(620,525 |
) |
|
|
256,116 |
|
|
|
(106,913 |
) |
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
7,957 |
|
|
|
5,811 |
|
|
|
(56,925 |
) |
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
95,297 |
|
|
|
89,486 |
|
|
|
146,411 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
103,254 |
|
|
$ |
95,297 |
|
|
$ |
89,486 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
75
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
Dollar amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months |
|
|
|
Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
65,419 |
|
|
$ |
63,073 |
|
|
$ |
60,584 |
|
Adjustments
to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of investment securities |
|
|
(28,446 |
) |
|
|
|
|
|
|
|
|
Gain on San Joaquin Bank acquisition |
|
|
(21,122 |
) |
|
|
|
|
|
|
|
|
Capitalized prepayment penalty on borrowings |
|
|
(1,882 |
) |
|
|
|
|
|
|
|
|
FDIC Prepaid Assessment |
|
|
(22,420 |
) |
|
|
|
|
|
|
|
|
(Gain)/Loss on sale of premises and equipment |
|
|
79 |
|
|
|
34 |
|
|
|
(14 |
) |
Gain on sale of other real estate owned |
|
|
(411 |
) |
|
|
|
|
|
|
|
|
Credit-related impairment loss on investment securities held-to-maturity |
|
|
(323 |
) |
|
|
|
|
|
|
|
|
Increase from bank owned life insurance |
|
|
(2,792 |
) |
|
|
(5,000 |
) |
|
|
(3,839 |
) |
Net amortization of premiums on investment securities |
|
|
3,098 |
|
|
|
1,452 |
|
|
|
3,665 |
|
Provisions for credit losses |
|
|
80,500 |
|
|
|
26,600 |
|
|
|
4,000 |
|
Provisions for losses on other real estate owned |
|
|
848 |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
1,666 |
|
|
|
1,500 |
|
|
|
1,413 |
|
Depreciation and amortization |
|
|
9,880 |
|
|
|
10,817 |
|
|
|
9,571 |
|
Change in accrued interest receivable |
|
|
4,437 |
|
|
|
1,214 |
|
|
|
(2,310 |
) |
Change in accrued interest payable |
|
|
(3,737 |
) |
|
|
(3,571 |
) |
|
|
(2,844 |
) |
Deferred tax provision |
|
|
|
|
|
|
(13,082 |
) |
|
|
99 |
|
Change in other assets and liabilities |
|
|
(18,766 |
) |
|
|
598 |
|
|
|
790 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
609 |
|
|
|
20,562 |
|
|
|
10,531 |
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
$ |
66,028 |
|
|
$ |
83,635 |
|
|
$ |
71,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Transfer from loans to Other Real Estate Owned |
|
$ |
17,070 |
|
|
$ |
6,565 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federally Assisted Acquisition of San Joaquin Bank (2009) : |
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired |
|
$ |
520,508 |
|
|
|
|
|
|
|
|
|
Negative goodwill and intangibles |
|
|
(16,516 |
) |
|
|
|
|
|
|
|
|
FDIC Receivable |
|
|
131,860 |
|
|
|
|
|
|
|
|
|
Liabilities assumed |
|
|
(651,696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price of acquisition, net of cash received |
|
$ |
(15,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of First Coastal Bancshares (2007) : |
|
|
|
|
|
|
|
|
|
|
|
|
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.
76
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2009
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CVB Financial Corp. and subsidiaries are in
accordance with accounting principles generally accepted in the United States of America and
conform to practices within the banking industry. A summary of the significant accounting policies
consistently applied in the preparation of the accompanying consolidated financial statements
follows.
Principles of Consolidation The consolidated financial statements include the accounts of
CVB Financial Corp. (the Company) and its wholly owned subsidiaries: Citizens Business Bank (the
Bank) 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, CVB Statutory Trust
III, and FCB Trust II. CVB Statutory Trusts I and II were created in December 2003 and CVB
Statutory Trust III was created in January 2006 to issue trust preferred securities in order to
raise capital for the Company. The Company acquired FCB Trust II through the acquisition of First
Coastal Bancshares (FCB). 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 and 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 51 Business Financial and 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 comprise the loans, deposits, products and services the Bank offers to the majority
of its customers. The other segment is Treasury Department, which manages the investment portfolio
of the Company. The Companys remaining centralized functions have been aggregated and included in
Other.
The internal reporting of the Company considers all business units. Funds are allocated to
each business unit based on its need to fund assets (use of funds) or its need to invest funds
(source of funds). Net income is determined based on the actual net income of the business unit
plus the allocated income or expense based on the sources and uses of funds for each business unit.
Non-interest income and non-interest expense are those items directly attributable to a business
unit.
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
77
at cost and adjusted for amortization of premiums and
accretion of discounts. Trading securities are accounted for at fair value with the unrealized
gains and losses being included in current earnings. Available-for-sale securities are accounted
for at fair value, with the net unrealized gains and losses, net of income tax effects, presented
as a separate component of stockholders equity. Realized gains and losses on sales of securities
are recognized in earnings at the time of sale and are determined on a specific-identification
basis. Purchase premiums and discounts are recognized in interest income using the effective-yield
method over the terms of the securities. For mortgage-backed securities (MBS), the amortization
or accretion is based on estimated average lives of the securities. The lives of these securities
can fluctuate based on the amount of prepayments received on the underlying collateral of the
securities. The Companys investment in Federal Home Loan Bank (FHLB) stock is carried at cost.
At each reporting date, securities are assessed to determine whether there is an
other-than-temporary impairment. Other-than-temporary impairment on investment securities is
recognized in earnings when there are credit losses on a debt security for which management does
not intend to sell and for which it is more-likely-than-not that the Company will not have to sell
prior to recovery of the noncredit impairment. In those situations, the portion of the total
impairment that is attributable to the credit loss would be recognized in earnings, and the
remaining difference between the debt securitys amortized cost and its fair value would be
included in other comprehensive income.
Loans and Lease Finance Receivables Loans and lease finance receivables are reported at the
principal amount outstanding less deferred net loan origination fees and the allowance for credit
losses. Interest on loans and lease finance receivables is credited to income based on the
principal amount outstanding. Interest income is not recognized on loans and lease finance
receivables when collection of interest is deemed by management to be doubtful.
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.
Acquired loans for which there is deterioration in credit quality between origination and
acquisition of the loans and the bank does not expect to collect all amounts due according to the
loans contractual terms are accounted for individually or in pools of loans based on common risk
characteristics. These loans are within the scope of accounting guidance for loans acquired with
deteriorated credit quality. The excess of the loans or pools scheduled contractual principal
and interest payments over all cash flows expected at acquisition is the nonaccretable difference.
The remaining amount, representing the excess of the loans cash flows expected to be collected
over the fair value is the accretable yield (accreted into interest income over the remaining life
of the loan or pool). The Bank has also elected to account for acquired loans not within the scope
of accounting guidance using this same methodology.
Provision and Allowance for Credit Losses The determination of the balance in the allowance
for credit losses is based on an analysis of the loan and lease finance receivables portfolio using
a systematic methodology and reflects an amount that, in managements judgment, is adequate to
provide for probable credit losses inherent in the portfolio, after giving consideration to the
character of the loan portfolio, current economic conditions, past credit loss experience, and such
other factors as deserve current recognition in estimating inherent credit losses. The estimate is
reviewed periodically by management and various regulatory entities and, as adjustments become
necessary, they are reported in earnings in the periods in which they become known. The provision
for credit losses is charged to expense.
78
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. In certain cases, the portion of
an impaired loan that exceeds its fair value is charged-off. Fair value is usually based on the
value of underlying collateral, if the loan is determined to be collateral dependent.
Acquired loans are recorded at fair value as of the acquisition date, factoring in credit
losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit
losses is not carried over or recorded as of the acquisition date.
Premises and Equipment Premises and equipment are stated at cost, less accumulated
depreciation, which is provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives using the straight-line method. Properties under
capital lease and leasehold improvements are amortized over the shorter of estimated economic lives
of 15 years or the initial terms of the leases. Estimated lives are 3 to 5 years for computer and
equipment, 5 to 7 years for furniture, fixtures and equipment, and 15 to 40 years for buildings and
improvements. Long-lived assets are reviewed periodically for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. The existence of
impairment is based on undiscounted cash flows. To the extent impairment exists, the impairment is
calculated as the difference in fair value of assets and their carrying value. The impairment
loss, if any, would be recorded in noninterest expense.
FDIC Loss Sharing Asset The FDIC loss sharing asset is initially recorded at fair value
which represents the present value of the estimated cash payments from the FDIC for future losses
on covered loans. The ultimate collectability of this asset is dependent upon the performance of
the underlying covered loans, the passage of time and claims paid by the FDIC.
Other Real Estate Owned Other real estate owned represents real estate acquired through
foreclosure in satisfaction of commercial and real estate loans and is stated at fair value, minus
estimated costs to sell (fair value at time of foreclosure). Loan balances in excess of fair value
of the real estate acquired at the date of acquisition are charged against the allowance for credit
losses. Any subsequent operating expenses or income, reduction in estimated values, and gains or
losses on disposition of such properties are charged to current operations.
Business Combinations, Goodwill 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 assets acquired and liabilities assumed are
measured at their fair values as of the acquisition date and acquisition costs are expensed as
incurred. The Company has paid premiums on certain transactions, and such premiums are recorded as
intangible assets, in the form of goodwill or other intangible assets. Goodwill is not being
amortized whereas identifiable intangible assets with finite lives are amortized over their useful
lives. On an annual basis, the Company tests goodwill and intangible assets for impairment. The
Company completed its annual impairment test as of July 1, 2009; there was no impairment of
goodwill.
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 chosen group of employees. The Bank is
the owner and beneficiary of these policies. BOLI is recorded as an asset at cash surrender value.
Increases in the cash value of these policies, as well as insurance proceeds received, are recorded
in other non-interest income and are not subject to income tax.
Income Taxes Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are
79
expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Future realization of deferred tax assets ultimately depends on
the existence of sufficient taxable income of the appropriate character (for example, ordinary
income or capital gain) within the carryback or carryforward periods available under the tax law.
Based on historical and future expected taxable earnings and available strategies, the Company
considers the future realization of these deferred tax assets more likely than not.
The tax effects from an uncertain tax position are recognized in the financial statements only
if, based on its merits, the position is more likely than not to be sustained on audit by the
taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part
of other operating expense.
Earnings per Common Share The Company calculates earnings per common share (EPS) using the
two-class method. The two-class method requires the Company to present EPS as if all of the
earnings for the period are distributed to common shareholders and any participating securities,
regardless of whether any actual dividends or distributions are made. All outstanding unvested
share-based payment awards that contain rights to non-forfeitable dividends are considered
participating securities. The Company grants restricted shares under the 2008 Equity Incentive Plan
that qualify as participating securities. Restricted shares issued under this plan are entitled to
dividends at the same rate as common stock. A reconciliation of the numerator and the denominator
used in the computation of basic and diluted earnings per common share is included in Note 15.
Statement of Cash Flows Cash and cash equivalents as reported in the statements of cash
flows include cash and due from banks and federal funds sold. Cash flow from loans and deposits
are reported net.
Stock Compensation Plans At December 31, 2009, the Company has three stock-based employee
compensation plans. The Company accounts for stock compensation using the modified prospective
method. Under this method, awards that are granted, modified, or settled after December 31, 2005,
are fair valued as of grant date and compensation costs recognized over the vesting period on a
straight-lined basis. Also under this method, unvested stock awards as of January 1, 2006 are
recognized over the remaining service period with no change in historical reported earnings.
CitizensTrust This division provides trust, investment and brokerage related services, as
well as financial, estate and business succession planning services. The Company maintains funds
in trust for customers. CitizensTrust has approximately $1.9 billion in assets under
administration, including, $1.0 billion 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.
Derivative Financial Instruments All derivative instruments, including certain derivative
instruments embedded in other contracts, are recognized on the consolidated balance sheet at fair
value. For derivatives designated as fair value hedges, changes in the fair value of the derivative
and the hedged item related to the hedged risk are recognized in earnings. Changes in fair value of
derivatives designated and accounted for as cash flow hedges, to the extent they are effective as
hedges, are recorded in Other Comprehensive Income, net of deferred taxes and are subsequently
reclassified to earnings when the hedged transaction affects earnings. Any hedge ineffectiveness
would be recognized in the income statement line item pertaining to the hedged item.
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
80
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, valuation and loans acquired in business
combinations, and valuation of deferred tax assets and other intangibles and OREO.
2. FEDERALLY ASSISTED ACQUISITION OF SAN JOAQUIN BANK
On October 16, 2009, Citizens Business Bank acquired substantially all of the assets and
assumed substantially all of the liabilities of San Joaquin Bank (SJB) from the Federal Deposit
Insurance Corporation (FDIC) in an FDIC-assisted transaction. The Bank entered into a loss
sharing agreement with the FDIC, whereby the FDIC will cover a substantial portion of any future
losses on certain acquired assets. The acquired assets subject to the loss sharing agreement are
referred to collectively as covered assets. Under the terms of such loss sharing agreement, the
FDIC will absorb 80% of losses and share in 80% of loss recoveries up to $144.0 million with
respect to covered assets, after a first loss amount of $26.7 million. The FDIC will reimburse the
Bank for 95% of losses and share in 95% of loss recoveries in excess of $144.0 million with respect
to covered assets. The loss sharing agreement is in effect for 5 years for commercial loans and 10
years for single-family residential loans from the October 16, 2009 acquisition date and the loss
recovery provisions are in effect for 8 and 10 years, respectively for commercial and single-family
residential loans from the acquisition date. The purpose of this acquisition was to expand our
presence in the Central Valley region of California.
The acquisition has been accounted for under the purchase method of accounting. The assets
and liabilities were recorded at their estimated fair values as of the October 16, 2009 acquisition
date. The application of the purchase method of accounting resulted in an after-tax gain of $12.3
million which is included in 2009 earnings. The gain is the negative goodwill resulting from the
acquired assets and liabilities recognized at fair value. A summary
of the estimated fair value adjustments resulting in the net gain follows:
|
|
|
|
|
|
|
October 16, 2009 |
|
|
|
(in thousands) |
|
SJBs cost basis net assets on October 16, 2009 |
|
$ |
84,279 |
|
Purchase Accounting Fair Value Adjustments |
|
|
|
|
Loans |
|
|
(199,768 |
) |
FDIC loss sharing asset |
|
|
131,860 |
|
Core Deposit Intangible |
|
|
4,904 |
|
Other assets |
|
|
145 |
|
Time Deposits |
|
|
(298 |
) |
Income tax liabliity |
|
|
(8,871 |
) |
|
|
|
|
Net after-tax gain from SJB acquisition |
|
$ |
12,251 |
|
|
|
|
|
The statement of assets acquired and liabilities assumed at their estimated fair values as of
October 16, 2009 are presented in the following table.
81
|
|
|
|
|
|
|
October 16, 2009 |
|
|
|
(in thousands) |
|
Assets: |
|
|
|
|
Cash |
|
$ |
15,844 |
|
Investment securities |
|
|
25,263 |
|
Loans covered by loss sharing |
|
|
489,111 |
|
OREO covered by loss sharing |
|
|
75 |
|
Core Deposit Intangible |
|
|
4,904 |
|
FDIC loss sharing asset |
|
|
131,860 |
|
Other assets |
|
|
6,060 |
|
|
|
|
|
Total assets acquired |
|
$ |
673,117 |
|
|
|
|
|
Liabilities: |
|
|
|
|
Deposits |
|
|
530,042 |
|
Borrowings |
|
|
121,400 |
|
Other liabilties |
|
|
9,424 |
|
|
|
|
|
Total liabilities acquired |
|
$ |
660,866 |
|
|
|
|
|
Net assets acquired |
|
$ |
12,251 |
|
|
|
|
|
Covered Loans
Loans acquired in the SJB acquisition are referred to as covered loans as a substantial
portion of any future losses are reimbursed under the terms of the FDIC loss sharing agreement. At
the October 16, 2009 acquisition date, the estimated fair value of the SJB loan portfolio was
estimated at $489.1 million. In estimating the fair value, the portfolio was segregated into two
groups: credit-impaired covered loans and other covered loans. Credit-impaired loans are those
loans showing evidence of credit deterioration since origination and it is probable, at the date of
acquisition, that the Company will not collect all contractually required principal and interest
payments. For the credit-impaired loans, the fair
value was estimated by using observable market data for similar types of loans. For the other
covered loans, the fair value was estimated by calculating the
undiscounted expected cash flows based on estimated levels of
prepayments, default factors, and loss severities and discounting the
expected cash flows at a market rate.
The covered loans acquired in the SJB transaction are and will continue to be subject to our
internal and external credit review. As a result, if and when credit deterioration in excess of
that estimated in the fair value calculations is noted subsequent to the October 16, 2009
acquisition date, such deterioration will be measured through our loan loss reserve methodology and
a provision for credit losses will be charged to earnings. A partially offsetting noninterest
income item reflecting the increase to the FDIC loss sharing asset will also be recognized.
A summary of the covered loans acquired in the SJB acquisition as of October 16, 2009 and the
related discount is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-impaired |
|
|
|
|
|
|
|
|
|
loans |
|
|
Other loans |
|
|
Total |
|
|
|
(Amounts in thousands) |
|
Total Loans |
|
$ |
185,292 |
|
|
$ |
503,587 |
|
|
$ |
688,879 |
|
Total
discount resulting from acquisition date fair value adjustments |
|
|
(149,319 |
) |
|
|
(50,449 |
) |
|
|
(199,768 |
) |
|
|
|
|
|
|
|
|
|
|
Loans, net of discount |
|
$ |
35,973 |
|
|
$ |
453,138 |
|
|
$ |
489,111 |
|
|
|
|
|
|
|
|
|
|
|
82
The undiscounted contractual cash flows for the covered credit-impaired loans and the covered
other loans is $220.3 million and $657.5 million, respectively. The undiscounted estimated cash
flows not expected to be collected for the covered credit-impaired loans and covered other loans is
$180.1 million and $77.7 million, respectively.
The accretable yield on covered loans represents the amount by which the undiscounted expected
cash flows exceed the estimated fair value. The following table presents the changes in the
accretable yield related to the credit-impaired covered loans.
|
|
|
|
|
|
|
Accretable Yield |
|
|
|
(in thousands) |
|
Acquired balance at October 16, 2009 |
|
$ |
(4,311 |
) |
Accretion |
|
|
461 |
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
(3,850 |
) |
|
|
|
|
Covered loans are reviewed each reporting period to determine whether any changes occurred in
expected cash flows that would result in a reclassification from nonaccretable difference to
accretable yield.
FDIC Loss Sharing Asset
The FDIC loss sharing asset is initially recorded at fair value which represents the present
value of the estimated cash payments from the FDIC for future losses on covered loans. The
estimated gross cash flows associated with this asset are $144.9 million. The ultimate
collectability of this asset is dependent upon the performance of the underlying covered loans, the
passage of time and claims paid by the FDIC.
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are shown below. The
majority of securities held are publicly traded, and the estimated fair values were obtained from
an independent pricing service based upon market quotes.
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
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 |
|
$ |
507 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
507 |
|
|
|
0.02 |
% |
Government agency & government-sponsored
enterprises |
|
$ |
21,574 |
|
|
$ |
140 |
|
|
$ |
(1 |
) |
|
$ |
21,713 |
|
|
|
1.03 |
% |
Mortgage-backed securities |
|
|
629,998 |
|
|
|
18,138 |
|
|
|
(968 |
) |
|
|
647,168 |
|
|
|
30.70 |
% |
CMOs / REMICs |
|
|
759,179 |
|
|
|
17,297 |
|
|
|
(3,311 |
) |
|
|
773,165 |
|
|
|
36.67 |
% |
Municipal bonds |
|
|
647,556 |
|
|
|
18,290 |
|
|
|
(2,420 |
) |
|
|
663,426 |
|
|
|
31.46 |
% |
Other securities |
|
|
2,484 |
|
|
|
|
|
|
|
|
|
|
|
2,484 |
|
|
|
0.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities |
|
$ |
2,061,298 |
|
|
$ |
53,865 |
|
|
$ |
(6,700 |
) |
|
$ |
2,108,463 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Holding |
|
|
Holding |
|
|
|
|
|
|
Total |
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Fair Value |
|
|
Percent |
|
|
|
(Amounts in thousands) |
|
Investment Securities Available-for-Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency & government-sponsored
enterprises |
|
$ |
27,105 |
|
|
$ |
673 |
|
|
$ |
|
|
|
$ |
27,778 |
|
|
|
1.11 |
% |
Mortgage-backed securities |
|
|
1,150,650 |
|
|
|
33,836 |
|
|
|
(1 |
) |
|
|
1,184,485 |
|
|
|
47.50 |
% |
CMOs / REMICs |
|
|
591,531 |
|
|
|
9,855 |
|
|
|
(4,595 |
) |
|
|
596,791 |
|
|
|
23.94 |
% |
Municipal bonds |
|
|
674,655 |
|
|
|
16,704 |
|
|
|
(6,937 |
) |
|
|
684,422 |
|
|
|
27.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities |
|
$ |
2,443,941 |
|
|
$ |
61,068 |
|
|
$ |
(11,533 |
) |
|
$ |
2,493,476 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, approximately 67% of the available-for-sale portfolio represents
securities issued by the U.S. government or U.S. government-sponsored enterprises, which guarantee
payment of principal and interest.
The remaining CMO/REMICs are backed by agency-pooled collateral or whole loan collateral. All
available-for-sale CMO/REMICs issues held are rated investment grade or better by either Standard &
Poors or Moodys, as of December 31, 2009.
Gross realized gains were $28.4 million for the year ended December 31, 2009 and no realized
losses. There were no realized gains or losses for the years ended December 31, 2008 and 2007.
84
Composition of the Fair Value and Gross Unrealized Losses of Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
Holding |
|
|
|
|
|
|
Holding |
|
|
|
|
|
|
Holding |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Description of Securities |
|
(amounts in thousands) |
|
Held-To-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,838 |
|
|
$ |
1,671 |
|
|
$ |
3,838 |
|
|
$ |
1,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency |
|
$ |
5,022 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,022 |
|
|
$ |
1 |
|
Mortgage-backed securities |
|
|
73,086 |
|
|
|
968 |
|
|
|
|
|
|
|
|
|
|
|
73,086 |
|
|
|
968 |
|
CMO/REMICs |
|
|
179,391 |
|
|
|
3,025 |
|
|
|
9,640 |
|
|
|
286 |
|
|
|
189,031 |
|
|
|
3,311 |
|
Municipal bonds |
|
|
80,403 |
|
|
|
2,122 |
|
|
|
1,785 |
|
|
|
298 |
|
|
|
82,188 |
|
|
|
2,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
337,902 |
|
|
$ |
6,116 |
|
|
$ |
11,425 |
|
|
$ |
584 |
|
|
$ |
349,327 |
|
|
$ |
6,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the twelve months ended December 31, 2009, the Company recorded $1.7 million, on a pre-tax
basis, of the non-credit portion of OTTI for this security in other comprehensive income, which is
included as gross unrealized losses. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
Holding |
|
|
|
|
|
|
Holding |
|
|
|
|
|
|
Holding |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Description of Securities |
|
(amounts in thousands) |
|
Held-To-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMO |
|
$ |
4,770 |
|
|
$ |
2,097 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,770 |
|
|
$ |
2,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
$ |
265 |
|
|
$ |
|
|
|
$ |
13,903 |
|
|
$ |
1 |
|
|
$ |
14,168 |
|
|
$ |
1 |
|
CMO/REMICs |
|
|
163,036 |
|
|
|
4,542 |
|
|
|
1,853 |
|
|
|
53 |
|
|
|
164,889 |
|
|
|
4,595 |
|
Municipal bonds |
|
|
159,370 |
|
|
|
5,341 |
|
|
|
37,994 |
|
|
|
1,596 |
|
|
|
197,364 |
|
|
|
6,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
322,671 |
|
|
$ |
9,883 |
|
|
$ |
53,750 |
|
|
$ |
1,650 |
|
|
$ |
376,421 |
|
|
$ |
11,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables above show the 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 December 31, 2009 and 2008. The Company has reviewed
individual securities to determine whether a decline in fair value below the amortized cost basis
is other-than-temporary.
The following summarizes our analysis of these securities and the unrealized losses. This
assessment was based on the following factors: i) the length of the time and the extent to which
the fair value has been less than amortized cost; ii) adverse condition specifically related to the
security, an industry, or a geographic area and whether or not the Company expects to recover the
entire amortized cost, iii) historical and implied volatility of the fair value of the security;
iv) the payment structure of the security and the likelihood of the issuer being able to make
payments in the future; v) failure of the issuer of the security to make scheduled interest or
principal payments, vi) any changes to the rating of the security by a rating agency, and vii) recoveries or additional declines in fair value subsequent to the
balance sheet date.
CMO Held-to-Maturity-We have one investment security classified as held-to-maturity. This
security was issued by Countrywide Financial and is collateralized by Alt-A mortgages. The
mortgages are primarily fixed-rate, 30-year loans, originated in early 2006 with average FICO
scores of 715 and an average LTV of 71% at origination. The security was a senior security in the
securitization, was rated triple AAA at origination and was supported by subordinate securities.
This security is classified as held-to-maturity as we have both the intent and ability to hold this
debt security to maturity as the amount of the security, $3.8 million, is not significant to our
liquidity needs. We acquired this security in February
85
2008 at a price of 98.25%. The significant
decline in the fair value of the security first appeared in August 2008 as the current financial
crisis in the markets occurred and the market for securities collateralized by Alt-A mortgages
diminished.
As of December 31, 2009, the unrealized loss on this security was $1.7 million and the fair
value on the security was 65% of the current par value. The security is rated non-investment
grade. We evaluated the security for an other than temporary decline in fair value as of December
31, 2009. We assess for credit impairment using a cash flow model. The key assumptions include
default rates, severities and prepayment rates. This security was determined to be credit impaired
during 2009 due to degradation in expected cash flows primarily due to higher loss forecasts. We
determined the amount of the credit impairment by discounting the expected future cash flows of the
underlying collateral. We recognized an other-than-temporary impairment of $2.0 million reduced by
$1.7 million for the non-credit portion which was reflected in other comprehensive income. The
remaining loss of $323,000 was recognized in earnings for the year ended December 31, 2009.
The following table provides a roll-forward of credit-related other-than-temporary impairment
recognized in earnings for the year ended December 31, 2009.
|
|
|
|
|
|
|
For the year ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
|
(in thousands) |
|
Balance, beginning of the period |
|
$ |
|
|
Addition of OTTI that was not previously recognized |
|
|
323 |
|
Reduction for securities sold during the period |
|
|
|
|
|
|
|
|
|
Reduction for securities with OTTI recognized in earnings because the
security might be sold before recovery of its amortized cost basis |
|
|
|
|
|
Addition of OTTI that was previously recognized because the security
might not be sold before recovery of its amortized cost basis |
|
|
|
|
|
Reduction for increases in cash flows expected to be collected that are
recognized over the remaining life of the security |
|
|
|
|
|
|
|
|
Balance, end of the period |
|
$ |
323 |
|
|
|
|
|
Government Agency & Government-Sponsored Enterprise 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 December 31, 2009, there was no unrealized loss greater than 12
months.
Mortgage-Backed Securities and CMO/REMICs Almost all of the mortgage-backed and CMO/REMICs
securities are issued by the government-sponsored enterprises such as Ginnie Mae, Fannie Mae and
Freddie Mac. These securities are collateralized or backed by the underlying residential
mortgages. All mortgage-backed securities are considered to be rated investment grade with an
average life of approximately 3.5 years. The contractual cash flows of 97.9% of these investments
are guaranteed by U.S. government-sponsored agencies. The remaining 2.1% are issued by banks. The
unrealized loss greater than 12 months on these securities at December 31, 2009 is $286,000. The
loss is comprised of four bonds issued by non-government sponsored enterprises such as financial
institutions. Because we believe the decline in fair value is attributable to the changes in
interest rates and not credit quality and because the Company does not intend to sell the
investments and it is more likely than not that the Company will not be required to sell the
investments before recovery of their amortized costs, which may be at maturity, management does not
consider these investments to be other than temporarily impaired at December 31, 2009.
86
Municipal Bonds - Ninety-five percent of our $663.4 million municipal bond portfolio contains
securities which have an underlying rating of investment grade. The majority of our municipal bonds
are insured by the largest bond insurance companies with maturities of approximately 5.7 years.
The unrealized loss greater than 12 months on these securities is $298,000 at December 31, 2009
comprised of two 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 we believe the decline in
fair value is attributable to the changes in interest rates and not credit quality and because the
Company does not intend to sell the investments and it is more likely than not that the Company
will not be required to sell the investments before recovery of their amortized costs, which may be
at maturity, management does not consider these investments to be other than temporarily impaired
at December 31, 2009.
We are continually monitoring the quality of our municipal bond portfolio in light of the
current financial problems exhibited by certain monoline insurance companies. While most of our
securities are insured by these companies, we feel that there is minimal risk of loss due to the
problems these insurers are having. Many of the securities that would not be rated without
insurance are pre-refunded and/or are general obligation bonds. Based on our monitoring of the
municipal marketplace, to our knowledge, none of the municipalities are exhibiting financial
problems that would lead us to believe there is a loss in any given security.
At December 31, 2009 and 2008, investment securities having an amortized cost of approximately
$2.02 billion and $2.32 billion, respectively, were pledged to secure public deposits, short and
long-term borrowings, and for other purposes as required or permitted by law.
The amortized cost and fair value of debt securities at December 31, 2009, by contractual
maturity, are shown below. Although mortgage-backed securities and CMO/REMICs have contractual
maturities through 2029, expected maturities will differ from contractual maturities because
borrowers may have the right to prepay such obligations without penalty. Mortgage-backed securities
and CMO/REMICs are included in maturity categories based upon estimated prepayment speeds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Amortized |
|
|
Fair |
|
|
Average |
|
|
|
Cost |
|
|
Value |
|
|
Yield |
|
|
|
(amounts in thousands) |
|
Due in one year or less |
|
$ |
147,342 |
|
|
$ |
150,240 |
|
|
|
4.77 |
% |
Due after one year through five years |
|
|
1,014,839 |
|
|
|
1,044,628 |
|
|
|
4.46 |
% |
Due after five years through ten years |
|
|
806,201 |
|
|
|
822,106 |
|
|
|
4.35 |
% |
Due after ten years |
|
|
92,916 |
|
|
|
91,489 |
|
|
|
3.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,061,298 |
|
|
$ |
2,108,463 |
|
|
|
4.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
The investment in FHLB stock is periodically evaluated for impairment based on, among
other things, the capital adequacy of the FHLB and its overall financial condition. No impairment
losses have been recorded through December 31, 2009.
87
4. LOAN AND LEASE FINANCE RECEIVABLES
The following is a summary of the components of loan and lease finance receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
Non-Covered |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
Covered Loans |
|
|
Total |
|
|
December 31, 2008 |
|
Commercial and Industrial |
|
$ |
413,715 |
|
|
$ |
61,802 |
|
|
$ |
475,517 |
|
|
$ |
370,829 |
|
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
265,444 |
|
|
|
136,065 |
|
|
|
401,509 |
|
|
|
351,543 |
|
Commercial Real Estate |
|
|
1,989,644 |
|
|
|
357,140 |
|
|
|
2,346,784 |
|
|
|
1,945,706 |
|
SFR Mortgage |
|
|
265,543 |
|
|
|
17,510 |
|
|
|
283,053 |
|
|
|
333,931 |
|
Consumer |
|
|
67,693 |
|
|
|
11,066 |
|
|
|
78,759 |
|
|
|
66,255 |
|
Municipal lease finance receivables |
|
|
159,582 |
|
|
|
983 |
|
|
|
160,565 |
|
|
|
172,973 |
|
Auto and equipment leases, net of unearned discount |
|
|
30,337 |
|
|
|
|
|
|
|
30,337 |
|
|
|
45,465 |
|
Dairy and Livestock/Agribusiness |
|
|
422,958 |
|
|
|
70,493 |
|
|
|
493,451 |
|
|
|
459,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans |
|
$ |
3,614,916 |
|
|
$ |
655,059 |
|
|
$ |
4,269,975 |
|
|
$ |
3,746,031 |
|
Less: Purchase Accounting Discount |
|
|
|
|
|
|
(184,419 |
) |
|
|
(184,419 |
) |
|
|
|
|
Less: Deferred net loan fees |
|
|
(6,537 |
) |
|
|
(6 |
) |
|
|
(6,543 |
) |
|
|
(9,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, net of deferred loan fees |
|
$ |
3,608,379 |
|
|
$ |
470,634 |
|
|
$ |
4,079,013 |
|
|
$ |
3,736,838 |
|
Less: Allowance for credit losses |
|
|
(108,924 |
) |
|
|
|
|
|
|
(108,924 |
) |
|
|
(53,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans |
|
$ |
3,499,455 |
|
|
$ |
470,634 |
|
|
$ |
3,970,089 |
|
|
$ |
3,682,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Company held approximately $1.3 billion of fixed rate loans.
As of December 31, 2009, 55.0% of the loan portfolio consisted of commercial real estate loans and
9.4% of the loan portfolio consisted of construction loans. Substantially all of the Companys
real estate loans and construction loans are secured by real properties located in California.
5. TRANSACTIONS INVOLVING DIRECTORS AND SHAREHOLDERS
In the ordinary course of business, the Bank has granted loans to certain directors, executive
officers, and the businesses with which they are associated. All such loans and commitments to lend
were made under terms that are consistent with the Banks normal lending policies. All related
party loans were current as to principal and interest at December 31, 2009 and 2008.
The following is an analysis of the activity of all such loans:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(amounts in thousands) |
|
Outstanding balance, beginning of year |
|
$ |
7,814 |
|
|
$ |
8,779 |
|
Credit granted, including renewals |
|
|
1,051 |
|
|
|
2,253 |
|
Repayments |
|
|
(605 |
) |
|
|
(3,218 |
) |
|
|
|
|
|
|
|
Outstanding balance, end of year |
|
$ |
8,260 |
|
|
$ |
7,814 |
|
|
|
|
|
|
|
|
88
6. ALLOWANCE FOR CREDIT LOSSES AND OTHER REAL ESTATE OWNED (NON-COVERED LOANS)
Activity in the allowance for credit losses was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(amounts in thousands) |
|
Balance, beginning of year |
|
$ |
53,960 |
|
|
$ |
33,049 |
|
|
$ |
27,737 |
|
Provision charged to operations |
|
|
80,500 |
|
|
|
26,600 |
|
|
|
4,000 |
|
Acquisition of other institutions |
|
|
|
|
|
|
|
|
|
|
2,671 |
|
Loans charged off |
|
|
(26,339 |
) |
|
|
(6,037 |
) |
|
|
(2,098 |
) |
Recoveries on loans previously charged off |
|
|
803 |
|
|
|
348 |
|
|
|
739 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
108,924 |
|
|
$ |
53,960 |
|
|
$ |
33,049 |
|
|
|
|
|
|
|
|
|
|
|
The allowance for off-balance sheet credit exposure relates to commitments to extend
credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit
risk associated with the loan and lease portfolio at the same time it evaluates credit risk
associated with the off-balance sheet commitments. The Company recorded an increase of $3.7
million and $1.3 million in the reserve for undisbursed commitments for 2009 and 2008,
respectively. As of December 31, 2009, the balance in this reserve was $7.9 million compared to a
balance of $4.2 million as of December 31, 2008.
The Bank measures an impaired loan by using the present value of the expected future cash
flows discounted at the loans effective interest rate or the fair value of the collateral if the
loan is collateral dependent. If the calculated measurement of an impaired loan is less than the
recorded investment in the loan, a portion of the Banks general allowance is allocated as an
impairment reserve.
At
December 31, 2009, the Bank had classified as impaired, loans with a balance of $72.3
million, net of $18.4 million in charge-offs. Of this amount,
$3.5 million represents three
restructured loans. Of the total impaired loans, $65.0 million are supported by collateral with a
fair value less selling costs, net of prior liens. For the collateral deficient loans,
approximately $7.3 million, the amount of the specific reserve at December 31, 2009 was $1.8
million. At December 31, 2008, the Bank had $20.2 million in loans classified as impaired,
including one restructured loan with a balance of $2.5 million. The average recorded investment in
impaired loans during the years ended December 31, 2009, 2008, and 2007 was approximately $56.8
million, $11.0 million, and $804,000, respectively. Interest income of $2.2 million, $871,000 and
$161,000 was recognized on impaired loans during the years ended December 31, 2009, 2008 and 2007,
respectively.
The accrual of interest on loans is discontinued when the loan becomes 90 days past due, or
when the full collection of principal and interest is in doubt. When an asset is placed on
non-accrual status, previously accrued but unpaid interest is reversed against income. Subsequent
collections of cash may be applied as reductions to the principal balance, or recorded as income,
depending on managements assessment of the ultimate collectability of the asset. Non-accrual loans
may be restored to accrual status when principal and interest become current and full payment of
principal and interest is expected. For 2009 and 2008, non-accrual loans were $69.8 million and
$17.7 million. Had non-accrual loans for which interest was no longer accruing complied with the
original terms and conditions of their notes, interest income would have been $4.1 million and
$370,000 greater for 2009 and 2008, respectively.
At December 31, 2009, the Bank held $3.9 million as OREO, a decrease of $2.7 million from OREO
of $6.6 million at December 31, 2008.
89
7. PREMISES AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Amounts in thousands) |
|
Land |
|
$ |
7,211 |
|
|
$ |
7,211 |
|
Bank premises |
|
|
43,922 |
|
|
|
43,006 |
|
Furniture and equipment |
|
|
41,080 |
|
|
|
39,974 |
|
Leased property under capital lease |
|
|
649 |
|
|
|
649 |
|
|
|
|
|
|
|
|
|
|
|
92,862 |
|
|
|
90,840 |
|
Accumulated depreciation and amortization |
|
|
(51,418 |
) |
|
|
(46,420 |
) |
|
|
|
|
|
|
|
|
|
$ |
41,444 |
|
|
$ |
44,420 |
|
|
|
|
|
|
|
|
8. INCOME TAXES
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(amounts in thousands) |
|
Current provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
30,748 |
|
|
$ |
22,059 |
|
|
$ |
14,138 |
|
State |
|
|
14,326 |
|
|
|
13,698 |
|
|
|
8,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,074 |
|
|
|
35,757 |
|
|
|
22,380 |
|
|
|
|
|
|
|
|
|
|
|
Deferred provision(benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(15,924 |
) |
|
|
(10,141 |
) |
|
|
173 |
|
State |
|
|
(5,320 |
) |
|
|
(2,941 |
) |
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,244 |
) |
|
|
(13,082 |
) |
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,830 |
|
|
$ |
22,675 |
|
|
$ |
22,479 |
|
|
|
|
|
|
|
|
|
|
|
Income tax asset (liability) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(amounts in thousands) |
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
5,240 |
|
|
$ |
962 |
|
State |
|
|
(249 |
) |
|
|
(1,884 |
) |
|
|
|
|
|
|
|
|
|
|
4,991 |
|
|
|
(922 |
) |
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
|
12,289 |
|
|
|
(4,354 |
) |
State |
|
|
3,764 |
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
16,053 |
|
|
|
(4,173 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
21,044 |
|
|
$ |
(5,095 |
) |
|
|
|
|
|
|
|
90
The components of the net deferred tax (liability) asset are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
( amounts in thousands ) |
|
Federal |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
3,914 |
|
|
$ |
2,730 |
|
Intangibles Acquistions |
|
|
9,636 |
|
|
|
4,543 |
|
FHLB Stock |
|
|
9,374 |
|
|
|
7,854 |
|
Deferred income |
|
|
2,501 |
|
|
|
2,091 |
|
Unrealized gain on investment securities, net |
|
|
14,177 |
|
|
|
17,268 |
|
|
|
|
|
|
|
|
Gross deferred tax liability |
|
|
39,602 |
|
|
|
34,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
California franchise tax |
|
|
2,605 |
|
|
|
3,493 |
|
Bad debt and credit loss deduction |
|
|
40,891 |
|
|
|
20,341 |
|
Net operating loss carryforward |
|
|
1,217 |
|
|
|
1,326 |
|
Deferred compensation |
|
|
2,896 |
|
|
|
2,843 |
|
Capital loss carryforward |
|
|
1,487 |
|
|
|
1,487 |
|
Other, net |
|
|
2,795 |
|
|
|
642 |
|
|
|
|
|
|
|
|
Gross deferred tax asset |
|
|
51,891 |
|
|
|
30,132 |
|
|
|
|
|
|
|
|
Net deferred tax (liability) asset federal |
|
$ |
12,289 |
|
|
$ |
(4,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
745 |
|
|
$ |
541 |
|
Intangibles Acquistions |
|
|
2,800 |
|
|
|
1,407 |
|
FHLB Stock |
|
|
2,903 |
|
|
|
2,433 |
|
Deferred income |
|
|
643 |
|
|
|
647 |
|
Unrealized gain on investment securities, net |
|
|
4,932 |
|
|
|
3,537 |
|
Gross deferred tax liability |
|
|
12,023 |
|
|
|
8,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Bad debt and credit loss deduction |
|
|
12,664 |
|
|
|
6,300 |
|
Net operating loss carryforward |
|
|
652 |
|
|
|
652 |
|
Deferred compensation |
|
|
924 |
|
|
|
912 |
|
Capital loss carryforward |
|
|
681 |
|
|
|
681 |
|
Other, net |
|
|
866 |
|
|
|
201 |
|
|
|
|
|
|
|
|
Gross deferred tax asset |
|
|
15,787 |
|
|
|
8,746 |
|
|
|
|
|
|
|
|
Net deferred tax (liability) asset state |
|
$ |
3,764 |
|
|
$ |
181 |
|
|
|
|
|
|
|
|
A reconciliation of the statutory income tax rate to the consolidated effective income tax
rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
|
|
|
|
|
Federal income tax at statutory rate |
|
$ |
31,237 |
|
|
|
35.0 |
% |
|
$ |
30,012 |
|
|
|
35.0 |
% |
|
$ |
29,072 |
|
|
|
35.0 |
% |
State franchise taxes, net of federal benefit |
|
|
6,289 |
|
|
|
7.0 |
% |
|
|
6,042 |
|
|
|
7.0 |
% |
|
|
5,691 |
|
|
|
6.9 |
% |
Tax-exempt income |
|
|
(12,525 |
) |
|
|
(14.0 |
)% |
|
|
(13,416 |
) |
|
|
(15.6 |
)% |
|
|
(12,012 |
) |
|
|
(14.5 |
)% |
Tax credits |
|
|
(1,577 |
) |
|
|
(1.8 |
)% |
|
|
(1,509 |
) |
|
|
(1.8 |
)% |
|
|
(1,526 |
) |
|
|
(1.8 |
)% |
Other, net |
|
|
406 |
|
|
|
0.5 |
% |
|
|
1,546 |
|
|
|
1.8 |
% |
|
|
1,254 |
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,830 |
|
|
|
26.7 |
% |
|
$ |
22,675 |
|
|
|
26.4 |
% |
|
$ |
22,479 |
|
|
|
27.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
The change in unrecognized tax benefits in 2009 follows:
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
|
(amounts in thousands) |
|
Balance at December 31, 2008 |
|
$ |
1,819 |
|
Reductions due to lapse of statutes of limitations |
|
|
(402 |
) |
|
|
|
|
Balance at December 31, 2008 |
|
$ |
1,417 |
|
|
|
|
|
The total amount of unrecognized tax benefits at December 31, 2009, of $1.4 million
would, if recognized, affect the effective tax rate. The amount accrued for payment of interest as
of December 31, 2009 and 2008 was $317,000 and $354,000, respectively. We record interest and
penalties related to uncertain tax positions as part of other operating expense. We do not expect
the total amount of unrecognized tax benefits to significantly increase or decrease within the next
twelve months.
The Company is subject to federal income tax and income tax of the state of California. Our
federal income tax returns for the years ended December 31, 2006, 2007 and 2008 are open to audit
by the federal authorities and our California state tax returns for the years ended December 31,
2005, 2006, 2007 and 2008 are open to audit by state authorities.
9. DEPOSITS
The composition of deposits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
(Amounts in thousands) |
|
|
|
|
|
Non-interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
1,561,981 |
|
|
|
35.2 |
% |
|
$ |
1,334,248 |
|
|
|
38.0 |
% |
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Deposits |
|
|
1,682,415 |
|
|
|
37.9 |
% |
|
|
1,143,779 |
|
|
|
32.6 |
% |
Time deposits |
|
|
1,194,258 |
|
|
|
26.9 |
% |
|
|
1,030,129 |
|
|
|
29.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
4,438,654 |
|
|
|
100.0 |
% |
|
$ |
3,508,156 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Time certificates of deposit with balances of $100,000 or more amounted to approximately
$1.0 billion and $737.3 million at December 31, 2009 and 2008, respectively. Interest expense on
such deposits amounted to approximately $11.3 million, $15.8 million, and $33.7 million for the
years ended December 31, 2009, 2008 and 2007, respectively.
92
At December 31, 2009, the scheduled maturities of time certificates of deposit are as follows
(000s omitted):
|
|
|
|
|
2010 |
|
$ |
1,178,002 |
|
2011 |
|
|
10,205 |
|
2012 |
|
|
2,402 |
|
2013 |
|
|
360 |
|
2014 and thereafter |
|
|
3,289 |
|
|
|
|
|
|
|
$ |
1,194,258 |
|
|
|
|
|
At December 31, 2009, the Company had a single public depositor with certificates of
deposit balances of approximately $240.0 million.
10. BORROWINGS
During 2009 and 2008, the Bank entered into short-term borrowing agreements with the FHLB. The
Bank had no outstanding balances as of December 31, 2009 under these agreements and had $776.5
million at December 31, 2008 with a weighted-average interest rate of 1.39%. FHLB held certain
investment securities of the Bank as collateral for those borrowings. The average outstanding
balance of short-term borrowings for 2009 and 2008 was $418.0 million and $1.2 billion,
respectively. The maximum outstanding at any month-end was $857.0 million during 2009 and $1.2
billion during 2008. At December 31, 2009, the Bank had no overnight agreements with other
financial institutions. On December 31, 2008, the Bank entered into overnight agreements with
certain financial institutions with a balance outstanding of $6.2 million at a weighted average
annual interest rate of 0.50%.
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 maturity date is September 30, 2012. The interest rate on this agreement is tied to
three-month LIBOR and resets quarterly. The Company entered into this arrangement to protect itself
from continued rising rates while benefiting from declining rates.
In November 2006, we began a repurchase agreement product with our customers. This product,
known as Citizens Sweep Manager, sells our securities overnight to our customers under an agreement
to repurchase them the next day. As of December 31, 2009 and 2008, total funds borrowed under
these agreements were $485.1 million and $357.8 million, respectively, with weighted average
interest rates of 0.95% and 1.29%.
The Bank entered into an agreement, known as the Treasury Tax & Loan (TT&L) Note Option
Program, in 1996 with the Federal Reserve Bank and the U.S. Department of the Treasury in which
federal tax deposits made by depositors can be held by the Bank until called (withdrawn) by the
U.S. Department of the 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 December 31, 2009 and
2008, the amounts held by the Bank in the TT&L Note Option Program were $2.4 million and $5.4
million respectively, collateralized by securities. Amounts are payable on demand.
During 2009 and 2008, the Bank entered into long-term borrowing agreements with the FHLB. The
Bank had outstanding balances of $750.0 million and $950.0 million under these agreements at
December 31, 2009 and 2008, respectively, with weighted-average interest rates of 3.81% and 4.09%
in 2009 and 2008, respectively. FHLB held certain investment securities and loans of the Bank as
collateral for those borrowings. The maturity dates of the outstanding balances at December 31, 2009 are
as follows: $100.0 million in each of 2010, 2012 and 2013, $250.0 million in 2015 and $200.0 in
2016.
The Bank assumed subordinated debt of $5.0 million from the acquisition of FCB in June 2007
which is included in long-term borrowings. 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.
93
11. JUNIOR SUBORDINATED DEBENTURES
On December 17, 2003, CVB Statutory Trust I completed a $40,000,000 offering of Trust
Preferred Securities and used the gross proceeds from the offering and other cash, totaling
$41,238,000 to purchase a like amount of junior subordinated debenture of the Company. The junior
subordinated debenture was issued concurrent with the issuance of the Trust Preferred Securities.
The interest on junior subordinated debenture, paid by the Company to CVB Statutory Trust I,
represents the sole revenues of CVB Statutory Trust I and the sole source of dividend distribution
to the holders of the Trust Preferred Securities. The Company has fully and conditionally
guaranteed all of CVB Statutory Trust Is obligations under the Trust Preferred Securities. The
Company has the right, assuming no default has occurred, to defer payments of interest on the
junior subordinated debenture at any time for a period not to exceed 20 consecutive quarters. The
Trust Preferred Securities will mature on December 17, 2033, and became callable in part or in
total on December 17, 2008 by CVB Statutory Trust I. The Trust Preferred Securities had a fixed
interest rate of 6.51% during the first five years. On December 17, 2008, the interest rate
changed to a floating rate of three-month LIBOR plus 2.85% and resets quarterly. As of December
31, 2009, these securities were not called.
On December 15, 2003, CVB Statutory Trust II completed a $40,000,000 offering of Trust
Preferred Securities and used the gross proceeds from the offering and other cash totaling
$41,238,000 to purchase a like amount of junior subordinated debenture of the Company. The junior
subordinated debenture was issued concurrent with the issuance of the Trust Preferred Securities.
The interest on junior subordinated debenture, paid by the Company to CVB Statutory Trust II,
represents the sole revenues of CVB Statutory Trust II and the sole source of dividend distribution
to the holders of the Trust Preferred Securities. The Company has fully and conditionally
guaranteed all of CVB Statutory Trust IIs obligations under the Trust Preferred Securities. The
Company has the right, assuming no default has occurred, to defer payments of interest on the
junior subordinated debenture at any time for a period not to exceed 20 consecutive quarters. The
Trust Preferred Securities will mature on January 7, 2034, but became callable in part or in total
on January 7, 2009 by CVB Statutory Trust II. The Trust Preferred Securities have a fixed interest
rate of 6.46% during the first five years. In January 2009, the interest rate changed to floating
rate of three-month Libor rate plus 2.85% and resets quarterly. As of December 31, 2009, these
securities were not called.
On January 31, 2006, CVB Statutory Trust III completed a $25,000,000 offering of Trust
Preferred Securities and used the gross proceeds from the offering and other cash totaling
$25,774,000 to purchase a like amount of junior subordinated debenture of the Company. The junior
subordinated debenture was issued concurrent with the issuance of the Trust Preferred Securities.
The interest on junior subordinated debenture, paid by the Company to CVB Statutory Trust III,
represents the sole revenues of CVB Statutory Trust III and the sole source of dividend
distribution to the holders of the Trust Preferred Securities. The Company has fully and
conditionally guaranteed all of CVB Statutory Trust IIIs obligations under the Trust Preferred
Securities. The Company has the right, assuming no default has occurred, to defer payments of
interest on the junior subordinated debenture at any time for a period not to exceed 20 consecutive
quarters. The Trust Preferred Securities will mature on March 15, 2036, but become callable in part
or in total on March 15, 2011 by CVB Statutory Trust III. The Trust Preferred Securities have a
variable per annum rate equal to LIBOR (as defined in the indenture dated as of January 31, 2006 (Indenture) between the Company and U.S. Bank National Association, as
debenture trustee) plus 1.38% (the Variable Rate).
On June 22, 2007, we acquired FCB Statutory Trust II as a result of the FCB acquisition.
Junior subordinated debentures were issued concurrent with the issuance of the Trust Preferred
Securities. The Trust Preferred Securities have a principal amount of $6.8 million and mature on
October 7, 2033. These securities become callable on July 7, 2008 and have a variable per annum
rate equal to LIBOR plus 3.25%. As of December 31, 2009, these securities were not called.
94
12. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases land and buildings under operating leases for varying periods extending to
2020, at which time the Company can exercise options that could extend certain leases through 2026.
The future minimum annual rental payments required for leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 2009, excluding property taxes
and insurance, are as follows (000s omitted):
|
|
|
|
|
2010 |
|
$ |
5,587 |
|
2011 |
|
|
4,947 |
|
2012 |
|
|
4,142 |
|
2013 |
|
|
2,665 |
|
2014 |
|
|
2,032 |
|
Succeeding years |
|
|
5,988 |
|
|
|
|
|
Total minimum payments required |
|
$ |
25,361 |
|
|
|
|
|
Total rental expense for the Company was approximately $6.0 million, $5.8 million, and
$5.0 million for the years ended December 31, 2009, 2008, and 2007, respectively.
Commitments
At December 31, 2009, the Company had commitments to extend credit of approximately $596.6
million and obligations under letters of credit of $69.5 million. 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 $7.9 million as of December 31, 2009 and $4.2 million as
of December 31, 2008.
Standby letters of credit written are conditional commitments issued by the Bank to guarantee
the financial performance of a customer to a third party. Those guarantees are primarily issued to
support private borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers. When deemed
necessary, the Bank holds appropriate collateral supporting those commitments. Management does not anticipate any
material losses as a result of these transactions.
The Bank has available lines of credit totaling $1.1 billion from certain financial
institutions of which $696.8 million were secured.
Shareholder Rights Plan
In 2000, the Company adopted a shareholder rights plan designed to maximize long-term value
and to protect shareholders from improper takeover tactics and takeover bids which are not fair to
all shareholders. In accordance with the plan, preferred share purchase rights were distributed as
a dividend at the rate of one right to purchase one one-thousandth of a share of our Series A
Participating Preferred Stock at an exercise price of $50.00 (subject to adjustment) upon the
occurrence of certain triggering events.
The rights become exercisable, and will begin to trade separately from the Common Stock of the
Company, upon the earlier of (i) 10 days following a public announcement that a person or group of
95
affiliated persons has acquired, or obtained the right to acquire, beneficial ownership of 20% or
more of the outstanding Common Stock or (ii) ten business days (or such later day as determined by
the Board) after a person or group announces a tender offer or exchange offer, the consummation of
which would result in ownership by a person or group of 20% or more of our Common Stock. Each right
will entitle the holder to purchase Common Stock of the Company having a current market value of
twice the exercise price of the right. If the Company is acquired through a merger or other
business combination transaction, or if there is a sale of more than 50% of our assets or earning
power, each right will entitle the holder (other than rights held by the acquiring person) to
purchase, at the exercise price, common stock of the acquiring entity having a value of twice the
exercise price at the time.
The Companys Board of Directors has the option, at any time after a person becomes a 20%
holder of our outstanding common stock, to exchange all or part of the rights (other than rights
held by the acquiring person) for shares of common stock of the Company provided the Company may
not make such an exchange after the person becomes the beneficial owner of 50% or more of our
outstanding stock.
The Company may redeem the rights for $.01 each at any time on, or prior to, public
announcement that a person has become the beneficial owner of 20% or more of our common stock. The
rights will expire on June 21, 2010, unless earlier redeemed or exchanged.
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. As of December 31, 2009, the
Company does not have any litigation reserves and is not aware of any material pending legal action
or complaint asserted against the Company.
13. DEFERRED COMPENSATION PLANS
As a result of the acquisition of Citizens Commercial Trust and Savings Bank of Pasadena
(CCT&SB) in 1996, the Bank assumed deferred compensation and salary continuation agreements with
several former employees of CCT&SB. These agreements call for periodic payments at the retirement
of such employees who have normal retirement dates through 2021. In connection with these
agreements, the Bank assumed life insurance policies, which it intends to use to fund the related
liability. Benefits paid to retirees amounted to approximately $106,000 in each of 2009, 2008 and
2007.
The Bank also assumed a death benefit program for certain former employees of CCT&SB, under
which the Bank will provide benefits to the former employees beneficiaries: 1) in the event of
death while employed by the Bank; 2) after termination of employment for total and permanent
disability; 3) after retirement, if retirement occurs after age 65. Amounts are to be paid to the
former employees beneficiaries over a 10-year period in equal installments. Further, the Bank
assumed life insurance policies to fund any future liability related to this program. Amounts paid
for the benefit of retirees totaled approximately $45,000 in each of 2009, 2008 and 2007.
The Company assumed certain deferred compensation and salary continuation agreements as a
result of the merger with Orange National Bancorp (ONB) in 1999. These agreements called for
periodic payments over 180 months in the event that ONB experienced a merger, acquisition, or other
act wherein the employees were not retained in similar positions with the surviving company.
Amounts paid under these agreements totaled approximately $60,000 in each of 2009, 2008 and 2007.
The Company assumed certain deferred compensation and salary continuation agreements as a
result of the merger with Western Security Bank (WSB) in 2002. These agreements called for
periodic payments over 180 months in the event that WSB experienced a merger, acquisition, or other
act wherein
96
the employees were not retained in similar positions with the surviving company.
Amounts paid under these agreements totaled approximately $636,000 in 2009, $578,500 in 2008, and
$498,000 in 2007.
In 2003, the Company acquired Kaweah National Bank (KNB) which had severance arrangements
with several of its officers should they not retain a similar position upon a change of control.
These monies totaling $879,000 were paid into a Rabbi Trust by KNB prior to the closing of the
acquisition. As a result, there is no affect on net earnings. Amounts paid under these agreements
totaled approximately $118,950 in each of 2009, 2008, and 2007.
In February 2006, the Company acquired Granite State Bank (GSB) which had a severance
arrangement with an officer should he not retain a similar position upon a change of control. The
total of $1.2 million was paid into a Rabbi Trust by GSB prior to the closing of the acquisition.
As a result, there is no affect on net earnings. No amount was paid under this agreement as of
December 31, 2009.
The total expense recorded under these deferred compensation agreements was $509,000 in 2009,
$467,000 in 2008, and $326,000 in 2007.
On December 22, 2006, the Company approved a deferred compensation plan for its President and
Chief Executive Officer, Christopher D. Myers. Under the Plan, which became effective on January
1, 2007, Mr. Myers may defer up to 75% of his base salary and up to 100% of his bonus for each
calendar year in which the Plan is effective. The Company has the discretion to make additional
contributions to the Plan for the benefit of Mr. Myers.
On March 31, 2007, the Company approved the Executive Non-qualified Excess Plan, a deferred
compensation plan for certain management employees to provide a means by which they may elect to
defer receipt of compensation in order to provide retirement benefits. The Plan is intended to be
unfunded and primarily serve the purpose of providing deferred compensation benefits for a select
group of employees.
14. 401(k) AND PROFIT-SHARING PLAN
The Bank sponsors a 401(k) and profit-sharing plan for the benefit of its employees. Employees
are eligible to participate in the plan immediately upon hire. Employees may make contributions to
the plan under the plans 401(k) component. The Bank contributes 3%, non-matching, to the plan to
comply with ERISAs safe harbor provisions. The Bank may make additional contributions under the
plans profit-sharing component, subject to certain limitations. The Banks total contributions are
determined by the Board of Directors and amounted to approximately $2.2 million in 2009 and $1.3 million in each
of 2008 and 2007.
97
15. EQUITY AND EARNINGS PER SHARE RECONCILIATION
Preferred Stock and Warrant
On December 5, 2008, the Company issued, (1) 130,000 shares of the Companys Fixed Rate
Cumulative Perpetual Preferred Stock, Series B, liquidation preference of $1,000 per share, and (2)
a ten-year warrant to purchase up to 1,669,521 shares of the Companys voting common stock, without
par value, at an exercise price of $11.68 per share, for an aggregate purchase price of
$130,000,000 in cash pursuant to the U.S. Treasurys TARP Capital Purchase Program. Of this
amount, $8.6 million was allocated to the warrant and $121.4 million was allocated to Preferred
Stock based on the fair values of these instruments. The preferred stock discount was being
amortized over 5 years. We recorded $8.5 million for the amortization of preferred stock discount
in 2009 and $99,000 during 2008. The Series B Preferred Stock accrued a cumulative cash dividend
at the rate of 5% for the first five years of issuance and 9% thereafter and is redeemable by the
Company after February 15, 2012. We paid $4.3 million and $570,000 in preferred stock dividends
during 2009 and 2008, respectively.
In July 2009, we raised $132.5 million in gross proceeds ($126.1 million net proceeds) from
the issuance of common stock in an underwritten public offering. Because we issued common stock in
excess of $130 million, the warrant was reduced to 834,000 shares. The net proceeds were used,
along with other funds, to repurchase the preferred stock and outstanding warrant issued to the
United States Treasury as part of our participation in the Capital Purchase Program. We completed
the repurchase of the preferred stock on September 2, 2009 and repurchased the warrant on October
28, 2009.
Earnings Per Common Share Reconciliation
Basic earnings per common share are computed by dividing income allocated to common
stockholders by the weighted-average number of common shares outstanding during each period. The
computation of diluted earnings per common share considers the number of tax-effected shares
issuable upon the assumed exercise of outstanding common stock options. The table below shows
earnings per common share and diluted earnings per common share and reconciles the numerator and
denominator of both earnings per common share calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Amount and share in thousands, except |
|
|
|
per share amount) |
|
Earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
65,419 |
|
|
$ |
63,073 |
|
|
$ |
60,584 |
|
Less: Dividends on preferred stock and discount amortization |
|
|
12,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common shareholders |
|
$ |
52,656 |
|
|
$ |
63,073 |
|
|
$ |
60,584 |
|
|
|
|
|
|
|
|
|
|
|
Less: Net earnings allocated to restricted stock |
|
|
179 |
|
|
|
75 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings allocated to common shareholders (numerator) |
|
$ |
52,477 |
|
|
$ |
62,998 |
|
|
$ |
60,552 |
|
|
|
|
Weighted Average Shares Outstanding (denominator) |
|
|
92,955 |
|
|
|
83,121 |
|
|
|
83,600 |
|
Earnings per common share (1) |
|
$ |
0.56 |
|
|
$ |
0.75 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common shareholders (numerator) |
|
$ |
52,477 |
|
|
$ |
62,998 |
|
|
$ |
60,552 |
|
|
|
|
Weighted Average Shares Outstanding |
|
|
92,955 |
|
|
|
83,121 |
|
|
|
83,600 |
|
Incremental shares from assumed exercise of outstanding options |
|
|
101 |
|
|
|
215 |
|
|
|
406 |
|
|
|
|
|
|
|
Diluted Weighted Average Shares Outstanding (denominator) |
|
|
93,056 |
|
|
|
83,336 |
|
|
|
84,006 |
|
Diluted earnings per common share (1) |
|
$ |
0.56 |
|
|
$ |
0.75 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
(1) |
|
Of the decrease in earnings and diluted earnings per common share for 2009, $0.14
is due to the preferred stock dividend and discount amortization and $0.07 is due to the
increase in weighted common shares outstanding as a result of our capital offering. |
98
16. STOCK OPTION PLANS AND RESTRICTED STOCK GRANTS
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. As of December 31, 2009, we have 1,692,270 outstanding options under our 2000
Stock Option Plan and 108,601 outstanding options remaining under our 1991 Stock Option Plan.
Stock Options
The Company expensed $1.7 million, $1.3 million, and $1.4 million for the years ended December
31, 2009, 2008 and 2007 respectively.
The estimated fair value of the options granted during 2009 and prior years was calculated
using the Black-Scholes options pricing model. There were 936,000, 390,500 and 72,500 options
granted during 2009, 2008, and 2007 respectively. The options will vest, in equal installments,
over a five-year period. The fair value of each stock option granted in 2009, 2008, and 2007 was
estimated on the date of grant using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Dividend Yield |
|
|
4.0 |
% |
|
|
3.6 |
% |
|
|
3.0 |
% |
Volatility |
|
|
47.3 |
% |
|
|
41.0 |
% |
|
|
39.3 |
% |
Risk-free interest rate |
|
|
2.5 |
% |
|
|
3.6 |
% |
|
|
4.1 |
% |
Expected life |
|
7.2 years |
|
7.5 years |
|
7.2 years |
Fair Value |
|
$ |
2.88 |
|
|
$ |
3.07 |
|
|
$ |
3.85 |
|
The expected volatility is solely based on the daily historical stock price volatility
over the expected option life. The expected life of options granted is derived from the output of
the option valuation model and represents the period of time an optionee will hold an option before
exercising it. The risk-free rate for periods within the contractual life of the option is based
on the U.S. Treasury five-year constant maturity yield curve in effect at the time of the grant.
Option activity under the Companys stock option plans as of December 31, 2009 and changes for
the years ended December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Stock |
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
|
|
Options |
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Outstanding |
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
Options |
|
(000) |
|
|
Price |
|
|
Term (in Years) |
|
|
($000) |
|
Outstanding at January 1, 2009 |
|
|
2,249 |
|
|
$ |
10.64 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
936 |
|
|
$ |
8.59 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(56 |
) |
|
$ |
4.97 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(25 |
) |
|
$ |
10.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
3,104 |
|
|
$ |
10.13 |
|
|
|
6.30 |
|
|
$ |
1,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2009 |
|
|
2,912 |
|
|
$ |
10.16 |
|
|
|
6.12 |
|
|
$ |
1,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009 |
|
|
1,607 |
|
|
$ |
10.57 |
|
|
|
3.87 |
|
|
$ |
1,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted was $2.88, $3.07 and $3.85
for 2009, 2008, and 2007, respectively. The total intrinsic value of options exercised during the
year ended 2009, 2008 and 2007 was $147,000, $424,000 and $1.9 million, respectively. The Company
estimates its forfeiture rates based on its historical experience. The forfeiture rate for 2009
was 5.0%.
99
As of December 31, 2009, there was $3.8 million of total unrecognized compensation cost
related to nonvested options granted under the Plan. That cost is expected to be recognized over a
weighted-average period of approximately 3.7 years. The total fair value of options vested was $1.4
million during 2009, $1.2 million in 2008 and $1.4 million during 2007. Cash received from stock
option exercises was $280,000, $606,000, and $2.1 million in 2009, 2008, and 2007, respectively.
At December 31, 2009, options for the purchase of 3,103,671 shares of Company common stock
were outstanding under the above plans, of which options to purchase 1,606,543 shares were
exercisable at prices ranging from $4.80 to $15.53.
Restricted Stock
Under the 2008 Equity Incentive Plan, we granted 282,000 restricted stock awards in 2009. The
restricted stock awards had a weighted average fair value of $8.56. The stock will vest, in equal
installments, over a five-year period.
Compensation cost is recognized over the requisite service period, which is five years, and
amounted to $403,000, $214,000 and $144,000 during the years ended December 31, 2009, 2008 and
2007, respectively. Total unrecognized compensation cost related to restricted shares was $2.6
million at December 31, 2009.
A summary of the status of the Companys non-vested restricted shares as of December 31, 2009
and changes during the year ended December 31, 2009, is presented below:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
Shares |
|
|
Average |
|
Nonvested Restricted Shares |
|
(000) |
|
|
Fair Value |
|
Nonvested at January 1, |
|
|
105 |
|
|
$ |
10.55 |
|
Granted |
|
|
282 |
|
|
|
8.56 |
|
Vested |
|
|
(25 |
) |
|
|
10.98 |
|
Forfeited |
|
|
(1 |
) |
|
|
9.46 |
|
|
|
|
|
|
|
|
Nonvested at December 31, |
|
|
361 |
|
|
$ |
8.97 |
|
|
|
|
|
|
|
|
|
|
The Company has a policy of issuing new shares to satisfy share option exercises. |
Under the 2008 Equity Incentive Plan, 2,249,391 shares of common stock were available for the
granting of future options and restricted stock awards as of December 31, 2009.
17. REGULATORY MATTERS
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital
requirements administered by the federal banking regulatory agencies. Failure to meet minimum
capital requirements can initiate certain mandatoryand possibly additional discretionaryactions
by regulators that, if undertaken, could have a direct, material effect on the Companys and the
Banks financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and classification are also subject to
qualitative judgment by the regulators about components, risk-weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company
and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and
Tier I capital
100
(primarily common stock and retained earnings, less goodwill) to risk-weighted
assets, and of Tier I capital to average assets. Management believes that, as of December 31, 2009
and 2008, the Company and the Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 2009 and 2008, the most recent notifications from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the minimum total risk-based, Tier I risk-based, and Tier I
leverage (tangible Tier I capital divided by average total assets) ratios as set forth in the table
below must be maintained. There are no conditions or events since said notification that management
believes have changed the Banks category.
The Company has $115.1 million of trust-preferred securities, which are included in Tier 1
capital for regulatory purposes. The actual amount and capital ratios of the Company and the Bank
at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
|
|
|
Amount |
|
|
|
|
|
Amount |
|
|
|
|
(000s) |
|
Ratio |
|
(000s) |
|
Ratio |
|
(000s) |
|
Ratio |
As of December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-
Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
716,182 |
|
|
|
16.3 |
% |
|
$ |
351,500 |
|
|
|
> 8.0 |
% |
|
|
|
|
|
|
N/A |
|
Bank |
|
$ |
708,457 |
|
|
|
16.2 |
% |
|
$ |
349,855 |
|
|
|
> 8.0 |
% |
|
$ |
437,319 |
|
|
|
> 10.0 |
% |
Tier I Capital (to Risk-
Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
655,569 |
|
|
|
14.9 |
% |
|
$ |
175,992 |
|
|
|
> 4.0 |
% |
|
|
|
|
|
|
N/A |
|
Bank |
|
$ |
652,992 |
|
|
|
14.9 |
% |
|
$ |
175,300 |
|
|
|
> 4.0 |
% |
|
$ |
262,950 |
|
|
|
> 6.0 |
% |
Tier I Capital (to Average-
Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
655,569 |
|
|
|
9.6 |
% |
|
$ |
272,303 |
|
|
|
> 4.0 |
% |
|
|
|
|
|
|
N/A |
|
Bank |
|
$ |
652,992 |
|
|
|
9.6 |
% |
|
$ |
272,080 |
|
|
|
> 4.0 |
% |
|
$ |
340,100 |
|
|
|
> 5.0 |
% |
As of December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
692,352 |
|
|
|
15.5 |
% |
|
$ |
356,423 |
|
|
|
> 8.0 |
% |
|
|
|
|
|
|
N/A |
|
Bank |
|
$ |
676,000 |
|
|
|
15.2 |
% |
|
$ |
356,024 |
|
|
|
> 8.0 |
% |
|
$ |
445,030 |
|
|
|
> 10.0 |
% |
Tier I Capital (to Risk-
Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
631,643 |
|
|
|
14.2 |
% |
|
$ |
178,179 |
|
|
|
> 4.0 |
% |
|
|
|
|
|
|
N/A |
|
Bank |
|
$ |
620,323 |
|
|
|
13.9 |
% |
|
$ |
178,126 |
|
|
|
> 4.0 |
% |
|
$ |
267,189 |
|
|
|
> 6.0 |
% |
Tier I Capital (to Average-
Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
631,643 |
|
|
|
9.8 |
% |
|
$ |
256,765 |
|
|
|
> 4.0 |
% |
|
|
|
|
|
|
N/A |
|
Bank |
|
$ |
620,323 |
|
|
|
9.7 |
% |
|
$ |
257,129 |
|
|
|
> 4.0 |
% |
|
$ |
321,411 |
|
|
|
> 5.0 |
% |
In addition, California Banking Law limits the amount of dividends a bank can pay without
obtaining prior approval from bank regulators. Under this law, the Bank could, as of December 31,
2009, declare and pay additional dividends of approximately $108,778,169.
18. FAIR VALUE INFORMATION
Fair Value Hierarchy
The following disclosure provides the fair value information for financial assets and
liabilities as of December 31, 2009. The fair value hierarchy prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 3).
101
|
|
|
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. |
|
|
|
|
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. |
Determination of Fair Value
The following is a description of valuation methodologies used for assets and liabilities
recorded at fair value and for estimating fair value for financial instruments not recorded at fair
value.
Cash The carrying amount of cash and cash equivalents is considered to be a reasonable
estimate of fair value.
Investment securities available-for-sale Investment securities available-for-sale are valued
based upon quotes obtained from a reputable third-party pricing service. The service uses
evaluated pricing applications and model processes. Market inputs, such as, benchmark yields,
reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities,
bids, offers and reference data are considered as part of the evaluation. The inputs are related
directly to the security being evaluated, or indirectly to a similarly situated security. Market
assumptions and market data are utilized in the valuation models. Accordingly, the Company
categorized its investment portfolio as a Level 2 valuation.
Non-covered Loans The carrying amount of loans and lease finance receivables is their
contractual amounts outstanding, reduced by deferred net loan origination fees and the allocable
portion of the allowance for credit losses.
The fair value of loans, other than loans on non-accrual status, was estimated by discounting
the remaining contractual cash flows using the estimated current rate at which similar loans would
be made to borrowers with similar credit risk characteristics and for the same remaining
maturities, reduced by deferred net loan origination fees and the allocable portion of the
allowance for credit losses. Accordingly, in determining the estimated current rate for discounting
purposes, no adjustment has been made for any change in borrowers credit risks since the
origination of such loans. Rather, the allocable portion of the allowance for credit losses is
considered to provide for such changes in estimating fair value. As a result, this fair value is
not necessarily the value which would be derived using an exit price.
Non-covered Impaired loans and OREO are generally measured using the fair value of the
underlying collateral, which is determined based on the most recent appraisal information received,
less costs to sell. Appraised values may be adjusted based on factors such as the changes in
market conditions from the time of valuation or discounted cash flows of the property. As such,
these loans fall within Level 3 of the fair value hierarchy.
The fair value of commitments to extend credit and standby letters of credit were not
significant at either December 31, 2009 or 2008, as these instruments predominantly have adjustable
terms and are of a short-term nature.
Covered
Loans Covered loans were measured at fair value on the date of acquisition.
Thereafter, covered loans are not measured at fair value on a recurring basis. The above valuation
discussion for non-covered loans is applicable to covered loans following their acquisition date.
102
Swaps The fair value of the interest rate swap contracts are provided by our counterparty
using a system that constructs a yield curve based on cash LIBOR rates, Eurodollar futures
contracts, and 3-year through 30-year swap rates. The yield curve determines the valuations of the
interest rate swaps. Accordingly, the swap is categorized as a Level 2 valuation.
Deposits & Borrowings The amounts payable to depositors for demand, savings, and money
market accounts, and the demand note to the U.S. Treasury, and short-term borrowings are considered
to be stated at fair value. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities. The fair value of
long-term borrowings and junior subordinated debentures is estimated using the rates currently
offered for borrowings of similar remaining maturities.
Accrued Interest Receivable/Payable The amounts of accrued interest receivable on loans and
lease finance receivables and investments and accrued interest payable on deposits and borrowings
are considered to be stated at fair value.
Assets & Liabilities Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
Carrying Value at |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
(in thousands) |
|
December 31, 2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Description of Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
507 |
|
|
$ |
|
|
|
$ |
507 |
|
|
$ |
|
|
Mortgage-backed securities |
|
|
647,168 |
|
|
|
|
|
|
|
647,168 |
|
|
|
|
|
CMOs / REMICs |
|
|
773,165 |
|
|
|
|
|
|
|
773,165 |
|
|
|
|
|
Government agency |
|
|
21,713 |
|
|
|
|
|
|
|
21,713 |
|
|
|
|
|
Municipal bonds |
|
|
663,426 |
|
|
|
|
|
|
|
663,426 |
|
|
|
|
|
Other securities |
|
|
2,484 |
|
|
|
|
|
|
|
2,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities-AFS |
|
$ |
2,108,463 |
|
|
$ |
|
|
|
$ |
2,108,463 |
|
|
$ |
|
|
Interest Rate Swaps |
|
|
4,334 |
|
|
|
|
|
|
|
4,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,112,797 |
|
|
$ |
|
|
|
$ |
2,112,797 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
$ |
4,334 |
|
|
$ |
|
|
|
$ |
4,334 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We may be required to measure certain assets at fair value on a nonrecurring basis
in accordance with GAAP. These adjustments to fair value usually result from application of
lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at
fair value on a nonrecurring basis that were still held in the balance sheet at year end, the
following table provides the level of valuation assumptions used to determine each adjustment and
the carrying value of the related assets at year end.
103
Assets & Liabilities Measured at Fair Value on a Non-Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
|
For the year |
|
|
|
|
|
|
Active Markets |
|
Other |
|
Significant |
|
ended |
|
|
|
|
|
|
for Identical |
|
Observable |
|
Unobservable |
|
December 31, |
|
|
Carrying Value at |
|
Assets |
|
Inputs |
|
Inputs |
|
2009 |
(in thousands) |
|
December 31, 2009 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total Losses |
Description of Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Security-HTM |
|
$ |
3,838 |
|
|
$ |
|
|
|
$ |
3,838 |
|
|
$ |
|
|
|
$ |
(323 |
) |
Impaired Loans-Noncovered (1) |
|
$ |
72,278 |
|
|
$ |
|
|
|
$ |
2,500 |
|
|
$ |
69,778 |
|
|
$ |
(18,450 |
) |
OREO-Noncovered |
|
$ |
3,936 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,936 |
|
|
$ |
(848 |
) |
OREO-Covered |
|
$ |
5,565 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,565 |
|
|
$ |
|
|
|
|
|
(1) |
|
Impaired loans of $65.0 million have sufficient collateral values to cover losses and are
recorded at
carrying value. |
The following disclosure presents estimated fair value of financial instruments. The
estimated fair value amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is required to develop the
estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative
of the amounts the Company could have realized in a current market exchange as of December 31, 2009
and 2008. The use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
FAIR VALUE INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
|
(amounts in thousands) |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
103,254 |
|
|
$ |
103,254 |
|
|
$ |
95,297 |
|
|
$ |
95,297 |
|
Interest-bearing balances due from depository
institutions |
|
|
1,226 |
|
|
|
1,226 |
|
|
|
285 |
|
|
|
285 |
|
FHLB Stock |
|
|
97,582 |
|
|
|
97,582 |
|
|
|
93,240 |
|
|
|
93,240 |
|
Investment securities available-for-sale |
|
|
2,108,463 |
|
|
|
2,108,463 |
|
|
|
2,493,476 |
|
|
|
2,493,476 |
|
Investment securities held-to-maturity |
|
|
3,838 |
|
|
|
3,838 |
|
|
|
6,867 |
|
|
|
4,770 |
|
Total Loans, net of allowance for credit losses |
|
|
3,970,089 |
|
|
|
3,955,500 |
|
|
|
3,682,878 |
|
|
|
3,689,876 |
|
Accrued interest receivable |
|
|
28,672 |
|
|
|
28,672 |
|
|
|
28,519 |
|
|
|
28,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
1,561,981 |
|
|
$ |
1,561,981 |
|
|
$ |
1,334,248 |
|
|
$ |
1,334,248 |
|
Interest-bearing |
|
|
2,876,673 |
|
|
|
2,879,305 |
|
|
|
2,173,908 |
|
|
|
2,177,435 |
|
Demand note to U.S. Treasury |
|
|
2,425 |
|
|
|
2,425 |
|
|
|
5,373 |
|
|
|
5,373 |
|
Borrowings |
|
|
1,490,132 |
|
|
|
1,536,933 |
|
|
|
2,345,473 |
|
|
|
2,415,900 |
|
Junior subordinated debentures |
|
|
115,055 |
|
|
|
115,817 |
|
|
|
115,055 |
|
|
|
116,149 |
|
Accrued interest payable |
|
|
6,481 |
|
|
|
6,481 |
|
|
|
9,741 |
|
|
|
9,741 |
|
The fair value estimates presented herein are based on pertinent information available to
management as of December 31, 2009 and 2008. Although management is not aware of any factors that
would significantly affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since that date, and therefore,
current estimates of fair value may differ significantly from the amounts presented above.
104
19. GOODWILL AND INTANGIBLE ASSETS
The following is a summary of amortizable intangible assets, which consist of core deposit
intangibles, at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
Accumulated |
|
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
|
(amounts in thousands) |
Amortizing intangible assets |
|
$ |
31,999 |
|
|
$ |
(19,238 |
) |
|
$ |
27,095 |
|
|
$ |
(16,075 |
) |
Aggregate Amortization Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For year ended December 31, |
|
$ |
3,163 |
|
|
|
|
|
|
$ |
3,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Amortization Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 2010 |
|
$ |
3,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 2011 |
|
$ |
3,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 2012 |
|
$ |
2,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 2013 |
|
$ |
1,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 2014 |
|
$ |
475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter |
|
$ |
1,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 the weighted average remaining life of intangible assets is
approximately 4.2 years.
The change in the carrying amount of goodwill for the years ended December 31, 2009 and 2008
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
(amounts in thousands) |
|
Balance as of January 1 |
|
$ |
55,097 |
|
|
$ |
55,167 |
|
Purchase price adjustment related to
acquisition of First Coastal Bank |
|
|
|
|
|
|
(70 |
) |
|
|
|
|
|
|
|
Balance as of December 31 |
|
$ |
55,097 |
|
|
$ |
55,097 |
|
|
|
|
|
|
|
|
20. 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 51
Business Financial Centers and Commercial Banking Centers 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 Business Financial and Commercial Banking Centers
are considered one operating segment as their products and services are similar and are sold to
similar types of customers, have similar production and distribution processes, have similar
economic characteristics, and have similar reporting and organizational structures. The Treasury
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.
105
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 the Companys
management structure or reporting methodologies may result in changes in the measurement of
operating segment results.
The following tables present the operating results and other key financial measures for the
individual operating segments for the year ended December 31, 2009, 2008 and 2007:
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
Centers |
|
|
Treasury |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
Interest income, including loan fees |
|
$ |
159,347 |
|
|
$ |
104,778 |
|
|
$ |
46,634 |
|
|
$ |
|
|
|
$ |
310,759 |
|
Credit for funds provided (1) |
|
|
53,759 |
|
|
|
|
|
|
|
23,233 |
|
|
|
(76,992 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
213,106 |
|
|
|
104,778 |
|
|
|
69,867 |
|
|
|
(76,992 |
) |
|
|
310,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
28,428 |
|
|
|
55,572 |
|
|
|
4,495 |
|
|
|
|
|
|
|
88,495 |
|
Charge for funds used (1) |
|
|
12,559 |
|
|
|
28,077 |
|
|
|
36,356 |
|
|
|
(76,992 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
40,987 |
|
|
|
83,649 |
|
|
|
40,851 |
|
|
|
(76,992 |
) |
|
|
88,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
172,119 |
|
|
|
21,129 |
|
|
|
29,016 |
|
|
|
|
|
|
|
222,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
80,500 |
|
|
|
|
|
|
|
80,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for credit losses |
|
$ |
172,119 |
|
|
$ |
21,129 |
|
|
|
(51,484 |
) |
|
$ |
|
|
|
$ |
141,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
19,537 |
|
|
|
28,124 |
|
|
|
33,410 |
|
|
|
|
|
|
|
81,071 |
|
Non-interest expense |
|
|
47,860 |
|
|
|
5,945 |
|
|
|
79,781 |
|
|
|
|
|
|
|
133,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss) |
|
$ |
143,796 |
|
|
$ |
43,308 |
|
|
$ |
(97,855 |
) |
|
$ |
|
|
|
$ |
89,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of December 31, 2009 |
|
$ |
4,696,134 |
|
|
$ |
2,276,909 |
|
|
$ |
698,351 |
|
|
$ |
(931,625 |
) |
|
$ |
6,739,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, including loan fees |
|
$ |
166,290 |
|
|
$ |
119,975 |
|
|
$ |
46,253 |
|
|
$ |
|
|
|
$ |
332,518 |
|
Credit for funds provided (1) |
|
|
22,838 |
|
|
|
|
|
|
|
4,026 |
|
|
|
(26,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
189,128 |
|
|
|
119,975 |
|
|
|
50,279 |
|
|
|
(26,864 |
) |
|
|
332,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
34,790 |
|
|
|
92,644 |
|
|
|
11,405 |
|
|
|
|
|
|
|
138,839 |
|
Charge for funds used (1) |
|
|
17,350 |
|
|
|
7,070 |
|
|
|
2,444 |
|
|
|
(26,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
52,140 |
|
|
|
99,714 |
|
|
|
13,849 |
|
|
|
(26,864 |
) |
|
|
138,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
136,988 |
|
|
|
20,261 |
|
|
|
36,430 |
|
|
|
|
|
|
|
193,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
26,600 |
|
|
|
|
|
|
|
26,600 |
|
Net interest income after provision
for credit losses |
|
$ |
136,988 |
|
|
$ |
20,261 |
|
|
|
9,830 |
|
|
$ |
|
|
|
$ |
167,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
21,593 |
|
|
|
6 |
|
|
|
12,858 |
|
|
|
|
|
|
|
34,457 |
|
Non-interest expense |
|
|
48,108 |
|
|
|
1,285 |
|
|
|
66,395 |
|
|
|
|
|
|
|
115,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss) |
|
$ |
110,473 |
|
|
$ |
18,982 |
|
|
$ |
(43,707 |
) |
|
$ |
|
|
|
$ |
85,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of December 31, 2008 |
|
$ |
3,592,794 |
|
|
$ |
2,640,396 |
|
|
$ |
677,972 |
|
|
$ |
(261,511 |
) |
|
$ |
6,649,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, including loan fees |
|
$ |
169,955 |
|
|
$ |
119,544 |
|
|
$ |
51,778 |
|
|
$ |
|
|
|
$ |
341,277 |
|
Credit for funds provided (1) |
|
|
64,187 |
|
|
|
|
|
|
|
9,582 |
|
|
|
(73,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
234,142 |
|
|
|
119,544 |
|
|
|
61,360 |
|
|
|
(73,769 |
) |
|
|
341,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
63,120 |
|
|
|
99,230 |
|
|
|
17,785 |
|
|
|
|
|
|
|
180,135 |
|
Charge for funds used (1) |
|
|
14,728 |
|
|
|
30,468 |
|
|
|
28,573 |
|
|
|
(73,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
77,848 |
|
|
|
129,698 |
|
|
|
46,358 |
|
|
|
(73,769 |
) |
|
|
180,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
156,294 |
|
|
|
(10,154 |
) |
|
|
15,002 |
|
|
|
|
|
|
|
161,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
for credit losses |
|
$ |
156,294 |
|
|
$ |
(10,154 |
) |
|
$ |
11,002 |
|
|
$ |
|
|
|
$ |
157,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
18,148 |
|
|
|
1 |
|
|
|
13,176 |
|
|
|
|
|
|
|
31,325 |
|
Non-interest expense |
|
|
44,558 |
|
|
|
1,148 |
|
|
|
59,698 |
|
|
|
|
|
|
|
105,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss) |
|
$ |
129,884 |
|
|
$ |
(11,301 |
) |
|
$ |
(35,520 |
) |
|
$ |
|
|
|
$ |
83,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of December 31, 2007 |
|
$ |
3,486,922 |
|
|
$ |
2,526,472 |
|
|
$ |
710,310 |
|
|
$ |
(429,741 |
) |
|
$ |
6,293,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit for funds provided and charge for funds used is eliminated in the consolidated
presentation. |
107
21. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank is exposed to certain risks relating to its ongoing business operations. The primary
risks managed by using derivative instruments are market risk and interest rate risk. As of
December 31, 2009, the Bank entered into 27 interest-rate swap agreement with customers and 27 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 fair value of the swaps primarily offset each other and therefore do not have a
significant impact on the Companys results of operations.
As of December 31, 2009, the total notional amount of the Banks swaps was $167.8 million.
The following tables present the location of the asset and liability and the amount of gain
recognized as of and for the year ended December 31, 2009.
Fair Value of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
December 31, 2009 |
|
|
December 31, 2009 |
|
|
|
(amounts in thousands) |
|
|
|
Balance Sheet |
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
Location |
|
|
Fair Value |
|
|
Location |
|
|
Fair Value |
|
Derivatives Not Designated as
Hedging Instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps |
|
Other Assets |
|
$ |
4,334 |
|
|
Other Liabilities |
|
$ |
4,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives |
|
|
|
|
|
$ |
4,334 |
|
|
|
|
|
|
$ |
4,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments on the Consolidated Statement of Earnings for
year ended December 31, 2009
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
|
|
|
|
|
Recognized in Income |
|
Derivatives Not Designated as |
|
Location of Gain Recognized in |
|
|
on Derivative |
|
Hedging Instruments |
|
Income on Derivative |
|
|
December 31, 2009 |
|
Interest Rate Swaps |
|
Other Income |
|
$ |
275 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
275 |
|
|
|
|
|
|
|
|
|
108
22. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
(amounts in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
Investment in subsidiaries |
|
$ |
747,251 |
|
|
$ |
715,171 |
|
Other assets, net |
|
|
21,152 |
|
|
|
28,875 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
768,403 |
|
|
$ |
744,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
$ |
130,175 |
|
|
$ |
129,154 |
|
Stockholders equity |
|
|
638,228 |
|
|
|
614,892 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
768,403 |
|
|
$ |
744,046 |
|
|
|
|
|
|
|
|
CONDENSED
STATEMENTS OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(amounts in thousands) |
|
Excess in net earnings of subsidiaries |
|
$ |
34,421 |
|
|
$ |
50,806 |
|
|
$ |
19,632 |
|
Dividends from the Bank |
|
|
35,000 |
|
|
|
18,000 |
|
|
|
46,800 |
|
Other expense, net |
|
|
(4,002 |
) |
|
|
(5,733 |
) |
|
|
(5,848 |
) |
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
65,419 |
|
|
$ |
63,073 |
|
|
$ |
60,584 |
|
|
|
|
|
|
|
|
|
|
|
109
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(amounts in thousands) |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
65,419 |
|
|
$ |
63,073 |
|
|
$ |
60,584 |
|
Adjustments to reconcile net earnings to cash used in
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of subsidiaries |
|
|
(69,421 |
) |
|
|
(68,806 |
) |
|
|
(66,432 |
) |
Tax settlement received from the Bank |
|
|
3,180 |
|
|
|
17,831 |
|
|
|
|
|
Other operating activities, net |
|
|
(120 |
) |
|
|
1,384 |
|
|
|
1,205 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
(66,361 |
) |
|
|
(49,591 |
) |
|
|
(65,227 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(942 |
) |
|
|
13,482 |
|
|
|
(4,643 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired from First Coastal Bancshares |
|
|
|
|
|
|
|
|
|
|
601 |
|
Dividends received from the Bank |
|
|
35,000 |
|
|
|
18,000 |
|
|
|
46,800 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
35,000 |
|
|
|
18,000 |
|
|
|
47,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on common stock |
|
|
(32,228 |
) |
|
|
(28,317 |
) |
|
|
(28,479 |
) |
Cash dividends on preferred stock |
|
|
(4,271 |
) |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
280 |
|
|
|
606 |
|
|
|
2,082 |
|
Tax benefit from exercise of stock options |
|
|
62 |
|
|
|
172 |
|
|
|
544 |
|
Issuance of common stock |
|
|
126,056 |
|
|
|
|
|
|
|
|
|
Repurchase of commons stock |
|
|
|
|
|
|
(650 |
) |
|
|
(33,918 |
) |
Repurchase of preferred stock and warrant |
|
|
(131,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities |
|
|
(41,408 |
) |
|
|
(28,189 |
) |
|
|
(59,771 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALIENTS |
|
|
(7,350 |
) |
|
|
3,293 |
|
|
|
(17,013 |
) |
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR |
|
|
21,239 |
|
|
|
17,946 |
|
|
|
34,959 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS,
END OF YEAR |
|
|
13,889 |
|
|
$ |
21,239 |
|
|
$ |
17,946 |
|
|
|
|
|
|
|
|
|
|
|
110
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
Summarized quarterly financial data follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
|
(amounts in thousands, except per share amounts) |
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
55,292 |
|
|
$ |
54,095 |
|
|
$ |
54,806 |
|
|
$ |
58,071 |
|
Provision for credit losses |
|
|
22,000 |
|
|
|
20,000 |
|
|
|
13,000 |
|
|
|
25,500 |
|
Net earnings |
|
|
13,168 |
|
|
|
15,861 |
|
|
|
19,322 |
|
|
|
17,068 |
|
Basic earnings per common share |
|
|
0.13 |
|
|
|
0.17 |
|
|
|
0.10 |
|
|
|
0.16 |
|
Diluted earnings per common share |
|
|
0.13 |
|
|
|
0.17 |
|
|
|
0.10 |
|
|
|
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
44,130 |
|
|
$ |
48,483 |
|
|
$ |
49,012 |
|
|
$ |
52,054 |
|
Provision for credit losses |
|
|
1,700 |
|
|
|
3,000 |
|
|
|
4,000 |
|
|
|
17,900 |
|
Net earnings |
|
|
16,184 |
|
|
|
17,152 |
|
|
|
17,460 |
|
|
|
12,277 |
|
Basic earnings per common share |
|
|
0.19 |
|
|
|
0.21 |
|
|
|
0.21 |
|
|
|
0.14 |
|
Diluted earnings per common share |
|
|
0.19 |
|
|
|
0.21 |
|
|
|
0.21 |
|
|
|
0.14 |
|
* * * *
* *
111
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
CVB Financial Corp.:
We have audited the accompanying consolidated balance sheets of CVB Financial Corp. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of earnings,
stockholders equity and comprehensive income, and cash flows for each of the years in the three
year period ended December 31, 2009. These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of CVB Financial Corp and subsidiaries as of December 31,
2009 and 2008, and the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), CVB Financial Corp. and subsidiaries internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 3, 2010 expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
Los Angeles, California
March 3, 2010
112
INDEX TO EXHIBITS
|
|
|
Exhibit No. |
|
|
2.1
|
|
Purchase and Assumption Agreement Whole Bank All Deposits, among the Federal Deposit
Insurance Corporation, receiver of San Joaquin Bank, Bakersfield, California, the Federal
Deposit Insurance Corporation and Citizens Business Bank, dated as of October 16, 2009, and
related addendum. (1) |
|
|
|
3.1
|
|
Articles of Incorporation of the Company, as amended (2) |
|
|
|
3.2
|
|
Bylaws of Company, as amended (2) |
|
|
|
3.3
|
|
Certificate of Determination of Participating Series A Preferred Stock of Registrant (See
Exhibit 3.1 hereto) |
|
|
|
3.4
|
|
Certificate of Determination of Participating Series B Preferred Stock of Registrant
(Repurchased in 2009) (2) |
|
|
|
4.1
|
|
Form of Registrants Common Stock certificate (3) |
|
|
|
4.2
|
|
Preferred Shares Rights Agreement, dated as of June 21, 2000, between CVB
Financial Corp. and U.S. Stock Transfer Corp. (4) |
|
|
|
4.3
|
|
Warrant to purchase up to 1,669,521 shares of Common Stock, issued on December 8, 2008 (5)
(Repurchased in 2009) |
|
|
|
4.4
|
|
Form of Rights Certificate (See Exhibit 4.2 hereto) |
|
|
|
4.5
|
|
Summary of Rights (See Exhibit 4.2 hereto) |
|
|
|
4.6
|
|
Form of Preferred Share Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series
B (5) (Cancelled) |
|
|
|
10.1(a)
|
|
Employment Agreement by and among Christopher D. Myers, CVB Financial Corp.
and Citizens Business Bank, dated September 16, 2009 (6) |
|
|
|
10.1(b)
|
|
Restricted Stock Agreement by and between CVB Financial Corp. and Christopher
D. Myers dated June 1, 2006 (7) |
|
|
|
10.1(c)
|
|
Deferred Compensation Plan for Christopher D. Myers, effective January 1, 2007 (8) |
|
|
|
10.2
|
|
Chino Valley Bank Profit Sharing Plan, as amended (9) |
|
|
|
10.3
|
|
Form of Indemnification Agreement (10) |
|
|
|
10.4
|
|
CVB Financial Corp. 1991 Stock Option Plan, as amended (11) |
|
|
|
10.5
|
|
CVB Financial Corp. 2000 Stock Option Plan (12) |
|
|
|
10.6(a)
|
|
CVB Financial Corp. 2008 Equity Incentive Plan (13) |
|
|
|
10.6(b)
|
|
CVB Financial Corp. Amendment No. 1 to the 2008 Equity Incentive Plan (6) |
113
|
|
|
Exhibit No. |
|
|
10.6(c)
|
|
CVB Financial Corp. Amendment No. 2 to the 2008 Equity Incentive Plan (14) |
|
|
|
10.6(d)
|
|
Form of Stock Option Agreement pursuant to the 2008 Equity Compensation Plan (15) |
|
|
|
10.6(e)
|
|
Form of Restricted Stock Agreement pursuant to the 2008 Equity Compensation Plan
(15) |
|
|
|
10.7
|
|
CVB Financial Corp. Discretionary Performance Compensation Plan Summary 2009 |
|
|
|
10.8
|
|
The Executive NonQualified Excess PlanSM Plan Document effective
February 21, 2007 (8) |
|
|
|
10.9
|
|
D. Linn Wiley Consulting Agreement dated April 16, 2008 (16) |
|
|
|
10.10
|
|
Jay Coleman Consulting and Confidentiality Agreement, dated December 5, 2008 (17) |
|
|
|
10.11
|
|
Severance Compensation Agreement for Edward J. Biebrich dated December 31, 2008 (18) |
|
|
|
10.12
|
|
Outside Directors Compensation (19) |
|
|
|
10.13
|
|
Base Salaries for Named Executive Officers of the Registrant (6) |
|
|
|
10.14(a)
|
|
Offer letter for Christopher A. Walters, dated June 13, 2007 (20) |
|
|
|
10.14(b)
|
|
Severance Compensation Agreement for Christopher A. Walters, dated December 31, 2008 (18) |
|
|
|
10.15(a)
|
|
Offer letter for James F. Dowd, dated May 16, 2008 (2) |
|
|
|
10.15(b)
|
|
Severance Compensation Agreement for James F. Dowd, dated December 31, 2008 (18) |
|
|
|
10.16(a)
|
|
Offer letter for Todd E. Hollander, dated April 21, 2008 (2) |
|
|
|
10.16(b)
|
|
Severance Compensation Agreement for Todd E. Hollander, dated December 31, 2008 (18) |
|
|
|
10.17
|
|
Form of Waiver, executed by each of Messrs. Christopher D. Myers, Edward J. Biebrich, Jr.,
Jay W. Coleman, James F. Dowd, Christopher Walters and Todd E. Hollander as to certain
compensation benefits (5) |
|
|
|
10.18
|
|
Form of Consent, executed by each of Messrs. Christopher D. Myers, Edward J. Biebrich, Jr.,
Jay W. Coleman, James F. Dowd, Christopher A. Walters and Todd E. Hollander, to adoption of
amendments to Benefit Plans as required by Section 111(b) of EESA (5) |
|
|
|
10.19(a)
|
|
Letter Agreement, dated December 5, 2008, including the Securities Purchase Agreement
Standard Terms incorporated by reference therein, between the Company and the U.S. Treasury.
(5) |
|
|
|
10.19(b)
|
|
Letter Agreement between the Company and the U.S. Treasury, dated August 26, 2009
(Repurchase of 75% or 97,500 shares of Preferred Stock)(21) |
|
|
|
10.19(c)
|
|
Letter Agreement between the Company and the U.S. Treasury, dated September 2, 2009
(Repurchase of 25% or 32,500 shares of Preferred Stock)(22) |
|
|
|
10.20
|
|
CVB Financial Corp. 2005 Executive Incentive Plan (23) |
114
|
|
|
Exhibit No. |
|
|
10.21(a)
|
|
Offer letter for David C. Harvey, dated December 7, 2009 |
|
|
|
10.21(b)
|
|
Severance Compensation Agreement for David C. Harvey, dated December 31, 2009 |
|
|
|
12
|
|
Statements regarding computation of ratios |
|
|
|
21
|
|
Subsidiaries of Company |
|
|
|
23
|
|
Consent of KPMG LLP |
|
|
|
31.1
|
|
Certification of Christopher D. Myers pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Edward J. Biebrich, Jr. pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
|
|
|
32.1
|
|
Certification of Christopher D. Myers pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |
|
|
|
32.2
|
|
Certification of Edward J. Biebrich, Jr. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |
|
|
|
99.1
|
|
First fiscal year certification of Christopher D. Myers pursuant to Section 111(b) of the
Emergency Economic Stabilization Act of 2008, as amended. |
|
|
|
99.2
|
|
First fiscal year certification of Edward J. Biebrich, Jr. pursuant to Section 111(b) of the
Emergency Economic Stabilization Act of 2008, as amended. |
|
|
|
|
|
Indicates a management contract or compensation plan. |
|
* |
|
Except as noted below, Form 8-A12G, Form 8-K, Form 10-K and Form DEF 14A identified in the
exhibit index
have SEC file number 000-10140. |
|
D |
|
We have entered into the following trust preferred security issuances and agree to furnish
a copy to the SEC upon request: |
|
|
|
|
|
|
(a) |
|
Indenture dated as of December 17, 2003 by and between CVB Financial Corp. and U.S. Bank,
National
Association, as Trustee (CVB Statutory Trust I). |
|
|
(b) |
|
Indenture dated as of December 5, 2003 by and between CVB Financial Corp. and Wells Fargo
Bank,
National Association, as Trustee (CVB Statutory Trust II). |
|
|
(c) |
|
Indenture by and between CVB Financial Corp. and U.S. Bank, National Association, as
Trustee, dated as of
January 31, 2006 (CVB Statutory Trust III). |
|
|
(d) |
|
Indenture by and between FCB and Wells Fargo Bank, National Association, as Trustee,
acquired on June
22, 2007 (FCB Statutory Trust II) |
|
|
|
|
(1) |
|
Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on
October 20, 2009. |
|
(2) |
|
Incorporated herein by reference from our Annual Report on Form 10-K filed with the SEC on
February 27, 2009. |
|
(3) |
|
Incorporated herein by reference from our Form 8-A12G filed with the SEC on June 11, 2001. |
|
(4) |
|
Incorporated herein by reference from our Form 8-A12G filed with the SEC on June 22, 2000. |
|
(5) |
|
Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on
December 8, 2008. |
115
|
|
|
(6) |
|
Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on
September 22, 2009. |
|
(7) |
|
Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on
June 7, 2006. |
|
(8) |
|
Incorporated herein by reference from our Annual Report on Form 10-K filed with the SEC on
March 1, 2007. |
|
(9) |
|
Filed as Exhibits 10.3 to Registrants Annual Report on Form 10-K for the fiscal year ended
December 31, 1990, which is incorporated herein by this reference. |
|
(10) |
|
Filed as Exhibit 10.13 to Registrants Annual Report on Form 10-K for the fiscal year ended
December 31, 1988, which is incorporated herein by this reference. |
|
(11) |
|
Incorporated herein by reference from our Quarterly Report on Form 10-Q filed with the SEC on
May 13, 1998, Commission file number 1-10394. |
|
(12) |
|
Incorporated herein by reference from our Registration Statement on Form S-8 filed with the
SEC on July 12, 2000, Commission file number 333-41198. |
|
(13) |
|
Incorporated herein by reference from our Definitive Proxy Statement on Form DEF 14A filed
with the SEC on April 16, 2008. |
|
(14) |
|
Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on
November 24, 2009. |
|
(15) |
|
Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on
May 23, 2008. |
|
(16) |
|
Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on
April 18, 2008. |
|
(17) |
|
Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on
January 2, 2009. |
|
(18) |
|
Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on
January 7, 2009. |
|
(19) |
|
Incorporated herein by reference from our Annual Report on Form 10-K filed with the SEC on
March 14, 2005. |
|
(20) |
|
Incorporated herein by reference from our Quarterly Report on Form 10-Q filed with the SEC on
August 8, 2007. |
|
(21) |
|
Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC
on September 1, 2009. |
|
(22) |
|
Incorporated herein by reference from our Current Report on Form 8-K filed with the SEC on
September 3, 2009. |
|
(23) |
|
Incorporated herein by reference from our Definitive Proxy Statement on Form DEF 14A filed
with the SEC on April 7, 2005. |
116